From mine to market - the rising cost of infrastructure
Geology determines the location of a potential mine site, and these days they are usually in locations far from the consumers. It is evident, therefore, that various forms of infrastructure are required to bring the mined commodities to market.
As the search for new resources is global, many new mines are in places that in the past were either unexplored or discounted on the basis of being too hot, too cold, politically unstable or just too remote to overcome the accessibility costs of infrastructure. Historically remote locations may not seem too far removed by today’s standards, such as the Witwatersrand of South Africa before the Boer Great Trek, or the Pilbara of Western Australia. In both cases, no infrastructure was in place prior to the development of mining.
‘These are the challenges that face engineering companies who undertake the feasibility studies, design and construction of mines and their all too necessary infrastructure,’ says Ian Brown, Consulting Practice Director at Canadian company Hatch. ‘We evaluate, design and execute mining projects in ever more challenging remote areas, which have recently seen developments from the Arctic to the Sahara to the tropical rainforest.’
In particular, the resources that have the largest transport logistics requirement are those with a high weight-to-value ratio – well illustrated by iron ore. There are many iron ore projects under development in very remote areas, such as Arcelor Mittal’s Mary River project on Baffin Island north of the Arctic Circle, where temperatures plummet to -50°C in winter and sea access is frozen for 8–9 months of the year. Even in warmer climes, distance from mine to port can pose considerable problems, as encountered by Anglo-American’s Minas Rio project in Brazil, which employs a 525km slurry pipeline to the Atlantic Açu port, crossing more than 1,200 landowners’ properties on the way. ‘It is not only new exploration areas such as Baffin Island that have infrastructural challenges,’ says Brown. Western Australia has many mining opportunities that are held back by a lack of infrastructure. While the Pilbara has two major rail links (owned by BHP Billiton and Rio Tinto) from iron ore mines to the coast (at Port Hedland and Dampier), these are inadequate for future volumes and the Yilgarn iron ore region to the south is more poorly served. The same can be said for northern Quebec (the same geographic size as South Africa) in exploiting known mineral resources. The new Plan Nord hopes to overcome these logistical constraints with coordinated planning and investment from government and companies, but faces the problems of integrating private railways with provincial land, federal ports and First Nation residents’ interests.
Decisions are driven by money. However, large-scale, low-value commodities require large supporting components including water, power, road access and workforce accommodation. Transport is the major cost consideration – where is the market? Does the building of a rail link fit within national transport plans and attract nonmine related investment? Is river barging an option? If the mined material has to be concentrated prior to transport, is a slurry pipeline an option? International projects will need a new or expanded port. What are the shipping costs?
All of these factors will determine the investment case, says Brown, with a prime factor being the ore grade of the mineral deposit. As the higher grade deposits are depleted, those poorer ones previously left in place are now being developed as demand rises along with prices. The economic definition of ore and waste rock consequently changes, impacting on stripping ratios and fuel that determine mining costs. In bulk commodities, the major costs are less related to mining and more to the development of infrastructure – the more remote, the greater the cost. For example, Arcelor Mittal’s Baffin Island project has a likely 86% infrastructure, 14% mine split. Rio Tinto’s Simandou project in Guinea has an 83% to 17% split, while Anglo American’s Minas Rio has a 74% to 26% split.
Iron ore mines and similar low value-to-weight minerals require high-volume links to the port or consumer. Rail offers a high-volume fixed link but it is expensive to build, difficult ta to stage, may have land rights problems and needs to be sufficiently used to be cost-effective. In turn, this requires a large mine threshold scale or an agreement between a cluster of mines. If contemporaneous, this can lead to sharing and allocation of capacity.
Similarly with electrical power, crushing and concentration of ore is energyintensive. Local power generation often means expensive diesel generator sets, as there may be a problem with the scale of the mine to justify a long transmission line, even if the grid or a suitably sized power station are within reach. Water can be a major problem in desert mining even after on-site wells are drilled – ultimately, they dry up. In extreme examples of water shortage, such as the Minchilla mine in the Atacama desert, seawater is piped to an altitude of 835m over 15km for use in processing. Even desalination is now being employed.
‘Mining in remote regions requires a holistic approach to optimise the plethora of capital (capex) and operating (opex) costs, which are fundamentally more expensive,’ states Brown. Workers require transport to site, accommodation and canteens, and are likely to be paid at premium wage rates to ensure retention. Everything can be problematical as there is no local supplier down the road. This can require stockpiling of all sorts, including vital spares for many months with consequent cash outlay. In big tonnage mines, the integration and dynamic analysis design of mine, site infrastructure, process plant, handling, rail, stockpiling and shipping is the new reality of viable operations. And don’t forget the workers. Hatch designed the Gap Ridge village for the Woodside Pluto liquid natural gas project in Western Australia to accommodate 2,300 recruits.
Many major mining company projects face the viability challenges brought about by the remote nature of new mines, notes Brown. By illustration, of 17 major projects/ expansions of BHP Billiton, 11 could be classed as remote, of which six are iron ore projects – five in Australia and one in Brazil. Eight of the 17 are for bituminous and metallurgical coal. BHP Billiton’s indicative approved capex for these remote projects (both 100% and joint venture share) comes to over US$14bln, a value overshadowed by the now delayed expansion of its remote Olympic Dam copper uranium mine at US$30bln.
Rio Tinto has equally large major projects on the table, with 14 planned where capex has been approved. Of these, seven projects are in remote locations and three are for iron ore. Other remote projects include copper in Mongolia (US$6.2bln capex), and a bauxite mine and an alumina refinery in northern Queensland, Australia. The iron ore projects are in Guinea, Western Australia and India. The Rio Tinto share of capex for those near infrastructure is just over US$4bln, compared with US$31bln for those in remote locations.
Xstrata also has 13 out of 15 major projects planned in remote locations, with an estimated capex of US$7.6bln compared with US$1.4bln in nonremote locations. The majority (six) is for copper in Peru and Chile. The majority of Anglo American and Vale’s new projects are also in remote locations.
‘There is no doubt that the larger the project, the more challenges it faces,’ says Brown. ‘For example, Simandou requires more than 650km of railway through hilly country to an as yet unbuilt port on a shallow coastline. Sharing capital requirements with offtake partners or infrastructure investors may spread these risks. For example, iron ore, coal and manganese are dominantly China-bound, but such otherwise attractive co-financing isn’t easy and adds additional complexity that needs to be overcome.’