BENEFICIATION ECONOMICS: A VIEW FROM THE TRENCHES

BENEFICIATION ECONOMICS: A VIEW FROM THE TRENCHES Diversifying a Mineral Based Economy Neale Baartjes Mineral Economics Consultant

MINERAL ECONOMIC RESEARCH? PLATFORMS Labour Intensive Industries FOCUS 3

BENEFICIATION ECONOMICS Thinking like a Mineral Economist Towards A Common Definition The MPRDA, The Charter and Beneficiation The Beneficiation Strategy Looking at the Economics Macroeconomic Cycle Microeconomic Functions Costs and Cost Strategy Examples Aluminium (Caribbean) Copper (West Africa)

Thinking like a Mineral Economist Towards A Common Definition The MPRDA, The Charter and Beneficiation The Beneficiation Strategy Looking at the Economics Macroeconomic Cycle Microeconomic Functions Costs and Cost Strategy Examples Aluminium (Caribbean) Copper (Central Africa)

Constructing your Economics Mind What kind of Mineral Economist are you? Policy v Scientism The meaning of Ideas v The meaning of Numbers Issues of the Individual v Issues of Society Unrelated v Interrelated Describe today v Prescribe tomorrow Macro v Micro K v L

Why we don t get it! There is a need to constantly update your thinking You need to approach it analytically AND objectively!

MINERAL ECONOMIC POLICY THE PEOPLE SHALL SHARE IN THE COUNTRY'S WEALTH! The national wealth of our country, the heritage of all South Africans, shall be restored to the people; The mineral wealth beneath the soil, the banks and the monopoly industry shall be transferred to the ownership of the people as a whole; All other industry and trade shall be controlled to assist the well-being of the people; All people shall have equal rights to trade where they choose, to manufacture and to enter all trades, crafts and professions. Freedom Charter, 1955

MINERAL ECONOMIC REALITY Foreign shareholders currently only get around 3% of the value that mines produce. DM 2011 Mining production for June 2011 decreased 0,7% year-on-year, according to data released by Statistics South Africa (StatsSA) on Thursday. Seasonally adjusted mining production in the second quarter of 2011 dropped 1,1%, compared to the first quarter of 2011. StatsSA says the main contributor the drop was a 2,7% decline in the production of platinum group metals (PGMs), while iron ore production rose by 1,3%. However, actual mining production increased 7% in the second quarter of 2011. BD2011

Thinking like a Mineral Economist Towards A Common Definition The Charter and Beneficiation The Beneficiation Strategy Looking at the Economics Macroeconomic Cycle Microeconomic Functions Costs and Cost Strategy Examples Aluminium (Caribbean) Copper (Central Africa)

SOUTH AFRICAN JARGON STAGE 1 STAGE 2 STAGE 3 STAGE 4 Mining Processing Refining Fabrication Comminution Intermediate Goods Final Goods Robinson and Von Below, 1990 Rustomjee and Fine, 1996

SOUTH AFRICAN JARGON Stage Mineral Beneficiation Process Category Process Flow-Chart Labour Intensity Capital Intensity 1 The action of mining and producing an ore or concentrate (primary Product) Run-of Mine Ores Washed and Sized Concentrates High High 2 The action of converting a concentrate into a bulk tonnage intermediate product (example a metal alloy) Mattes/Slags/ Bulk Chemicals Ferro Alloys/ Pure Metals Low High 3 The action of converting the intermediate goods into a refined product suitable for purchase by both small and sophisticated industries. Steel/Alloys Worked Shapes and Forms Low High 4 The action of manufacturing a final product for sale Worked Shapes and Forms Worked Shapes and Forms Medium to High Medium to High COM

EMPLOYMENT U CURVE Employment Numbers are highest at start and end of the value chain Jobs 1 2 3 4 Mining Processing Refining Fabrication

MINING: EMPLOYMENT DOWNHILL 900 000 800 000 700 000 600 000 500 000 400 000 300 000 200 000 100 000 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Male Female

EMPLOYMENT U CURVE Jobs Capital 1 2 3 4 Mining Processing Refining Fabrication

DOWNSTREAM AND SIDESTREAM Linkages Linkages Mining Processing Refining Fabrication Linkages Downstream: Following on from Sidestream: Related or support industries

THE MINERAL VALUE CHAIN Expl. Capital Goods Geophysical Drilling Survey etc. Mining Capital Goods Drilling Cutting Hauling Hoisting, etc. Processing Cap. Goods Crushers/mills Hydromet plant Materials handling Furnaces, etc. Refining Cap. Goods Smelters Furnaces Electro winning cells Casters Fabrication Cap.Goods Rolling Moulding Machining Assembling Exploration Mining Mineral Processing Smelting & Refining Value Addition Exploration Services GIS Analytical Data processing Financing etc Mining Services Mine planning Consumables/spares Sub-contracting Financing Analytical, etc Processing Services Comminution Grinding media Chem/reagects Process control Analytical, etc Refining Services Reductants Chemicals Assaying Value adding services Design Marketing Distribution Services

Mining Charter Revised Charter Mining companies must facilitate local beneficiation of mineral commodities by adhering to the provision of Section 26 of the MPRDA and the mineral beneficiation strategy. Mining companies can offset up to 11% of the value of beneficiation ownership target. against the

BENEFICIATION STRATEGY FOR SOUTH AFRICA BY COMMODITY 1. Coal and Uranium 2. Iron 3. Chrome 4. Vanadium 5. Nickel 6. Manganese 7. Titanium 8. PGM 9. Diamond 10.Gold

BENEFICIATION STRATEGY FOR SOUTH AFRICA BY VALUE CHAIN 1. Energy Commodities 2. Iron and Steel 3. Pigment and Titanium Metal Production 4. Autocatalytic Converters and Diesel Particulate 5. Diamond Cutting and Polishing and Jewellery Fabrication

CONVERT ADVANTAGES OPPORTUNITY BENEFITS OF BENEFICIATION GGP and GDP BOP JOBS ECONOMIC GROWTH

Profit Environment People

MACROECONOMIC FRAMEWORK L S Supply Labour Market L D Demand Wages Tr H Tr C Household T H Government T C Corporate S G Financial Markets G Yield Government Labour Savings Tax Transfer S F Foreign Import Export Commodity Market Consumption

MACROECONOMIC FRAMEWORK L S Supply Labour Market L D Demand Wages Tr H Tr M Tr P Household T H Government T C Corporate S G Financial Markets G Yield Government Labour Savings Tax Transfer S F Foreign Import Export Mining Plant Production Plant Consumption

Profits Positive Externalities STAGE 1 STAGE 2 STAGE 3 STAGE 4 Mining Processing Refining Fabrication Pollution Negative Externalities PigovianTaxes Penalties

MICROECONOMIC FRAMEWORK Factors of Production (Inputs) PRODUCTION PLANT Products (Outputs) What to produce? How much to produce? How to produce?

Factors of Production (Inputs) PRODUCTION PLANT Products (Outputs) Cost of Raw Material Water Price Electricity Price Transport Costs Skills Availability Cost of Labour Price of Land Cost of Finance RoC/RoI/RoE/Hurdle Monopoly Profits Subsidies Tax Incentives Demand Pigovian Tax Inventory Holding Cost Tariffs Market Structure Predatory Pricing

Sunk Costs: A cost that once spent is usually never recoverable. Fixed Costs: Costs that do not change with changes in Output quantity. Variable Costs: Costs that change with changes in Output quantity.

TC = FC+VC VC R FC Fixed Costs Sunk Costs Q

Sunk Costs Fixed Costs Variable Costs Research with no return Rental Raw material Incomplete Developments Permanent Labour Salaries Contract Labour Salaries BFS Insurance Transport Costs Depreciation Depreciation Energy Costs Permit Fees Building & Plant costs Water Costs

COST AND COST STRATEGY Inputs Cost of Raw Material Water Price Electricity Price Issues to Overcome Logistics HR Incentives Profitability Income Expenses Competition Transport Costs Skills Availability Cost of Labour Price of Land Cost of Finance RoC/RoI/RoE/Hurdle Monopoly Profits Subsidies Tax Incentives Demand Pigovian Tax Inventory Holding Cost Tariffs Market Structure Predatory Pricing

COST AND COST STRATEGY VALUE-EASE MODEL High First Reduce Required Effort Do First VALUE (Impact/Profitability) Low High Do Last Only pursue opportunities Low EASE OF IMPLEMENTATION (Time required/resources required)

VALUE-EASE MODEL 1 Cost of Raw Material 2 Water Price 3 Electricity Price 4 Transport Costs 5 Skills Availability VALUE (Impact/Profitability) High Low First Reduce Required Effort Do Last High 1 ❷ ❹ 3 ❶4❻ 6 ❸9 8 5 10 ❺ ❼ ❽ 27 Do First Only pursue opportunities Low 6 Cost of Labour 7 Price of Land 8 Cost of Finance 9 RoC/RoI/RoE/Hurdle 10 Monopoly Profits ❶ Subsidies ❷ Tax Incentives ❸ Demand ❹ Pigovian Tax ❺ Inventory Holding Cost EASE OF IMPLEMENTATION (Time required/resources required) ❻ Tariffs ❼ Market Structure ❽ Predatory Pricing

ALUMINIUM - CARIBBEAN Aluminium smelter costs are energy dependant (30-50% of costs are energy) When Trinidad was delivering at US$0.04 the smelters wanted it at US$0.015 Deal signed but then fell through. Later deals were secured. Benefit hoped for was (sidestream) industrial deepening and (downstream) broadening

ALUMINIUM - CARIBBEAN Net Value Add Maximise linkages Local technology development not just Operational and Maintenance involvement Need to develop two competing units (one private sector and one government owned)

COPPER CENTRAL AFRICA Preferred copper ore is the Cu-S family. Less popular is the Cu-OH family (e.g.malachite). Problem was large amounts of chrysocolla also recovered in mining. Volumes of oxidised ores keep increasing and processing is limited to economical extraction. Mass production of sulphuric acid enabled the processing of chrysocolla ore. This they called beneficiation!! Complex orebodies can now be exploited for local projects and longer process chains means that diversification can be considered. Decision to be made is does the SOE establish a new company to retreat the dumps, or should it give it to an existing market player

COPPER CENTRAL AFRICA Greenfields Client Brownfields Client Cut-off 1.3% 3% Acid consumption 200kg/mt 120kg/mt LOM 20 years 15 years Annual Revenue $101-million $86-million Annual OpEx $61-million $60-million Capital Cost $204-million $117-million NPV @ 10% $8.8 million $13-million DCFROR 10.6% 15.2% Hurdle Rate 12% 15% Result Project Rejected Project Accepted

Area Recommendation Legal Beneficiation Strategy Taxes and Subsidies Employment Costs Spatial Development Write the Beneficiation Act of South Africa Use evidence led analysis to inform implementation guidelines Develop an interface between Policy and Analysis Use Pigovian Subsidies wherever Pigovian Taxes are imposed Make investment in Stage 2 and Stage 3 activities attractive Provide SME support by removing Fixed Costs Declare coastal belt development nodes for specific commodities