Mining boom hits costs

Minara Resources managing director Peter Johnston says a shortage of tyres is emerging as a major issue in the mining industry.

“There are just no spare tyres in the whole of Australia,” he told WA Business News.

This bizarre situation shows how extreme the supply squeeze hitting the resources sector has become.

People like Mr Johnston have no trouble finding examples of soaring costs.

“The big issue we have had is freight,” he said. “Spot [shipping] rates are still at historic highs.”

Minara also has had to deal with “dramatic” increases in the cost of imported sulphur, one of the key inputs in its nickel processing.

Roc Oil and gold miner Newcrest have been hit by rising costs more than most of their peers.

Roc recently announced the second big increase in the cost of developing its Cliff Head oil project near Dongara.

What was a $156 million project in April last year has become a $235 million project – a 50 per cent cost blow-out in just nine months.

Similarly, the cost of developing Newcrest’s Telfer gold project in the Pilbara has gone from $1.19 billion to about $1.4 billion.

The company attributed this to the shortage of skilled labour and the effects of Cyclone Fay.

“Similarly, the performance of the underground mining contractor continues to be adversely affected by this shortage of skilled labour,” Newcrest says in its latest company report.

For most companies the effects of rising costs has been offset by soaring commodity prices, which are fuelling the investment boom in the first place.

A number of industry sources said they would not like to be stating a major project in the present environment, as cost blow-outs would be inevitable.

Yet that is exactly what industry heavyweights such as BHP Billiton, Woodside, ChevronTexaco and Alcoa are planning, and it remains to be seen how effectively they can cope with the current supply pressures.

Straits Resources is another mining company to have been adversely affected by skills shortages, though not as seriously as some others.

In its latest quarterly report, Straits says final commissioning of its Whim Creek copper project has been delayed by “a shortage of skilled trades in a number of areas, which is typical of the entire resources industry at this point in time, particularly in the Pilbara”.

Similarly, LionOre Mining International says the plant upgrade at its Lake Johnston nickel operation has been successfully commissioned “after a delay caused by a very tight construction contract market in Western Australia”.

The heavy work volume has even affected the ability of companies to complete feasibility studies.

Resolute Mining says engineering contractor Lycopodium completed a draft feasibility study for its Syama project in Mali, Africa, in late December but it will take a further three months to finalise the study “due to the workload on many of the parties”.

The challenge for resource companies is to try and mitigate the impact of rising costs and limited supplies.

Consolidated Minerals managing director Michael Kiernan said equipment orders had to be planned much further ahead in light of the current supply squeeze.

“In the old days you would ring and say, ‘bring it around in the morning’, end of story,” he said.

“But you have to modify your activities today to take in the longer lead time.

“More difficult to manage is the skilled labour. Its very, very difficult.”

Mr Kiernan said he had recruited staff in South Africa while some contractors had recruited fitters in South Australia.

He said the two biggest cost increases over the past year were fuel costs and labour costs, with geologists getting 50-60 per cent more and plant operators now getting 20 per cent more.

“To combat that, we used to have 50-tonne dump trucks and a 100-tonne digger, we’ve now got 90-tonne dump trucks and 125-tonne diggers.”

Mr Kiernan said labour costs were expected to stabilise after reaching a new plateau.

Arc Energy is another company to have changed its work practices to ameliorate the cost pressures.

Chief executive Derrick O’Keefe said that, in addition to skilled labour shortages, a big issue was the 30 per cent lift in steel prices over the past year.

In addition suppliers were now imposing more onerous conditions.

He said Arc had focused on drilling as one of its core competencies and had achieved a 35-40 per cent reduction in drilling costs as a result of productivity gains.

Nickel miner Mincor Resources experienced severe manpower problems in mid 2004 but now says it has solutions in place.

The company implemented a new shift and roster structure, with extended shifts and a continuous roster, and introduced fly-in fly-out workers to supplement its residential workforce.

It also engaged Barminco as its new mining contractor last year and now reports “very significant productivity gains”.

Managing director David Moore said manning issues had been largely resolved “though in common with probably all other mining operations in Western Australia we could use a few more jumbo operators and airleg miners”.

Like many other mining companies, Mincor aims to attract workers by offering better working conditions, specifically by building an on-site accommodation village.

“The mining boom does make everything harder,” he told Corporate File.

“It takes longer to get equipment, to get repairs done, to get specialist maintenance and things like that, but these are fairly small in the scheme of things and they’re not issues that significantly affect safety or production.”