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Oct 2013 - Cutting Costs

Innovatively Cutting Costs

The fall in the gold price has caused gold producers to focus on cutting costs, in exploration, corporate, staff, and anything else. However, it has also resulted in a few innovations that we/ERA have not seen before, most of which we saw in our August 2013 visit to Silver Lake's operations, such as LNG power, contractor vending machines and a mini de-sal(ination) plant as shown in Figure.

  • Likely to completely revolutionise the mining industry has to be a possible switch from diesel to LNG Power. Silver Lake expected to achieve the switch to LNG power at their refurbished Murchison plant at the end of September 2013, for a potential cost reduction in the plant's power costs of ~20% or a unit cost/t reduction of ~10% (~$2/t milled).
  • The two large new white tanks and larger gen sets are clearly shown in Figure 1.
  • The change in power did not involve material up-front capex as it is based on an LNG deliver / pay for the power contract, in which the LNG is delivered and the power produced (plus a fee for the capex) is paid for,  as the power plant is the property of the provider.
  • At both of SLR's Mt Monger and Murchison operations, contractor vending machines have been installed as shown inset in the Figure. In the style of a soft drinks vending machine, they can dispense equipment at low cost prices such as drill bits, gloves, and cards that can be exchange for boots and hard hats. The expected cost reduction at say Mt Monger was expected to be up to ~$40,000 per month or up to ~$0.5mpa.
  • At its Murchison operation, Silver Lake has also installed a mini de-sal(ination) plant, as shown inset in the Figure. Originally aimed at converting the local saline water into better quality water for processing as higher quality water usually results in higher recoveries, the current rainwater in the pits was feeding into the plant. So the desal plant's water was being used as waste water (toilets, showers etc) in the camp, which was still apparently a saving compared to trucking it in.
  • On the subject of innovation and not really a cost saving, but instead a potential life saver are the "Spot" devices shown inset in the Figure. They were being used by each of Silver Lake's exploration geologists at their Kundip operation where the bush is so dense that people can literally disappear after a few steps.
  • At an initial cost of $150 for the first year and then $50 per year thereafter, the unit pings a GPS location to a company collection point every 10 minutes. The "spot" device can be attached to a person's arm or placed in a vehicle and has a number of emergency buttons for when it pings at the same location representing different scenarios. Such as : no problem : don't worry; have a problem : can fix it (eg flat tyre); have a problem : can't fix it - need help; or have a serious problem (eg injured or snake bite) - send the cavalry.
  • We can recall a number of times being in exploration vehicles when a "spot" device would have been useful (even in the past 2 years) such as : punctured tyre on an unplanned route with no jack in the vehicle and the sat phone batteries were dead (solved by holding a mobile phone in the air standing on top of a vehicle and phoning Perth).
  • Or driving to an exploration site and becoming bogged on one of the access roads in a poor reception zone (solved by another vehicle eventually coming along the same road); or driving to a remote exploration site, stop, look around and find the battery and electrics have gone dead (so no communications either - solved by push starting the vehicle in reverse).
  • So the fall in the gold price has in some ways been beneficial as it has caused companies to focus on reducing costs and examine innovative methods and devices, with a switch to LNG power being a potential "game changer" for the industry.
  • At Diggers 2013, most delegates expected the atmosphere to be one of "doom and gloom", but as some delegates commented it was as if the companies had been operating in their own microcosms. At Diggers everyone found that they were in the same boat, with costs being reduced, personnel retrenched etc.
  • So, instead it became a case of "OK, let's get on with it", and the mood gradually changed and the Palace bars became their usual crush from the evening of Day 1 up to the evening dinner in the Diggers marquee on Day 3 for ~1300 of the ~2100 delegates (being ~400 less than 2012).
  • Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.
  • Figure 1. Innovations being used on Silver Lake Resources' operations
  • GDNoct2013
  • Written by: Keith Goode
  • Tuesday, 22 October 2013