Why Small Changes Can Mean Big Savings for Miners
The mining industry hasn't pulled out of its downturn yet, and keeping costs contained is going to be an important talking point for companies...at least through the next year. While big-ticket items like canceling or delaying expansion projects make the headlines, miners like Teck Resources and Cloud Peak Energy are digging deeper to create value for shareholders.
Teck has "a management meeting once a week and we go through what has become a very lengthy list of cost savings." According to the company, the list of items is in "excruciating detail." And while the company is being candid about its efforts, opening up in a way that not every company does, that same level of work is being undertaken throughout the mining industry.
Teck is working on "hundreds of small initiatives that collectively add up to a lot of money." And while delaying big-ticket investments has been important, it's the small things that have helped the company save more than $300 million. The list includes such mundane items as switching contractors to full-time employees to save on costs and limiting work on holidays that requires double pay.
However, even something as simple as turning off an engine is being examined. Teck notes that wear and tear from restarting older equipment increased maintenance costs. So the old rule was to leave engines running during breaks and other long stops. New equipment, however, can handle restarts, so the new rule is to shut the engines down. Sounds small, but it reduces fuel consumption by 8% -- a number that quickly starts to add up to big savings.
The next step
Cloud Peak is another miner that's been taking steps to save money. For one, the company has discussed its efforts to buy used equipment wherever it can. That saves on costs. However, the big news out of the coal miner is that it's planning to cut 10 million tons of production a year from its Cordero Rojo Mine because of weak coal demand.
Although that curtailment won't happen until 2015, this is a big cost-savings move. Part of the benefit, however, will come from shifting equipment from Cordero Rojo to other company-operated mines. Using your own old equipment is even cheaper than buying someone else's hand-me-downs.
The moves by Teck and Cloud Peak show the depth to which miners are rethinking and reworking their operations. They also suggest that, when the mining market improves, the industry will be pretty lean, and definitely mean.
But wait, there's more!
Shutting production and cutting costs is one thing, but companies are still spending money -- just more selectively. Big-ticket new mines may be on hold, but smaller investments that increase productivity are hot. For example BHP Billiton recently announced the approval of a $300 million expense to replace two ship-loaders at its Nelson Point port operations in Australia.
Each of the new loaders will have a capacity of 12,500 tonnes per hour, a 25% improvement versus the existing 40-year-old equipment, which can only load 10,000 tonnes an hour. That project will start in the second half of 2014 and will allow the company's other efficiency efforts to result in more iron ore hitting the water. While it may not make sense for miners to open new mines, getting more done with the same equipment is clearly a worthwhile investment.
Watch the little things
Most of the low-hanging fruit has been plucked when it comes to saving money in the mining industry. It's time to start paying attention to finer details. You should keep an eye on what's going on behind the scenes and look for companies like Teck, Cloud Peak, and BHP that are doing the little things right to support their businesses while still keeping costs down.
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The article Why Small Changes Can Mean Big Savings for Miners originally appeared on Fool.com.Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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