Live wire act [Mining power costs] – by Chris Windeyer (CIM Magazine – March/April 2015)

No other significant cost factor varies so widely as electricity – internationally, more than 800 per cent variation in the price of electricity from one jurisdiction to another is accepted as normal. So what can miners do to turn such risks into opportunities? The cost of electricity is generally the second biggest cost factor that miners face. Only the workforce costs more. In Canada alone, miners (excluding coal) spent $2.4 billion on energy costs in 2012, according to figures from Natural Resources Canada.

That was up from a 2011 tally of $2.2 billion that included coal. At the same time, no other significant cost factor varies so widely – internationally, more than 800 per cent variation in the price of electricity from one jurisdiction to another is accepted as normal. So what can miners do to turn such risks into opportunities?

“If you’re sitting in northern Quebec and you have access to the hydro grid, there’s nothing that will beat Hydro Quebec’s rates,” says Steve Letwin, CEO of Toronto-based Iamgold, which owns mines in Quebec, Suriname, Mali, and Burkina Faso. Letwin says Quebec’s electricity costs 3.5 cents per kilowatt- hour (kWh), compared with off-grid Africa, where Iamgold relies on diesel and heavy fuel oil, and costs can reach 30 cents per kWh.

The recent decline in oil prices has knocked those off-grid costs down to around 21 cents per kWh, which Letwin says translates into cash cost savings of around $200 per ounce. At Iamgold’s Essakane mine in northeast Burkina Faso, currently operating with costs of around $1,000 per ounce, Letwin says halving the mine’s power costs would bring cash costs down to about $800 per ounce; it is roughly the same impact as doubling the grade. “Given that we produce 400,000 ounces, that’s $80 million of cash flow,” he points out. “That’s a back-of-the-envelope [calculation] but it shows you the trade-off. Power has a huge impact on the economics.”

Whether or when Letwin and other miners in Africa will see their access to reliable power grids change is anybody’s guess. “Transmission infrastructure expansion in developing countries is driven primarily by a desire for economic growth and an enabling of investments in key strategic areas and industries; however, timing and triggers for doing so will vary,” says Georges Arbache, vice-president at KPMG’s Global Infrastructure practice in Toronto. “For example, a number of large Chinese companies have made significant investments in Africa, and it may be that in order to support their businesses, joint venturing with otherwise cash-constrained local national grid companies is essential in order to stabilize the power and transmission infrastructure they require to operate effectively.”

When considering projects, the key is to find the right balance of power costs, with factors such as political risks, the geology and the cost of labour, when conducting preliminary assessments, explains John Mullally, director of corporate affairs for Vancouver-based Goldcorp. He gives the example of Ontario, where political risks are low and mostly come in the form of “regulatory creep,” permitting delays and relatively high labour and energy costs by North American standards, which are expected to rise. “We’re willing to bear the cost of a higher cost jurisdiction,” he says.

Goldcorp has four operating mines in Canada, of which three are in Ontario and require a total of 70 megawatts (MW) of power to run. Figures for the new Éléonore mine in Quebec, which poured its first bar last October, are not available. Globally, all of its mines are connected to the grid, except for its open pit Peñasquito project in Mexico, which runs on diesel.

Mexico is one of the places where power infrastructure, and the rules surrounding it, is changing rapidly, Arbache points out: “Mexico recently announced significant reforms to its entire energy sector because there’s a huge generation supply deficit, among other factors. For mining companies […] it’s going to be simpler to gain access to alternatives and renewables offering better quality power. Power prices in Mexico are expected to rise significantly over the next 20 years because of the need for investment in the grid and on the generation supply side, so renewables offer a hedge against rising power prices, essentially.

With Mexico’s reforms expected to take effect later this year or early next year, more attractive combinations of grid-based and renewable power may become available soon for would-be miners.

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