18-10-2014, 05:17 PM
http://www.bhpbilliton.com/home/Pages/default.aspx
http://www.bhpbilliton.com/home/investor...fault.aspx
inside the lean australian
Matthew Stevens
2393 words
18 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Mining BHP Billiton is ramping up production of iron ore as prices crash, confident fortune lies in a streamlined operation, writes Matthew Stevens.
'This is iron ore heaven," Pat Bourke says, as a massive hole swallows our sun-seared horizon. "This" is the well-spring of BHP Billiton's 45-year history in creating national wealth by digging up iron ore in the Pilbara. "This" is Mount Whaleback. And Bourke is the monster's latest general manager.
Bourke is second-generation BHP. His father retired as a general manager at the Port Kembla steel mill. He was a 40-year man and Bourke is just more than half way there. But BHP has long left Wollongong and its steel behind. And so has Bourke.
Mount Whaleback is the greatest iron ore deposit ever found in Australia. It moved its first tonnes in 1969 and it will be central to BHP's Pilbara production for another 20 years at least. The production hub created around it will continue pumping out ore for another 50 years beyond that.
But never in its long history has Mount Whaleback been as effectively harvested as right now. The mine is bigger, deeper and harder to operate than ever before. But Mount Whaleback is producing more ore with greater predictability that ever, and over the past three years the Newman hub that pumps its product west has increased volumes by 10 per cent annually, while the numbers of people and machinery deployed in the big pit has fallen just as consistently. And that says everything about the way our big miners have anticipated the end of the long explosion of commodities prices.
BHP and rival Rio Tinto have risked the ire of a cohort of powerful shareholders and consistently ploughed the riches generated by a once-in-a-century boom into the heavy metal infrastructure, technology and knowledge that will sustain and grow Australia's place in the seaborne iron ore industry.
Australians seem always to have been profitably entertained by a mining boom. From the gold rush to the silver boom, from nickel to iron ore, we lap up the good times and, true to our tall-poppy-lopping nature, we don't mind the odd bust or two either.
One legacy of this enduring engagement is that mining is part of our national conversation. Nowhere else in the world is the iron ore price a data-point of television network news. As a result there is a relatively broad public awareness of both the travails of our iron ore and coal miners and of the idea that our stronger-for-longer mining boom has suddenly exhausted itself.
Back in 2003, just before China's economy overreached its ability to resource its growth, the mining sector accounted for 7.8 per cent of Australia's GDP. Last year, in the boom's final flush, that contribution hit 11 per cent. From the mid-1960s on, the Pilbara pretty much sat alone as the world's key seaborne trader. But Japanese frustration at our growing unreliability through the late 1970s saw a cartel of steel mills seed the Brazilian iron ore business. By the turn of the century we had surrendered market leadership to Brazil, despite its distance from Asian customers.
The investment phase of the mining boom has changed all that. Australian exporters, big and small, currently account front 42 per cent of the seaborne market, while Brazil's share has slipped to 26 per cent.
Australian went into the boom producing 200 million tonnes a year of iron ore. Over a decade more than $80 billion has been invested in building the mines, trains and port capacity that last year pumped out 579 million tonnes. The government forecaster expects production to surge through the 700 million tonne mark this year and top 900 million tonnes by 2019. with our share of the market by then to be 56 per cent.
But while Australian output is expected to grow at a compound annual growth rate of 6 per cent, the market for that product is only going to grow at around 2 per cent.
Here lie the seeds of the great iron ore paradox. The iron ore price has been smashed by 40 per cent this year as the market moved into surplus. The likes of BHP and Rio Tinto say this shift is structural and so it will persist. And yet both have plans to push more material into an already glutted market.
A latecomer to an iron ore party that seems already over is the Swiss commodities trader turned global miner Glencore. Its patently clever, enamel-hard boss is Ivan Glasenberg. He reads this expansion strategy as mutually assured minerals market destruction. This week he was joined in publicly challenging the iron ore king's shared expansion theology. Both Western Australian Premier Colin Barnett and Fortescue Metals Group chief executive Nev Power accused BHP and Rio of a collusive exercise of excessive market power that is aimed to hurt competitors by sustaining lower prices.
Each of these gentlemen have discreetly different axes to grind. Glasenberg has publicly expressed ambitions to force our biggest producer, Rio, into a merger. Barnett's budget outlook has been thoroughly undermined by falling iron ore prices. And Power is running a miner that, for all its sterling efforts, is the highest-cost Australian, which produces the lowest value-in-use export.
But the simple fact is that Fortescue's pathway to lower costs has been built around adding nearly 100 million new tonnes to the global system, and it is hard to believe that Power doesn't admire the logic driving his bigger competitors, even it he doesn't appreciate the outcome.
Needless to say, Rio and BHP reject any idea that they are acting collusively or anti-competitively. Each insists the growth ahead is about making the most efficient, highest-returning use of the capital that has been sunk into the Pilbara.
Power's bellicosity did not end with suggestions of collusion. In a recovery of Fortescue's foundation rhetoric, he suggested the majors were inspired to growth by the Third Force's arrival in the market and that Rio's and BHP's latest aspirations were as surprising as they were unwelcome. Power's rant has been described by one leading miner as "a game of distraction". Whatever the motivation, the claims do not match the record. Both the majors kicked off their long growth plans back in 2005. And both flagged in considerable detail the volume targets, timing and costs of the campaigns currently being completed back in 2010.
According to BREE, we have entered the third phase of the boom. The price boom is dusted, the investment boom is closing, but the production phase has just begun. And the additional 130 million tonnes that Rio and BHP plan to introduce to the market over the next three years or so should be received as productivity tonnes.
Over a decade of chasing new Chinese demand, BHP has added 150 million tonnes to its annual volumes. Those tonnes have come at about capital cost of about $US165 a pop, or $US25 billion in total.
The Global Australian has plans to add another 65 million tonnes to its capacity. But these new tonnes will come largely from more efficient operation of its massive infrastructure estate. BHP says the move from 225 million tonnes to 270 million tonnes will come without any significant capital spending and that the drive on to a peak of 290 million tonnes will cost no more than $US2 billion ($2.3 billion).
The analysts reckon the company is being conservative on cost and timing. BHP puts the capital cost of expansion at $US30 a tonne. Deutche Bank's Paul Young says it will cost $US15 a tonne ($US1 billion all told) and that the ramp-up to 290 will be under way by late 2016.
Should this lower cost case prove accurate, the average capital cost of BHP's growth tonnes since 2004 will come down to a ballpark $US120 a tonne. And that effectively slices years from the pay-back period and carves away at the hurdles for return on capital. It will also see BHP's core cash cost of production reduced to less than $US20 a tonne, giving the company an improved chance of achieving its ambition of winning the increasingly frantic race to the bottom of the iron ore cost curve .
But how can BHP add these tonnes so cheaply and quickly? Well, that is where the whole story gets interesting, at least for the mining boffins.
The increasingly fluid and brutal tectonics of the iron ore market don't hold a lot of interest for the likes of Bourke or his counterpart at BHP's new super mine, Jimblebar, Tim Day.
Each has watched over a multibillion expansion project that sees them in command of machinery that holds the potential to mine and ship 60 million tonnes per annum of iron ore. Now each is focused on the minutiae of performance that can make that happen.
At the mature Mount Whaleback operation, this means continuing to dig and move 110mtpa of waste and ore in a mine populated by half the number of giant shovels that used to stalk the pit. It means running trucks for 6000 hours a year rather than the 4200 hours of just two years ago. And it means reducing the downtime of trucks and shovels by spending $2 million a pop on mobile crib rooms that can be placed where people work.
And it means working ever more closely with the Perth-based operators that schedule everything that moves to, from and around the mine and that control all the machinery that doesn't move.
The $170 million remote operations centre (IROC) is based in glorious isolation on the 23rd floor of BHP's Perth office. If its three failsafe systems collapse in concert, there is a duplicate centre just 20 minutes away that can be switched on to replace it.
IROC opened last year and it has already become a hub of innovation through both bottom-up management and big data analysis. So far, for example, the remote operators have generated more than 4000 individual suggestions for mine-face improvements, while the way they individually operate their pieces of the mining puzzle is constantly assessed for differentiating instructions with the best of them then being baked into the operational hardware.
According to BHP's iron ore boss, Jimmy Wilson, the business's embrace of automation will happen "despite ourselves". Wilson is a determined second-mover. Being first brings it owns risks and Wilson has no time for operational risk.
BHP has two live experiments in mining automation. It is running autonomous drilling equipment at its Yandi mine and driverless trucks at Jimblebar. As things stand, the drilling piece is working rather better than the trucks. There are two sides to the success story of the robot drills, which spend their days making the holes that are filled with the explosives necessary to start the whole digging process. The robots work faster and are less destructive of their drill bits. And they have created a competitive tension that has seen human performance improve to match their speed – though not their sustainability. As a result the autobot drills will march across BHP sites in ever greater numbers. Getting human-leading productivity from the driverless trucks has been rather tougher. Jimblebar moves nearly 3 million tonnes a month of iron ore from 35 trucks. Nine of them are driverless. They represent 25 of the fleet but move only 16 per cent of mine material.
Another three robot trucks will join the fleet in the next few months and the trial will continue until next March. But there is a whole lot of work to be done to make them competitive with humans.
One reason for this is that Jimblebar's drivers set the standard at BHP. Having hit an operating hours target of 6200, they now have 6500 hours as their next line in the red dirt.
There is more to this truck out-performance though. Inspired by a piece of kit he saw at BHP's nickel business, Jimblebar's Tim Day has installed lots of large yellow frames around his mine. They are dragged form place to place and they allow for more rapid shift changes by the drivers.
So, what once took maybe 45 minutes now takes an average of six minutes. That might not sound much. But these mines a 24/7 operations, so this initiative adds 22 working days to a truck's annual active life.
Improving mine performance would be useless without similarly paced improvement across BHP's entire logistics chain. Here again, little things become very big very quickly. Decisions to spend $US300 million restoring the original Mount Newman railway (it is duel track most of the way now) and to install electronic brakes on all of its ore wagons mean BHP's railway will never again be a supply bottleneck.
Once the new braking system is across a fleet that will expand from 8800 cars to more than 9500, BHP can run heavier, longer trains more quickly and reliably than ever.
Four locomotives do the braking for the 268 wagons of these two-kilometre trains. It takes five kilometres to stop these things and 3km to get them up to speed again. It means curves are taken more slowly than they might be and that wagon life can be unnecessarily reduced by the stresses of the crush and pull of a life on the rails. Adding 16 new wagons to every train will cost $120 million and generate $780 million annually in additional tonnes (at an $US80 a tonne price). This will pay for itself in two months.
Getting brakes on the wagons will allow trains to run faster and use less fuel doing it. It will add 18 million tonnes to capacity at a cost of $US144 million.
At $80 a tonne, that means gross revenues of $1.4 billion. Which means this is even better business.
A classic example of what Jimmy Wilson calls his "relentless pursuit of the basics".
The writer was a guest of BHP Billiton.
Fairfax Media Management Pty Limited
Document AFNR000020141017eaai0001u
http://www.bhpbilliton.com/home/investor...fault.aspx
inside the lean australian
Matthew Stevens
2393 words
18 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Mining BHP Billiton is ramping up production of iron ore as prices crash, confident fortune lies in a streamlined operation, writes Matthew Stevens.
'This is iron ore heaven," Pat Bourke says, as a massive hole swallows our sun-seared horizon. "This" is the well-spring of BHP Billiton's 45-year history in creating national wealth by digging up iron ore in the Pilbara. "This" is Mount Whaleback. And Bourke is the monster's latest general manager.
Bourke is second-generation BHP. His father retired as a general manager at the Port Kembla steel mill. He was a 40-year man and Bourke is just more than half way there. But BHP has long left Wollongong and its steel behind. And so has Bourke.
Mount Whaleback is the greatest iron ore deposit ever found in Australia. It moved its first tonnes in 1969 and it will be central to BHP's Pilbara production for another 20 years at least. The production hub created around it will continue pumping out ore for another 50 years beyond that.
But never in its long history has Mount Whaleback been as effectively harvested as right now. The mine is bigger, deeper and harder to operate than ever before. But Mount Whaleback is producing more ore with greater predictability that ever, and over the past three years the Newman hub that pumps its product west has increased volumes by 10 per cent annually, while the numbers of people and machinery deployed in the big pit has fallen just as consistently. And that says everything about the way our big miners have anticipated the end of the long explosion of commodities prices.
BHP and rival Rio Tinto have risked the ire of a cohort of powerful shareholders and consistently ploughed the riches generated by a once-in-a-century boom into the heavy metal infrastructure, technology and knowledge that will sustain and grow Australia's place in the seaborne iron ore industry.
Australians seem always to have been profitably entertained by a mining boom. From the gold rush to the silver boom, from nickel to iron ore, we lap up the good times and, true to our tall-poppy-lopping nature, we don't mind the odd bust or two either.
One legacy of this enduring engagement is that mining is part of our national conversation. Nowhere else in the world is the iron ore price a data-point of television network news. As a result there is a relatively broad public awareness of both the travails of our iron ore and coal miners and of the idea that our stronger-for-longer mining boom has suddenly exhausted itself.
Back in 2003, just before China's economy overreached its ability to resource its growth, the mining sector accounted for 7.8 per cent of Australia's GDP. Last year, in the boom's final flush, that contribution hit 11 per cent. From the mid-1960s on, the Pilbara pretty much sat alone as the world's key seaborne trader. But Japanese frustration at our growing unreliability through the late 1970s saw a cartel of steel mills seed the Brazilian iron ore business. By the turn of the century we had surrendered market leadership to Brazil, despite its distance from Asian customers.
The investment phase of the mining boom has changed all that. Australian exporters, big and small, currently account front 42 per cent of the seaborne market, while Brazil's share has slipped to 26 per cent.
Australian went into the boom producing 200 million tonnes a year of iron ore. Over a decade more than $80 billion has been invested in building the mines, trains and port capacity that last year pumped out 579 million tonnes. The government forecaster expects production to surge through the 700 million tonne mark this year and top 900 million tonnes by 2019. with our share of the market by then to be 56 per cent.
But while Australian output is expected to grow at a compound annual growth rate of 6 per cent, the market for that product is only going to grow at around 2 per cent.
Here lie the seeds of the great iron ore paradox. The iron ore price has been smashed by 40 per cent this year as the market moved into surplus. The likes of BHP and Rio Tinto say this shift is structural and so it will persist. And yet both have plans to push more material into an already glutted market.
A latecomer to an iron ore party that seems already over is the Swiss commodities trader turned global miner Glencore. Its patently clever, enamel-hard boss is Ivan Glasenberg. He reads this expansion strategy as mutually assured minerals market destruction. This week he was joined in publicly challenging the iron ore king's shared expansion theology. Both Western Australian Premier Colin Barnett and Fortescue Metals Group chief executive Nev Power accused BHP and Rio of a collusive exercise of excessive market power that is aimed to hurt competitors by sustaining lower prices.
Each of these gentlemen have discreetly different axes to grind. Glasenberg has publicly expressed ambitions to force our biggest producer, Rio, into a merger. Barnett's budget outlook has been thoroughly undermined by falling iron ore prices. And Power is running a miner that, for all its sterling efforts, is the highest-cost Australian, which produces the lowest value-in-use export.
But the simple fact is that Fortescue's pathway to lower costs has been built around adding nearly 100 million new tonnes to the global system, and it is hard to believe that Power doesn't admire the logic driving his bigger competitors, even it he doesn't appreciate the outcome.
Needless to say, Rio and BHP reject any idea that they are acting collusively or anti-competitively. Each insists the growth ahead is about making the most efficient, highest-returning use of the capital that has been sunk into the Pilbara.
Power's bellicosity did not end with suggestions of collusion. In a recovery of Fortescue's foundation rhetoric, he suggested the majors were inspired to growth by the Third Force's arrival in the market and that Rio's and BHP's latest aspirations were as surprising as they were unwelcome. Power's rant has been described by one leading miner as "a game of distraction". Whatever the motivation, the claims do not match the record. Both the majors kicked off their long growth plans back in 2005. And both flagged in considerable detail the volume targets, timing and costs of the campaigns currently being completed back in 2010.
According to BREE, we have entered the third phase of the boom. The price boom is dusted, the investment boom is closing, but the production phase has just begun. And the additional 130 million tonnes that Rio and BHP plan to introduce to the market over the next three years or so should be received as productivity tonnes.
Over a decade of chasing new Chinese demand, BHP has added 150 million tonnes to its annual volumes. Those tonnes have come at about capital cost of about $US165 a pop, or $US25 billion in total.
The Global Australian has plans to add another 65 million tonnes to its capacity. But these new tonnes will come largely from more efficient operation of its massive infrastructure estate. BHP says the move from 225 million tonnes to 270 million tonnes will come without any significant capital spending and that the drive on to a peak of 290 million tonnes will cost no more than $US2 billion ($2.3 billion).
The analysts reckon the company is being conservative on cost and timing. BHP puts the capital cost of expansion at $US30 a tonne. Deutche Bank's Paul Young says it will cost $US15 a tonne ($US1 billion all told) and that the ramp-up to 290 will be under way by late 2016.
Should this lower cost case prove accurate, the average capital cost of BHP's growth tonnes since 2004 will come down to a ballpark $US120 a tonne. And that effectively slices years from the pay-back period and carves away at the hurdles for return on capital. It will also see BHP's core cash cost of production reduced to less than $US20 a tonne, giving the company an improved chance of achieving its ambition of winning the increasingly frantic race to the bottom of the iron ore cost curve .
But how can BHP add these tonnes so cheaply and quickly? Well, that is where the whole story gets interesting, at least for the mining boffins.
The increasingly fluid and brutal tectonics of the iron ore market don't hold a lot of interest for the likes of Bourke or his counterpart at BHP's new super mine, Jimblebar, Tim Day.
Each has watched over a multibillion expansion project that sees them in command of machinery that holds the potential to mine and ship 60 million tonnes per annum of iron ore. Now each is focused on the minutiae of performance that can make that happen.
At the mature Mount Whaleback operation, this means continuing to dig and move 110mtpa of waste and ore in a mine populated by half the number of giant shovels that used to stalk the pit. It means running trucks for 6000 hours a year rather than the 4200 hours of just two years ago. And it means reducing the downtime of trucks and shovels by spending $2 million a pop on mobile crib rooms that can be placed where people work.
And it means working ever more closely with the Perth-based operators that schedule everything that moves to, from and around the mine and that control all the machinery that doesn't move.
The $170 million remote operations centre (IROC) is based in glorious isolation on the 23rd floor of BHP's Perth office. If its three failsafe systems collapse in concert, there is a duplicate centre just 20 minutes away that can be switched on to replace it.
IROC opened last year and it has already become a hub of innovation through both bottom-up management and big data analysis. So far, for example, the remote operators have generated more than 4000 individual suggestions for mine-face improvements, while the way they individually operate their pieces of the mining puzzle is constantly assessed for differentiating instructions with the best of them then being baked into the operational hardware.
According to BHP's iron ore boss, Jimmy Wilson, the business's embrace of automation will happen "despite ourselves". Wilson is a determined second-mover. Being first brings it owns risks and Wilson has no time for operational risk.
BHP has two live experiments in mining automation. It is running autonomous drilling equipment at its Yandi mine and driverless trucks at Jimblebar. As things stand, the drilling piece is working rather better than the trucks. There are two sides to the success story of the robot drills, which spend their days making the holes that are filled with the explosives necessary to start the whole digging process. The robots work faster and are less destructive of their drill bits. And they have created a competitive tension that has seen human performance improve to match their speed – though not their sustainability. As a result the autobot drills will march across BHP sites in ever greater numbers. Getting human-leading productivity from the driverless trucks has been rather tougher. Jimblebar moves nearly 3 million tonnes a month of iron ore from 35 trucks. Nine of them are driverless. They represent 25 of the fleet but move only 16 per cent of mine material.
Another three robot trucks will join the fleet in the next few months and the trial will continue until next March. But there is a whole lot of work to be done to make them competitive with humans.
One reason for this is that Jimblebar's drivers set the standard at BHP. Having hit an operating hours target of 6200, they now have 6500 hours as their next line in the red dirt.
There is more to this truck out-performance though. Inspired by a piece of kit he saw at BHP's nickel business, Jimblebar's Tim Day has installed lots of large yellow frames around his mine. They are dragged form place to place and they allow for more rapid shift changes by the drivers.
So, what once took maybe 45 minutes now takes an average of six minutes. That might not sound much. But these mines a 24/7 operations, so this initiative adds 22 working days to a truck's annual active life.
Improving mine performance would be useless without similarly paced improvement across BHP's entire logistics chain. Here again, little things become very big very quickly. Decisions to spend $US300 million restoring the original Mount Newman railway (it is duel track most of the way now) and to install electronic brakes on all of its ore wagons mean BHP's railway will never again be a supply bottleneck.
Once the new braking system is across a fleet that will expand from 8800 cars to more than 9500, BHP can run heavier, longer trains more quickly and reliably than ever.
Four locomotives do the braking for the 268 wagons of these two-kilometre trains. It takes five kilometres to stop these things and 3km to get them up to speed again. It means curves are taken more slowly than they might be and that wagon life can be unnecessarily reduced by the stresses of the crush and pull of a life on the rails. Adding 16 new wagons to every train will cost $120 million and generate $780 million annually in additional tonnes (at an $US80 a tonne price). This will pay for itself in two months.
Getting brakes on the wagons will allow trains to run faster and use less fuel doing it. It will add 18 million tonnes to capacity at a cost of $US144 million.
At $80 a tonne, that means gross revenues of $1.4 billion. Which means this is even better business.
A classic example of what Jimmy Wilson calls his "relentless pursuit of the basics".
The writer was a guest of BHP Billiton.
Fairfax Media Management Pty Limited
Document AFNR000020141017eaai0001u