How the Mining Industry Benefits from ERP Systems

Mining is a multifaceted business, one that in many ways parallels a repetitive manufacturing business. The analogy is that exploration and marketing for a mining company, for example, is similar to the marketing research performed by a manufacturer, although a noted difference between the two is that most mines are of sizes to support decades of operation, whereas a manufacturer’s production runs last for much shorter durations.

Here in this article, a loose comparison is drawn between the mining industry and the manufacturing industry, and suggested is a method to follow in order to integrate financial reporting so that auditors can verify results. It concludes with concepts that are required to manage the entire organization.

In a mining company, each department has its own way of measuring outputs, which often is incompatible with legal or shareholder requirements. An enterprise resource planning (ERP) system allows each department to use its own reporting measures. The ERP software transforms data bidirectionally to the standard (legal) business reporting. However, it is this use of disparate methods by departments that causes confusion within the mining company.

The manufacturing industry has learned that integrated scheduling, materials management, production manufacturing, and distribution are the keys to profitability. Yet in a mining company, what is understood in one business department, if managed by non-ERP software such as spreadsheets and tailored stand-alone software, is that financial integration is time-consuming and fraught with errors, and it does not allow a coherent view of the company’s operations or a true measure of annual profit.

Table 1 depicts similarities between the basic departmental structure of a mining company and a manufacturer, but this article focuses specifically on one overview of the departmental structure of mineral mining.

Table 1. The corresponding departments of mining companies and manufacturers.

The Departments of a Mining Company

1. Exploration
Geologists are the mining company’s major explorers. Often the geologist’s work is to follow the ore vein at an existing mine, other times it is fieldwork. The geologist collaborates with the mining engineer in exploration and in extending operations at an existing site.

In the past, the land to be surveyed was walked; samples taken were labeled and put into knapsacks for later analysis. Newer methods now use aircraft with instrumentation to look at anomalies to the earth’s magnetic field as well as at soil colorations and vegetation as indications of vast ore bodies lying beneath the earth’s surface. This primary information is used to limit where the geologists begin the on-foot exploration and the extent of their survey. Once a potential ore-bearing area is targeted, the geologist arrives to take samples.

After a potential ore body is discovered, a secondary, in-depth analysis is performed to determine the economics of building a mine. Other (chemical) research determines the amount of the ores’ accompanying minerals, such as sulfur, gold, uranium, and others. Exploration costs include salaries, camps, insurances, aircraft and electromagnetic equipment, and other machinery and materials needed to estimate the ore body size.

Financial considerations that come after an adequate “ore body size” has been confirmed include a lifetime estimate of the mine (based on a prescribed rate of depletion), labor, installation and amortization of fixed assets; cost of converting currency and royalties; and taxes. All things being favorable, the infrastructure planning for roadways, railways, and so forth is done in conjunction with the ore extraction department.

Exploration costs are based on overheads and on time and materials. Typically, this cost is converted to a per diem charge (dollars per day, amortized over a year).

2. Ore Extraction and Excavation
In a typical manufacturing company, a production order is issued to respond to a sales order, sales contract, or a marketing request to make goods to forecasted sales. The mining industry operates in a similar way. The mining sales contract is more often a multiyear (10 years or more) deal. This deal marks the beginning of the refining or smelting process. Multiple sales contracts combined initiate the mining of the ore. Extraction and transportation of the ore is subject to sales and to seasonal requirements, and these operations are managed by the geologist and the engineering groups. In the extraction environment, analysis is performed to determine decline (the angle of a tunnel or the angle of the walls) at an open pit. This ongoing work allows for maximizing safety while ensuring the lowest cost of excavation possible as the dig expands. Too sharp an angle increases risk of collapse, whereas too shallow an angle cuts into the available area for excavation.

At a working mine, consumables and spare machinery parts are inventoried. Geologists now active in the quality control (QC) role measure the quality of the excavated material and its accompanying minerals. Extraction may be performed by many means, including strip, pit, or in-situ mining (the latter of which uses solutions to dissolve desired metals). As much as possible, the ore is separated from the soil and other accompanying material.

New environmental laws require mining companies to minimize the pollution they might create, with overburden being a prime example. Overburden is the unwanted material that is excavated along with the ore. After separation from the ore, overburden is spread over the exhausted area and covered with topsoil. Other pollutants are recyclable, permitting reuse with a minimal increase in excavation costs. Typically, the financial exercise at the mine is to derive a standard cost per metric ton of metal and to establish a standard quantity of ore that can be extracted to produce a metric ton of metal.

Consumables (e.g., diamond drill bits, dynamite, chemicals, fuel, food, etc.) and fixed assets (e.g., buildings, heavy haul equipment, generators for electricity, air conditioning, etc.) are factored into the cost equation.

Amortizations, depreciation, and the like feed into a set of financial ledgers, weighting factors, and a few transformation rules assigned to each variable, when manipulated, and a cost per metric ton of the ore is derived.

3. Transportation
In the transportation department of large manufacturing organizations, management (logistics) plays a major role in minimizing costs and optimizing delivery routes. But companies in the mining industry have a larger requirement. These companies often need to build their own routes as well as purchase all their rolling stock, since mines are usually located some distance from the smelter or the stockpile area. This stockpile area could be at a wharf, at a smelter, or can even be the ore in transit. (In transit, ore and refined metal are parts of the inventory, and they are added to the measured inventory).

Specific to the mine operation are capital investments for roads, railways, and wharfs and barges needed to haul the ore to the smelter or the delivery of work-in-process metal or finished goods. Actual transportation of product requires another method of costing, based on weight and distance. Truck, rail, and boat each have their weight-distance rates. Costs for fixed assets (overhead cranes or vehicles required for ore transfer from one form of transport mode to another, based on destination) are apportioned out. The operational costs are generally converted and blended to provide an amount per ton–kilometer.

4. Smelting
In a manufacturing factory, inventoried material is scheduled, and the work in process passes multiple workstations, where at every station value is added. A mine operation is somewhat similar. Smelting or refining is the process of converting ore to metal. This is a continuous operation, with ore introduced at the end of the furnace where heating begins. As different metals have different melting points, the ore, which contains these metals, will have each metal siphoned away once its melting point is reached. Value is added as precious metals are extracted from the ore.

Sulfur, an element that accompanies almost every ore, is part of the “raw ore material,” which is consumed in the furnace as part of the mineral extraction process. Sulfur can be the fuel responsible for more then half the heat required to create molten metal. The molten metal is transferred to secondary mixing furnaces. QC activities for blending alloying ingredients, ensuring the purity of the product, and other processing then takes place.

Some internal or external customer contracts demand that the molten metal be poured into molds and then forged to a rough finished product. Other customers take ingot bars for further cold processing. Costs consist of the base smelting, the mixing, the purifying, and transportation. The transportation cost (ton-kilometer rates) is elevated, as the goods shipped require improved handling. The addition of alloys to make a special form of metal increases the finishing or work-in-process costs.

5. Sales and Marketing
The sales and marketing operations for manufacturing and mining are similar. The sales team for mining companies looks to manage contracts for deliveries based on seasonal demand. The metal is now considered make-to-order (MTO) to meet a contract and is shipped, or is considered made-for-stock for on-demand sale. Long-term contract sales for alloys have fixed delivery amounts per business period; other contract sale quantities fluctuate according to the seasons. Sales prices reflect the operations costs and profit requirements.

Marketing’s job is to ensure that a customer does not abandon the company for a competitor, as well as to find new customers or new uses for the company’s products. Again, from marketing and sales comes the pressure to have the lowest operating cost possible in order to maximize profits.

6. Human Resources (HR)
The HR department in a mining company is essentially the same as in the manufacturing industry. Since mining in total is a higher human capital risk business, this department has the added function of either managing its own group insurance, or blending the group insurance in with that provided by the insurance industries. Most mining companies will typically pay the insuring company a compensation to permit fair access cost benefits for all their employees. Some requirements that make mining different from manufacturing depend upon the country it is located in and government requirements. Compliance with government safety requirements is mandatory. For example, an employee working on multiple jobs will result in the company paying multiple hourly rates to the government based on the deemed job risk.

The Recommended Solution? An ERP System

As mentioned before, for the purposes of this article, the mining enterprise has been partitioned into six business areas. These distinct departments try to provide information to each other, with each business area using its own best business practices and measures. If each department had its own business system (as was the case before economical computing), the problems would manifest themselves as such: multiple inconsistent product measures, lack of timely data exchange, difficulty integrating spreadsheets with computer systems, difficulty converting information from one measure to another, problems with audit ability, and poor ability to respond to business or government demands altogether.

To avoid these problems and to be able to perform a financial month-end within days, there has to be some real-time system that each group uses where the yield at each mine is converted to a standard measure. A modern ERP system meets these business needs, and provides other benefits as well.

When preparing to implement an ERP system, a mining company should determine key performance indicators (KPIs) and the business intelligence (BI) functionality required by each department, as well as other research or reporting facilities.

The ERP system needs to be tailored to each revenue- and expense-producing entity (mine site) by providing approved conversion rules for producing standard costs. The system must support measures for fixed assets, variable costs, inventory, material-in-transit costs, and site cleanup. The ERP system must also provide budget forecasting capabilities, including such what-if scenarios as the ability to determine impact assessments for changes in fuel cost, ore grade changes, employment productivity changes, and more.

The main advantage of any ERP system is that it is a comprehensive, real-time system. Some business parameters are fixed constants, while others, such as currency conversions, are date stamped. An ERP system has all the transactions programmed for real-time updates. An invoice, payment, ore shipment, or purchase shows up immediately on the balance sheet. Every department can make use of the company’s up-to-date data.

While many tend to think of mining companies in terms of single-site mining, in reality, mining companies generally operate in more than one country and in more than one currency, and as such, they must ensure compliance with a myriad of government regulations.

Companies today acquire other businesses, sometimes in the vertical market, and other times, in other industries. The main purpose behind acquisitions is to accommodate seasonal fluctuations in the core business. These holdings are usually incorporated into the chosen ERP system.

Why should any company implement an ERP system? Based on the responses of over 1,400 manufacturers to an August 2007 survey by the Aberdeen Group on the reasons for implementing an ERP system, the following statistics were found:

• availability of low-cost options that minimize risk: 41%

• pressure from customers or suppliers for data and collaboration: 40%

• explosive growth: 33%

• growth beyond a predefined threshold: 29%

• regulatory compliance requirements: 25%

• a disastrous event that proved an ERP is essential to operate effectively: 18%

• mandates from the parent company: 11%

The challenge for any ERP provider is to identify a conversion process that considers all these factors.

A few ERP systems specifically designed for mining are available in the market, and these legacy ERP solutions are functionally very rich. Vendors of these solutions offer tailored packages to match the needs of any company in the mining industry (be it in iron, gold, diamonds, etc.) as shown in table 2.

Table 2. Vendors of ERP systems for mining companies.

Today, with the advent of low-cost hardware and competitive forces, ERP solutions for the mining industry are available within the five-digit dollar range. This cost includes hardware, software, licensing, and training.

Early adoption of an ERP system is recommended for mining companies, as its implementation will eliminate the business errors and reporting confusion that a smaller mining company start-up faces as it grows in profitability.