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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?

CIM
By: Chris Windeyer
March/April

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.

Matters in the hands of miners

Graph of industrial electricity price increasesGoldcorp still uses diesel as a backup fuel at all of its mines, but Mullally says it is trying to wean itself off it. While Ontario’s industrial electricity prices can top nine cents per kWh, it is still cheaper than diesel. Increasingly, he says, Goldcorp is using natural gas to heat buildings. “The price has certainly helped and the supply has as well. There’s been a huge influx [of gas] into the province.”

That is also why “there’s been a lot of investment in conservation and demand management,” Mullally says. “It’s always easier to conserve and reduce our energy footprint.” That has meant adopting techniques like batch milling instead of running the mill constantly, running crushers intermittently, and using sensors to govern mine ventilation. “That’s a huge component of energy costs, essentially pushing air down into the mine to keep the particulate and emissions down.”

Being connected to the grid, however, is no guarantee of a steady power supply, notes George Davies, a senior advisor to Hatch and a former Ontario deputy minister of energy. He says ongoing grid improvements in northern Saskatchewan are a response to reliability problems plaguing the region’s uranium mines, which have been experiencing several outages every year. Those outages trigger the need for backup power and drive up costs.

In many developing countries, connection to the grid is simply too risky. Davies says Barrick once declined Tanzania’s offer to split the cost of connecting the company’s mines to the national utility’s grid over concerns about the grid’s reliability. “It had to make a choice between making an arrangement with the government to have the grid expanded to its location or investing in its own supply,” Davies says. “This is typical of many third-world countries. There is such a lack of faith in the quality of management of the government-owned utility that for purposes of certainty the mining company has to make the decision to invest in its own electricity generation. That comes at a very significant cost premium.”

The utility of the future

Off-grid miners are progressively looking to renewables to combat power costs, but renewables work for on-grid mines too. KPMG’s Arbache says a system that efficiently incorporates the variety of potential energy sources is what his firm refers to as “the utility of the future.”

A 2014 study by the International Renewable Energy Agency found that the levelized cost of photovoltaic solar power dropped by half between 2010 and 2014, although it still ranges wildly between $0.07 and $0.40 per kWh. The cost of onshore wind energy is now competitive with fossil fuel generation and is sometimes cheaper. But the report also notes that “the installed costs and capacity factors for renewable energy are highly technology- and site-specific.” Wind resources, for example, are notoriously finicky, depending on location, and costs can range anywhere from under $0.03/kWh to more than $0.30/kWh.

Iamgold’s Letwin says energy cost was the driving force behind his company’s construction of a five MW solar array at its Rosebel mine in Suriname even though, according to the Inter-American Development Bank, Suriname’s grid prices are relatively low, at around $0.05/kWh. But power costs for industrial users like Iamgold are governed by a series of power purchase agreements that, in the case of Rosebel, average out closer to $0.14/kWh. The Iamgold solar plant, which opened last August, is currently producing 1.1 MW of power, with any extra electricity being put back into Suriname’s domestic grid. With a capital cost of $11 million, the solar panels are expected to save Iamgold around $1 million per year.

John Mathews, a professor at the MacQuarrie Graduate School of Management in Sydney, Australia, and author of The Greening of Capitalism, argues that the rapidly declining cost of renewable energy means miners that do not move to renewables risk being left behind.

As Mathews has written in Energy Post, an independent energy-focused website and newsletter, Chile has more than 18,000 MW of renewable energy projects – either proposed or under construction. That would more than double the country’s total current electricity production. A 110-MW solar plant, which is equipped with molten salt storage to provide constant power, and a 115-MW wind turbine array are now under construction to power copper projects in the Antofagasta region in northern Chile.

These developments are driven by Chile’s historically high power costs relative to its neighbours, around US$0.25 per kWh, according to a 2014 report by KPMG. Mining is Chile’s largest energy consumer, sucking up 85 per cent of the electricity produced in the country’s north, which is mostly generated by natural gas.

Mathews contends Chile has benefited from China’s massive push to develop renewable energy. While that largely began as a way for China to combat its abysmal domestic air pollution situation, he says it has also driven down unit costs everywhere, and Chile has simply taken advantage, with some costs declining to as low as US$0.08 per kWh.

“The example of Chile is there for all to see,” Mathews says. “What I see holding back adoption of renewable sources of energy in the mining industry is technical conservatism and failure of imagination to realize an alternative to conventional fossil fuels.”


Graph of average industrial electricity price in OECD countries

Guzzling cheap petroleum remains attractive

But Letwin says it is not “technical conservatism” holding back more deployment of renewables, but the brute calculus of oil prices. “It’s when oil starts to move north of US$100 that you start looking at alternate energy sources like the sun and start realizing that a large capital investment may make sense if your mine life is long enough to support the investment,” he says. “For solar to pay off, you need about a 20-year mine life. That was at US$100 a barrel. So at US$50, you need an extended mine life in order to get your money back. The math gets a lot more challenging.”

Brendan Marshall, director of economic affairs at the Mining Association of Canada, says one of the challenges for miners working in Canada is the location of a deposit relative to the available renewable resources. “You can’t move a mine,” Marshall says. “The deposit’s where it is and that’s that. The cost of the technology coming down is very helpful, but there’s a difference between pricing competition between technologies and the deployability for mining purposes.”

And even if your mine is located in a sunny or a windy locale, there will always be night-time, cloudy days and days when the wind is not blowing. That means diesel, heavy fuel oil or natural gas is still a necessary backup. Right now, mass on-site storage of renewable power is exceedingly expensive and difficult. In April 2014, the New York Times reported that storing one kilowatt-hour in a conventional battery could cost hundreds of dollars. But Letwin says whoever solves the storage problem will have a game-changing technology on par with the internal combustion engine on their hands: “It will, mark my words, change the world.”


Graph of industrial electricity prices