Sunday, December 6, 2009

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.

Major Mining Company Departments

Major Manufacturer Departments



market research and product development


ore extraction and excavation

raw material acquisition








sales and marketing

sales and marketing


human resources

human resources

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.

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