BHP takes a detonator to its costs

BHP is blasting a new path to lower costs with its use of wireless technology to trigger explosives.

A mining blast explosion at a WA mine. (Supplied)

Few other major Australian-based companies would have made the long-term promises BHP unveiled in its latest half-yearly report.

On the surface BHP is a cash-generating machine but behind that cash generation veneer is a company that is moving from being a traditional miner to a high-technology powerhouse.

What BHP is doing will be duplicated by other large miners and will underpin mining profits for a decade — depending, of course, on mineral prices.

In the latest half year BHP’s productivity actually slipped back as a result of a series of events including maintenance at Olympic Dam, expansion in Chile and lower US petroleum output from shale. But CEO Andrew Mackenzie was adamant that in the next financial year, 2018-19, BHP would have lifted productivity by $US2 billion, most of it from Australia

That seemed a bold statement until you read the BHP presentation, which went much further. Mackenzie revealed that BHP’s Australian minerals operation was targeting 10 per cent reduction unit costs over the medium term, which appears to be the year ended June 30, 2022. That will contribute to a 30 per cent increase in returns on capital from its Australian assets.

In Chile BHP has invested heavily in brownfield expansion and that will also contribute substantially. And Gulf of Mexico oil looks exciting.

To be able to achieve these sort of cost gains there must be something fundamental happening at BHP — it can’t be achieved by penny pinching. Mackenzie does not spell out the detail. It has taken former BHP executive and current Orica CEO Alberto Calderon to explain to the Melbourne Mining Club what was behind BHP’s productivity optimism.

He explains that the mining industry is embracing robotics, automation, big data and the internet-of-things, which are transforming every element of the mining value chain — from exploration, mining and processing to transport.

New technologies are enabling miners like BHP to lift utilisation rates, operate more precisely, reduce maintenance costs and increase asset life.

Perhaps the biggest single change to mining is the planned use of Wi-Fi to trigger explosives. BHP is working with Orica on this development and the new explosives technology is a key reason why BHP is so optimistic about cost reduction.

Blasting is one of the few processes in the mining value chain that to date remains largely untouched by automation.

Last year, Orica commercialised the world’s first wireless detonator — which uses wireless technology to initiate blasts through rock, water or air from surface control rooms. With the manual task of connecting wires removed, BHP will slash the costs of its most labour-intensive processes.

Orica believes that just as the introduction of ammonium nitrate was an industry changer in the 1950s and 60s, so the automation of drill and blast will be a gamechanger for the 2020 industry.

And if those cost reductions are combined with mineral prices akin to today’s level, then BHP profits will go through the roof. But that’s speculation.