Palabora Mining Company
A presentation by Nick Fouche
General Manger Growth (Investment projects) 29 January 2013
Palabora Mining Company
Company overview
• Palabora Mining Company in the Town of Phalaborwa with copper and magnetite operations
• Employs approximately 4000 employees and contractors
• Contributes significantly to local and regional GDP.
• Existing mine life ends in 2015 due to ore body (Lift I) depletion
• A pre-feasibility study, for a second level of mining (Lift II), has been undertaken to extend the life of mine to 2030
The effect of 16% tariff increases on Palabora
The extension of the mine is affected
• The rise in electricity prices has a significant impact on future expansion and operations of PMC, who is exposed and dependant on global
market prices.
• The Net Present Value, to extend mining operations, is reduced by 30% due to real increases (based on 16% average) arising from the 5 year tariff announcement.
• The business case for future investment, and extension of the mine, is thus severely impacted by the proposed increases.
• If these tariff increases are approved then future expansion at PMC becomes potentially unattractive for investors.
Is it 16% or 21% for Industrial?
Eskom PercentPrice Increase
Eskom MYPD Part 2 brochure
Exert from Eskom MYPD3 “Unpacking our MYPD application to Nersa” Part 2
The rising cost of power at PMC
Energy cost has more than doubled
2.48 3.11 4.80 6.91 8.03 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 2008 2009 2010 2011 2012 % of operating costs US cents/kWh Cost of power at PMC
Escalating energy costs is prevailing
Energy is becoming the single biggest expense after labour
Electricity Cost Escalation - Eskom PMC Energy Cost of Copper Production
0 1 2 3 4 5 6 7 8
USD cents per kWh
Electricity CPI 13.1 39.4 53.6 0 10 20 30 40 50 60 2008 2011 2014 USD cents/pound
Comparison Electricity Price (2013)
Current South African electricity prices ranks with the highest in the world
7 -1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00
South Africa United States Australia Canada
Electricity Price (US cents per kWh) USD
Cents/kWh
Eskom Megaflex
Canadian Electricity Price source http://www.iedm.org/files/avril07_en.pdf
United States Energy Information Agency www.eia.gov/electricity
Based on ZAR_US$ at R9/USD
Cost of power at 7.8 exchange then price is 7.05 US cents per kWh
Profit through energy transformation
…..but the impact with the 16% increases
South Africa will become the highest energy cost in resource based industrialized economies
USD Cents/kWh
Projected South African Eskom Magaflex Electricity Price Increase
4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 2012 2013 2014 2015 2016
US, Canadian and Australian Industrial
Electricity Price USD Cents/kWh
Eskom Price Rise USD
Cents/kWh
Global benchmark
Palabora is trying hard to manage energy efficiency
• PMC has embarked on a comprehensive energy saving programs with
Ensight covering every aspect of the operations.
• At least 60 energy saving projects have been implemented and 18 have
already approved by Eskom in Q4 2012
• The proposed tariff increases however far outweigh any energy saving
benefits
• The efficiency improvements are based on engineering initiatives within the
operating and processing environments
Examples of energy saving projects
Operate converter blowers to meet the needs of the converters and the acid plant by training power station and converter plant operators.
Demand management of the underground electrical chillers in Eskom peak season, incorporated into SCADA
• 44% energy saving
• R7.8m / annum energy savings
• Average electrical load of during Eskom peak season 2.2MW
• R1.44m / annum
Reveal every opportunity Meeting real needs at least cost Apply “whole-system” design
Replace SO2 blower guide vanes with variable-speed-drive and induction motor
• 70% energy saving
• R6m / annum energy savings
Electricity prices rises beyond inflation are not
sustainable
The copper prices are projected to fall based on consensus pricing models
2.5 3.1 4.8 6.9 8.0 9.3 10.8 12.5 14.5 16.9 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Cu price (US$/lb)
Power tariff (US cents/kWh)
Declining Cu prices
Sustaining the future
How does the increase in electricity prices impact on the Lift II investment
• A Mega Project is required for a second lift expansion – with a modest business case.
• Given the rates proposed (16% for 5 years) the project is not a robust economic proposition
• At the industrial rate (of 21%) the project becomes unfavorable.
• If an inflationary tariff increase is approved, the Lift II investment value is increased by approximately 50%, moving into a category where the economic sensitivities have lower impact.
• Does NERSA take into account, the impact of resource sector viability and development, when approving electricity price rises above
What is required ?
Proposed actions and way forward
• PMC offers to work with NERSA to model impact of price rises on operations and the socio-economic effect of such rises.
• NERSA takes in account the significance of the price increases to the cost base of industrial operations
• NERSA should consider, limiting tariff increases to globally exposed industries such as, copper mining which is dependent on globally set market prices.
• NERSA ensure that Eskom industrial prices are globally competitive. • An inflation based increase is required to ensure a market
competiveness and the economic viability of future investment in Palabora – mine extension (Lift II).
