Why is detailed zero-based budgeting important for mining companies? Why can we not simply use last year’s plans/actuals as a base for the next few years’ plans?
Consider the changes that are happening to the mine. Whether the mine is at an early, mid or late stage within its life cycle will lead to very different cost profiles and therefore requires detailed planning.
For example, take an open pit mine that is early in its life. The pit is relatively shallow; the waste dumps are small; and the haulage cycle is relatively short.
Move forward a few years and there will already be significant changes. Increased waste movement requires a larger number of equipment; deeper ore body requires a longer haul cycle; higher waste dumps also create a longer haul cycle; and ore grades are constantly changing meaning the processing plant has to adjust.
Let’s add a few more years onto the mine and again see how the mine has changed. There will be a much larger pit and deeper waste which continues to increase the haul cycle; changes in material density or mining below the water table; changes to the drilling and blasting requirements; longer haul cycles requiring additional support equipment to maintain the road conditions; and using stockpiles to blend the ore feed to the plant changes the processing requirements.
Then as we move towards the end of this mine’s life it is now very different from where it started. A very deep pit increases the wall stability risk and therefore cost to maintain the conditions; long inclined haul roads increase the wear and tear on the truck fleet; much larger waste dumps require increased rehabilitation; and constant changes in the ore being processed lead to different tailings handling requirements.
The key point here is: To maintain production and profitability of a mine requires a different mix of cost and revenue every year!
Now consider this across a business that has 5, 10 or even 20 mine sites, along with logistic networks and ports. It is essential that this environment is planned with clear visibility, governance and trust.
So what is zero-based budgeting and how is it applied to mining? Zero-based budgeting is a process of evaluating the need to perform every activity within an organisation and then understanding what drives the costs of those activities. Only once the physical plan of activities is completed do you apply the cost rates in the budget.
Therefore, in the mining industry, a zero-based budget is one where the physical plan and sequence of mining and processing activities – “the mine plan” – forms the basis of the budget from which you apply the various costing rates to those cost drivers.
As shown above, the physical production activities and the physical characteristics of the waste and ore material are constantly changing year on year so using last year’s actuals, plus or minus a few percent is simply not acceptable in a business that has such variation. Therefore, a zero-based budgeting approach is critical to ensure true cost control within a mining business.