Mineral processing equipment suppliers are beginning to offer equipment life-cycle service agreements based on performance outcome. Courtesy of Outotec

It has been tough out there for the mining industry over the last decade with volatility in commodity prices and rising costs. “High capital costs have been a huge hindrance to the industry,” said Adam Miller, technology and innovation lead for Teck Resources. Miners have understandably clamped down on capital expenditures and worked on getting the biggest bang for their capital buck through improved efficiencies.

But that is a short-term strategy with short-term savings and higher long-term costs, say some original equipment manufacturers (OEMs). They believe they can prove that the capital investment in equipment will save miners money and make them more profitable in the long run. Yes, the capital cost of such mineral processing equipment is high, but factor in the operational expenditure for a total cost of ownership (TCO) and it is a very different picture, they say. And they have the numbers to prove it. OEMs like Metso, FLSmidth and Outotec are willing to back it up by sharing some of the risk through new types of payment options and equipment life-cycle service (LCS) agreements based on performance outcome. They want to revamp the kinds of relationships they have with operators through those agreements to be far more hands-on in helping them reach their goals. 

Miller has heard about this new TCO-focused approach and likely speaks for many of his peers when he said, “We don’t have many examples of these types of relationships yet, in part because we haven’t developed a new mine in a number of years. We are seeing several vendors with this business model and are reviewing different partnerships where they make sense. However, we need to take each opportunity case by case as specific project and regional influences play a role in the overall benefits.”

Given the prominent financial woes of many mining companies, OEMs believe the time to dive deeper is now.

Due to their extensive expertise with their own equipment, OEMs believe they are the natural option to maintain the reliability of the eqiupment they supply to processing plant operators. Courtesy of Metso

The ABCs of TCO

Ultimately, TCO is about preventive maintenance and keeping equipment utilization and availability high, said Michael Woloschuk, global industry director of gold at FLSmidth. “The big bang for your buck here is really in potential revenue generation, higher recoveries, higher throughput, higher equipment availability,” he said.

It is not a new concept. To some degree, mining companies have always done this, said Clark Whiting, vice-president of Cementation AG, which designs and builds processing plants. “Some have had trouble articulating their TCO objectives to consulting organizations or contractors like us but that’s always what they are focused on,” he said. “When you get a request for a proposal, they are always looking for what the capital cost is going to be and what the operating cost is going to be. If there has been a change, it’s that they are getting a little better at articulating it. You hear it more and more in face-to-face meetings with them.”

In recent years, the rise in equipment monitoring and performance measurement technologies has led to more sophisticated calculations of operational costs for a better understanding of TCO, said Woloschuk. “I think what is new is that we are designing tools around our machines to be able to help in this analysis,” he said. “We can help our customers analyze TCO, along with capturing data and the analytics that go behind the data. We can use information from them, as well as our internal information, to put these models together and show that there are TCO benefits.”

However, miners typically put the weight of their purchasing decision on the capital cost, when really it is the operational cost in mineral processing that has the most gravity, argue the OEMs. “Especially when considering major equipment-level cost in a plant, the operational cost over the lifetime of the equipment is pretty much everything,” said Antti Rinne, Outotec’s vice-president of sales and beneficiation. “Even if there’s a small difference in the operational cost, in many cases, over the lifetime of the equipment, it’s enough to justify a higher capital cost. With many technologies in a concentrator plant, for example, 90 per cent of the TCO is the operational cost. So you can justify significantly bigger original equipment investment if you can get a 10 to 15 per cent operational cost reduction, or just a small increase in process performance.”

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Core factors for TCO are obviously energy and maintenance costs, including wear part life, especially in the case of such equipment as grinding mills and flotation cells with their auxiliaries that handle big tonnages of material, and require frequent wear part replacement. “The lifetime of the spare parts is a major area that can add up to a huge annual cost,” said Rinne.

There are big differences in the quality of maintenance across the sector, and that too can have a significant impact on equipment TCO.

“We see a trend where the impact of down markets results in cost cutting, and that can compromise maintenance program intentions,” said Whiting. “The owner says, ‘Keep that plant running, I need to fill agreements.’ That pressure for revenue, to sell the product, sometimes trumps sound maintenance and operating practices. They run equipment outside the specified operation levels, letting it run a lot longer between maintenance and just hope for the best.”

It is potentially a hopelessly expensive strategy that can lead to more unscheduled shutdowns, equipment damage, shorter life span and lost revenues, all resulting in a much higher TCO.

“Good quality maintenance practices keep the equipment in good conditions so that prolongs the life of the equipment,” said Rinne.

Metso says it is seeing more of its customers becoming interested in life-cycle service agreements in recent years. Courtesy of Metso

Virtual startup

Another factor that can affect the quality of maintenance is the time it takes mining operations to learn the new equipment, which is why Cementation developed its own virtual reality TCO tool that gathers all project controls, estimate tools, manufacturer operational specifications and maintenance information in one virtual reality database.

“Commissioning and startup are really a time for the owner to be involved with the constructor and engineer checking out a system, and it’s usually used as a time for the operators and maintainers to really understand the guts of what’s there. The manufacturer, engineer and constructor are there so it’s the perfect time to transfer knowledge,” said Whiting. “However, what can often end up happening after the month-long phase is people walk away with maybe a 20 to 30 per cent retention of what they learned. The best intentions of the commissioning and startup phase can wane. Too often, you hear stories about a piece of equipment really vibrating but it’s still working, so it can run a little longer. However, the reason it is vibrating is because there’s a part that’s not aligned or something has worn down and it’s likely going to have a catastrophic breakdown at some point when you can’t afford it.” 

In fact, the learning curve, said Rinne, is often a long one for new operations. “It’s difficult to have a generic maintenance schedule for all concentrator plants because there are so many variables,” said Rinne. “When the operation starts to run, it takes some years to learn which areas will need more maintenance effort.”

Life-cycle and optimization services

Outotec, said Rinne, has a head start when it comes to preventive maintenance and optimization because no one knows its equipment and wear parts as well as it does – and no one has the in-depth knowledge and data the company has gathered over the years of working with its global customers in diverse environments and conditions. Other OEMs such as FLSmidth and Metso say the same thing, which they believe makes them natural maintenance and service providers for mineral processing plants. They know how to help miners reduce their TCO and improve throughput, reduce shutdowns and get the revenues flowing faster. To do this, they offer service packages that can range from regular inspections to providing full-time staff working year-round maintaining and optimizing the entire plant, not just their own equipment.

“Today we have roughly 300 life-cycle services contracts globally,” said Giuseppe Campanelli, vice-president of solutions at Metso. “Those range from regular inspections contracts to having more than 100 people on site.

“Over the last several years we are seeing our customers becoming more open to these types of agreements,” he added.

In fact, Metso has some 700 people dedicated to these contracts working full-time on its customers’ sites around the world.

It is a model that makes sense both for the OEM and the mining plant, said Woloschuk. The OEMs’ preventive maintenance expertise can help increase the number of hours the plant operates at capacity every year. For a gold plant producing about 280,000 ounces per year, simply increasing plant availability by three and a half days annually results in some $3.5 million in added revenues at the current gold price, he said. “We help [operators] understand what the critical spare parts are and help them understand preventive maintenance tasks.”

One of Metso's clients in Sweden purchases mill lining on a cost-per-tonne basis under a life-cycle service agreement, which incentivizes both sides to optimize performance. Courtesy of Metso

Will that be cash or risk-sharing?

From a miner’s perspective, “we increasingly see vendors selling services on top of the capital expense,” said Teck’s Miller. “They could add another level of expertise, but understanding the trade-offs in project economics and risks are key.”

The answer to that varies, of course, depending on the package but OEMs such as Metso, FLSmidth and Outotec have added outcome-based payment options to their offerings based on key performance indicator (KPI) measurements.

“We are willing to sell you the equipment at a specified lower cost. However, we believe we can get more out of the equipment when it is paired with an LCS contract, so allow us to make that extra money should we achieve more than what you are expecting. That would be risk sharing,” said Campanelli.

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A complete LCS package allows the OEM to have greater control over the equipment’s performance, so that comes with a full guarantee. The higher the throughput or KPIs agreed upon – which can be anything from safety to energy or equipment availability – the higher the reward for the OEM if the KPI targets are met or exceeded. Conversely, if the equipment does not meet the agreed-upon outcomes, the OEM makes less money.

“In Chile we have contracts where we need to guarantee the availability of a crushing plant. To do so, we need to have the people on the ground to maintain the equipment,” said Campanelli. “Some clients want us to guarantee availability but use only their employees and all we have are supervisors there. In this case we can give you a guarantee if the equipment is maintained per our recommendations.”

Metso has been using this model globally for years. One of its customers in Sweden, for example, purchases mill lining under a cost-per-tonne LCS agreement. “In my opinion, that’s one of the best commercial solutions for the supplier and the customer to have aligned incentives,” said Campanelli.

FLSmidth also uses a KPI model. “We have maintenance teams down in South America that are maintaining full copper concentrators. It’s not only our equipment, it’s also competitor’s equipment,” said Woloschuk.

One of the main challenges of processing plant design is that decisions are made in silos, each of which has its own competing interests and responsibilities. Courtesy of Metso

The challenge of competing interests

One of the biggest challenges to achieving the best possible TCO is the fact that the industry often works and makes decisions in silos, said Whiting. The problem is that each silo has its own priorities and perspectives.

Cementation uses the virtual reality tool it developed to adjust designs based on feedback from operators and maintenance people. TCO, he said, begins with a plant design that facilitates such things as maintenance. In fact, Cementation believes everyone from the owner to the operations and maintenance people and OEMs need to be involved in the design throughout the project.

Success with a TCO model also requires a high degree of critical thinking, he said. “I define that by your ability to appreciate different perspectives,” said Whiting. “It’s fundamental. What are the owner’s objectives? Is the basis of where I’m coming from accurate? Is the basis of where the owner is coming from accurate? You are trying to get past your bias, help them get past their bias and home in on the reality and truth of things.”

“A major miner that we’ve been involved with for quite some time about TCO said, as a business, it’s very important,” said Woloschuk. But in the end, the client opted for a lower initial cost product over the life-cycle value proposition. “Basically, the feedback was, ‘Yes, we are interested in TCO, but our capital projects group, they’re responsible for the budget and the initial cost of this plant, and they bought the lower [capital] cost one.’”

A greater awareness and discussion of TCO across the mining industry needs to take place, according to suppliers. In the meantime, they are trying to come up with innovative solutions to bridge the gap between their own need to generate revenue while supporting the mining industry’s need to manage capital costs.

Miller agreed that the long-term service agreement model is being introduced to help reduce the barrier to capital investment and get miners buying again. “It wasn’t as common before,” he said, “but equipment suppliers are taking it a step further now so you can imagine the creativity going forward.”