In this briefing we focus on mining claims, and share our knowledge and technical expertise on one of the loss measurement issues regularly encountered in mining claims, production bottlenecks.
What you will learn from reading the article include:
- How the interaction between different processes can affect loss
- Understanding the relevance of production bottlenecks in measuring loss.
Mining is a series of complex processes with a simple objective of extracting a natural resource from the ground and getting it to market in a form useful to the end user. These can be broken down into a number of independent steps or separate processes that depend on each other and deliver the input to the next production step. Each element has critical plant and equipment, which if damaged or broken can impact the production process.
In order to accurately assess a mining loss one must fully understand how each of the processes work and depend on each other, and know information such as the input capacity required, machine capacity and machine operating schedule. If one examines the throughputs and schedule of the independent processes the limiting process or production bottleneck can be ascertained. This production process will essentially determine the maximum potential throughput of the facility which if considered through to the ultimate saleable product, will set the maximum potential loss and therefore the business interruption value of the operation.
If any one of these independent steps are affected by an insured event it is essential that these bottlenecks be understood as an apparently catastrophic event to one critical process could be construed as leading to a permanent loss, but given the process affected was not the bottleneck of the operation, production mitigation was possible.
Take for example an underground copper mine. The process comprises four steps, mining, hoisting, crushing and concentration. The mine has two shafts, one for manpower and one for hoisting copper ore. A breakdown occurs to the copper ore hoist motor which will take 60 days for repairs to be undertaken. Without the hoist motor the mine is unable to lift the copper ore, and as no work arounds are possible, a production loss occurs in crushing and concentration. The insured provides detail of hoist production which demonstrates a steady and consistent hoist level of 1,000 tonnes per day. Details are also provided of crushing production and concentration during the hoist outage period which indicates that crushing and concentration production are affected to a similar extent. A large business interruption claim is made for lost sales on the basis of the loss of hoist production, adjusted
for concentrate production yield.
Whilst the above may sound justifiable and reasonable, all is not as it appears. A study of production capacity and capacity utilisation reveals the following:
|Process||Ore Production Capacity||Pre-Loss Average Daily Production||Capacity Utilisation|
Whilst average daily production shows the processes are essentially in balance, the bottleneck of the operation is Mining as the mining production capacity is less than all the other operations. This means that it is possible that a loss involving the hoisting operation could be recoverable, depending upon the Mine production performance over the period of interruption.
Noting this, it is critical that the claims handler have a firm understanding of how the bottleneck of the process performed during the period of interruption. In the above case, the Mine continued to operate during the period of the hoist outage at the capacity level of 1,000 tonnes per day, building an underground stockpile of material. As Hoisting (and the other production operations) has a higher production capacity than the Mine, loss mitigation would be possible by increasing production rates for these processes after the period of interruption.
Upon reinstatement of the hoist motor, the insured increased the operating hours of hoist operations to achieve 2,000 tonnes per day, drawing down underground stockpiles to normal levels, and increasing above ground stock levels. These additional stocks allowed operating schedule adjustments to be made to increase crushing and concentration operating hours, which resulted in concentrate production increasing to 2,000 tonnes per day, which ultimately led to a recovery of sales lost earlier.
A large business interruption claim was NOT AS IT APPEARED!
Whether it’s a deep shaft mine in Northern Ontario, a gold mine near Las Vegas, a copper/zinc mine in Peru or a coal mine in Queensland, the forensic accounting experts at MDD understand that each mining loss is unique.
When clients trust us to help quantify their mining related claims, we consider a wide variety of factors and assess their relevance to the loss at hand.
We consider external contributing factors such as port blockage, rail transportation constraints, strikes, environmental or political challenges, potential issues with equipment suppliers, denial of access or acts by civil authority.
We also look at a myriad of loss-related matters. Examples include:
- Capacity of the mine, the mill and other key production processes
- Production bottlenecks
– Variances in production rates by process
– Limits on loaders and trucks
– The ore extraction rate and the size of the remaining reserve
- Maintenance Periods
– Scheduled shut-downs and their duration
– Whether some scheduled shutdowns were avoided as a result of the loss
- Equipment upgrades as a result of the loss/during the loss period and related impacts on efficiency and production bottlenecks
- Impact of seasonality such as extreme cold/heat or intense rain/drought
- Market price and how it may be affected by
– Global economic conditions
– Currency fluctuations
– Global supply and demand for commodities
– Production levels and costs
– Contracts that specify the basis for determining the selling price
– The loss event
- Policy wording and how this impacts the loss measurement, whether it be:
– Standard Gross Profits
– Standing Charge/Fixed Costs
– Advanced Loss of Profits/Delay in Start Up
– Bespoke policies
Even though mining is seen as one process, MDD knows that it’s actually a series of complex and independent processes, each of which are critical to the operation and each of which could be impacted differently by an insured event. An impact on one process may not impact all processes equally and production could, for some departments, continue normally despite the loss.
MDD conducts a careful analysis of these issues so appropriate consideration can be made as to how these different behaviors impact the value of the loss.
To learn more about MDD’s expertise and how we can help in the wake of a mining loss, we invite you to contact one of our forensic accounting experts today.
By Flemming Jensen.