I shall call it megamine

MERGING the Hunter Valley coal operations of Glencore Xstrata and Rio Tinto makes perfect sense to Hogsback because cost cutting is what happens in tough times. However, the question really is not about merging a few mines. It is about creating one mine.

Tim Treadgold

If the idea of one mine in the Hunter sounds ridiculous to some readers then they had best prepare themselves for what grew out of the iron ore price crash of the 1990s.

Back then, when a tonne of iron ore was selling for less than $US20 (a fraction of today’s $US110/t) and profits had effectively evaporated, the two biggest miners in WA’s iron ore province, the Pilbara, BHP Billiton and Rio Tinto, came awfully close to merger, either voluntarily or involuntarily.

At one stage Rio Tinto was thinking about a takeover bid for BHP Billiton. Later it was BHP Billiton trying to acquire Rio Tinto. All the time in the background was the idea of the Pilbara becoming a single operation with multiples mines feeding into common railway and port systems.

From an efficiency perspective it was a natural fit permitting flexibility from mines to ports, triggering huge operational cost savings and creating the world’s dominant supplier of seaborne iron ore.

There was, however, a small problem. Government anti-monopoly regulators in China, Europe, and the US deemed it a dream too far and said such a merger would create a business that dictated the price of iron ore and thus the price of steel.

Undeterred by what governments thought, the two miners proceeded to create their own version of a single mine in the Pilbara with operations coordinated from centralised control rooms that schedule everything, from to mine and when, to where to stack it, what train to load, when to send the train down the line, and how to fill a ship.

It sounds simple, but before low prices pushed Rio Tinto and BHP Billiton down the one-mine structure in their iron ore operations there were a series of operational units that worked to their own rhythm, partly because of their isolation and partly because that is the way they had been developed in the 1960s and 70s.

In Rio Tinto’s case the discovery of how to operate its vast Pilbara network of mines, railways and ports as a single mine (which is what it calls the business) has led to a single control facility near Perth airport and the embrace of the latest remote-control, automation and computerisation technologies.

Driverless trains and trucks are one example of where a one-mine policy has taken iron ore, with much more to come as the flow of data from sensors installed across the operation lead to increased automation, fewer people in the field, and lower costs.

What happened in iron ore will happen in coal, partly because the big miners have a template and know how to do it, but mainly because the same conditions that clobbered iron ore in the 1990s are clobbering coal.

It is falling profits and an urge to survive which is driving Rio Tinto’s proposal to sell a 29% stake in its Hunter Valley mines. Whether that will be the deal that evolves remains to be seen because something far more radical could emerge from the cost cutting drive.

Why not, for example, fully integrate the operations of some or all of the coal mines in the Hunter in the name of business efficiency?

The suggestions being floated today as Rio Tinto seeks to offload some of its coal assets include a partial sale to Indian or Chinese coal companies, or a merger of Rio Tinto’s assets with those of Glencore Xstrata.

No-one knows yet what will evolve from the Hunter Valley coal talks but there is an urgency about the situation because left on their own and without a huge uplift in efficiency and productivity more mines in the region will close.

However, if pulled together under a single management structure, with shared services and coordinated transport processes the cost structure of the entire Hunter region could be dramatically reduced.

A few years ago such a suggestion of turning the Hunter into a single mine, or a business which controls many (or most) of the mines in the region would have been laughed at – just as talk of Rio Tinto creating a single iron ore mine with multiple pits in its Pilbara operations was once laughed at.

No-one is laughing today. The Pilbara works seamlessly and has become a test bed of world-class automated mining, and a model for what might happen in the Hunter.

Tough times bring tough solutions.