Total Drilling CostAC BHMT's Value Proposition

Prepared for: Indiana Society of Mining and Reclamation 19th Annual Technolocy Transfer Seminar Dec. 5th & 6th, 2005

What is "value"?The AC BHMT "value proposition" is based on drill productivity, not "bit life".Drill productivity costs a mining company much more than "bit life".

Let's take a few minutes to talk about and understand what YOUR value proposition is based on.Then we will explain ours.

Total Drilling CostTotal Drilling Cost is a value concept that places its' emphasis on the cost of drill productivity.

Progressive customers understand and adopt the philosophy that the cost of productivity drives the economics of a mine.

Total Drilling Cost captures and shows the cost of drill productivity.

The Total Cost of DrillingTDC includes everything it takes to run a drill:LaborPower: fuel or electricityDrilling tools and suppliesMaintenance labor & partsSupervision, administrationCost of equipment ownership (lease, purchase, or rental payments)With all things considered, drill operating costs can exceed US$300 per operating hour.$$$$

Total Drilling CostMethod 1

TDC =

(Bit Price / Meters Drilled) + (Drill Operating Cost per Hour / ROP)

Total Drilling CostExample #1:Bit cost = US$5,000Bit life, meters = 6,500Penetration Rate = 52 meters/hourRig Cost = US$200 per hour

Total Drilling CostExample #1:TDC = Bit Life + Productivity($5,000 / 6,500m) + ($200 / 52 m/hr)=$0.77 / meter + $3.84 / meter

= $4.61/meter

Total Drilling CostExample #2:Bit cost = US$5,000Bit life, meters = 8,000Penetration Rate = 40 meters/hourRig Cost = US$200 per hour

TDC = (Bit Cost / Bit Life) + (Rig Cost / Pen Rate)

Total Drilling CostExample #2:TDC = ($5,000 / 8,000 m.) + ($200 / 40 m/hr) =$.625 + $5.00 =

$5.63 / meter

Total Drilling CostExample #2TDC = ($0.63 / m.) + ($5.00 / m.) =$5.63 / meter$1.02 MORE!

for a bit that is less productive but has longer life?!(52 vs. 40 m/hr., 8,000 vs. 6,500 m)

Where is the advantage really found?

Total Drilling CostTDC Method 2

TDC = (Bit Price / Meters Drilled) + Fixed Cost + (Variable Cost / Rate of Penetration)

Where: Fixed Cost = Annual Overhead Cost / Annual Meter BudgetVariable Cost = Labor + Fuel + Supervision + Repair Parts + Repair Maintenance + Repair Labor

TDC Method 2Fixed Cost Calculation:For example: $1.50/meter fixed cost$1.50 / meter = $900,000 overhead cost for drill fleet / 600,000 annual budget metersOwnership cost of the drill fleet (lease, rent, purchase payments)Drill Maintence budget for fleet (PM parts, fluids, normal wear parts, etc.)Budgeted drilled meters.

TDC Method 2Example A:Bit cost = US$5,000Bit life, meters = 6,500Penetration Rate = 52 meters/hourFixed Cost = $1.50 / meterVariable Cost = $95 / hour

TDC = ($5,000 / 6500) + $1.50 + ($95 / 52)TDC = $.77 + $1.50 + $1.83 = $4.10

TDC Method 2Example B:Bit cost = US$5,000Bit life, meters = 8,000Penetration Rate = 40 meters/hourFixed Cost = $1.50 / meterVariable Cost = $95 / hourTDC = ($5,000 / 8000) + $1.50 + ($95 / 40)TDC = $.63 + $1.50 + $2.38 = $4.51

$.41 / meter MORE for every meter drilled! ($246,000 per year based on 600,000 m drilled/yr)

Production Cost OnlyWhat is the cost of producing a single blasthole?Cost = Drill Cost per Hour x Time spent drilling, hrs$$ = $150 per hour x 30 minutes$$ = 150 x .5$$ = $75 per hole drilled$$ = $150 per hour x 20 minutes$$ = $150 x .33$$ = $50 per hole drilled

Productivity costs less!

Total Drilling CostWith Total Drilling Cost calculated by any method, the productivity (ROP) and drill cost are the drivers of the calculation.Bit Price per Meter is a small part of theTDC.Ex. 1, bit price/m, $.77 is 17% of $4.61/m.Ex. 2, bit price/m, $.63 is 11% of $5.63/m.Ex. A, bit price/m = 19%, FC + VC = 81%Ex B, bit price/m = 14%, FC + VC = 86%

Total Drilling Cost

Total Drilling CostThe cost of productivity is the largest part of TDCSpend less time drilling each hole.Choose faster drilling bits. Run bits to give high Penetration Rate and reasonable bit life.This will keep the TDC low.

Results00.400.801.201.602.002.4001/01/2002 thru 12/31/2002 1/01/2003 thru 12/31/2003 01/01/2004 thru 12/31/200401/01/2005 thru 12/31/2005BHMTManuf #2Manuf #3US DollarsWestern USA Copper Mining CompanyTotal Drill Cost (TDC)11/15/2005

ResultsWestern USA Copper Mining Cost Savings:2003 vs. 2002: $ -84,735$1.89/ft2004 vs. 2003: $ 837,561$1.65/ft2005 vs. 2004:$ 228,637$1.58/ftTotal savings year on year: $981,463If no change in TDC:Would have spent: $22,921,117 (at $1.86/ft, 2002)Actually spent: $21,254,869Saved: $ 1,666,248

Results

ResultsCanadian Coal Miner Operating Cost Savings:2003 vs. 2002: $1,235,237$7.58/m2004 vs. 2003: $ 520,781$6.30/m2005 vs. 2004:$ 120,268$5.85/mTotal savings year on year: $1,876,286If no change in TDC:Would have spent: $13,888,389 (at $9.91/meter, 2002)Actually spent: $10,101,431Saved: $ 3,786,958

Thank You!

Questions??

Value means different things to different people and different organizations, and different people within the same organization. An organization with different values in each department may find each department at odds with the others. This does not promote an organizational vision, and can lead to operational cost issues.

Atlas Copco believes that managing productivity, in terms of managing the cost of drilling a blasthole, is how to provide value to its customers. We hope that you will understand our philosophy and be able to use it to manage your blasthole drilling costs. TDC is a long standing concept, with roots extending back into the drilling industry of the 1960's

Lower production costs make the mine more competitive in the marketplace.

Audience view of drill CPH?

Drills are costly machines to operate. When everything above is taken into consideration, the hourly operating cost of a machine may surprise you.

The most difficult things to quantify are the equipment ownership costs (leases, payments, etc.), supervision and administration of the machine, and secondary support of the machine. How much is the lease payment on the drill?Is it depreciated?Does the Drill and Blast Supervisor spend more time drilling or blasting? How much more? Is his drilling time adequately accounted for?What about the Mining Engineers and surveyors? Does blast pattern design get charged to blasting? Drilling? or Mining? What about the surveyors that lay out the blast pattern? Mining, drilling, or blasting charges?Where do the fuel and the water truck get charged to?

Most mines only look at fuel, power, maintenance, labor and tools. Most mines with electric drills never accurately track the power consumption of an electric drill, so they really dont know how many kWh a drill uses per day.All of these things need to be accounted for when figuring the real drilling budget.This is the simplest form of the equation.We will plug these numbers into the equation.Here are all the numbers plugged into the equation. You can see that the Productivity side of the equation (the right side $200 / 52), gives a much HIGHER number than the Price side of the equation.PRODUCTIVITY is the driver of the equation.Productivity equals ROP.This example is for a slower drilling bit that lasts longer.Ask the group how they think ex. 2 will differ from ex.1Have someone work this out on the board before moving to the next slide.The numbers entered into the equation.It is the slow ROP, a smaller number, that makes the right side of the equation larger.Even though the bit life is 1500 meters (23%) more, the left side, the PRICE side, has little effect on the total sum.PRODUCTIVITY is the driver of the cost of drilling. This shows that lower productivity increases the cost of drilling.The increase in meters drilled lowers the Price side of the equation by only $0.14/meter.However, because of the lower ROP, the Productivity cost increases by $1.16.It now costs you $1.02 more per meter every meter to drill with a slower bit.Some mines may prefer to assign a portion of the drilling expenses as fixed costs based on the total drilling budgeted meters. Fixed costs are those costs that are not subject to change in the budget such as annual ownership costs, annual scheduled maintenance costs, and normal wear parts that are replaced on the basis of the budget schedule.

Variable costs are those items that can vary by the amount of drill usage, and while budgeted, cause variations in the budget: labor, fuel, repair (not PM) costs

Here again one can see that the Productivity part of the equation (Variable Cost / ROP) is the biggest portion of the equation.The speed of drilling influences the cost of drilling.Here we can see that the PRICE side of the equation has a minimal effect on the cost of drilling a hole.

Price is NOT a measure of productivity, therefore, should not be used as a measure for determining the effectiveness of a bit.

Rock bits must be used that are appropriate for the drilling conditions. Do not use a hard bit in soft ground.

Do not use a soft bit in hard ground.Operate the bits in a manner that will give the highest penetration rate and a reasonable bit life.

Remember, increased WOB and/or RPM will give higher ROP, but may also result in decreased life.

BE SURE the productivity gains are not offset by very short bit life.Based on AC BHMT drilled footages only.2002:2,690,344 ft drilled at $1.86/ft, 296 bits2003:2,824,548 ft drilled at $1.89/ft, 339 bits2004:3,489,838 ft drilled at $1.65/ft, 451 bits 2005: 3,262,164 ft drilled at $1.58/ft, 389 bitsThis is based on the following drilling results:2002: 197,775 meters drilled at $9.91/meter, 75 bits used.2003: 530,145 meters drilled at $7.58/meter, 135 bits used2004: 406,268 meters drilled at $6.30/meter, 94 bits used2005: 267,264 meters drilled at $5.85/meter, 72 bits used