Thursday, June 02, 2005

Digging for Problems

The mining industry in California has had a long and sometimes checkered history from the arrival of those original ‘49ers to today’s multinational aggregate firms. Billions of dollars were made from the natural bounty that was tucked in and beneath this state’s streams, hills and mountains. When those resources were depleted, the miners and their firms moved on leaving a legacy of waste and scarred landscapes. In recent decades, the state has forced mine operators to clean up their messes before they vacate their site under a law known as the Surface Mining and Reclamation Act (SMARA). Most operators manage to meet this requirement and leave, if not pristine, then acceptable landscapes. A few unfortunate operations go under before reclamation and leave the state and the county holding the bag, if their bonds were not high enough.

SMARA is really a unique law on California’s book. In addition to the specification of reclamation standards, it does something else quite interesting: it instructs counties to preserve and protect any and all mineral resources for their eventual use. As a consequence, you can get the real interesting situation where the mine operators and mineral resources they are extracting can receive protection from encroaching residential and other non-conforming uses.

Mining in California today is a multi-billion dollar industry and although most players today are in the sand and gravel (for construction use) business, a number of precious metal and non-aggregate mineral mines continue to operate. The mine industry members and constituents are fiercely protective of their status and will fight tooth and nail to open a new site, whether it’s CEMEX’s Soledad Canyon Project near Santa Clarita (LA County), Kaweah River Rock’s Kaweah South Mine in Tulare County or RMC Pacific’s Jesse Morrow Mountain Mine in Fresno County. Kaweah River Rock fought for 19 years and expended several million dollars before ultimately receiving their go-ahead last month. CEMEX actually took Los Angeles County to court (after they denied the project) and got a federal court to force the county to reverse its own decision. RMC continues to fight a pitched battle against the Sierra Club over their site.

The interesting part out of all of these examples is that they are ultimately driven by depletion. Just as oil companies are forced to continuously add reserves in order to replace what they produced, so too do mine companies. The CEMEX’s, Kaweah’s and others are fully aware that as soon as they begin mining, their reserves begin to shrink and at a certain point it becomes obvious: if they are going to stay in business, they will have to seek a new location.

The individual counties, under state direction, are to develop mineral policy elements to protect the mining industry (yes, you read that right) to ensure that an adequate supply of aggregate (construction grade rock) is available for consumption. The calculations of future aggregate demand are made from reviewing the historical record of actual usage and dividing by the population to determine a ton per year average. The resulting figure is multiplied against the projected population to get the expected aggregate demand.

These figures absolutely drive planning decisions. Justification for a new surface mine boils down to these lines:

“We have to approve that plant because our county needs affordable rock.”
- or -
"Without access to a source of aggregate, housing costs will rise"

Current events are beginning to intrude on mine operators and are driving them nuts however. The increase in population and construction activities is stretching their processing capacity to the limits. Just as a refinery's capacity will limit the amount of gasoline produced, a mine's processing plant will limit the amount of construction grade aggregate product it can crush and sort. Yet when asked if he would upgrade the equipment to process more rock, the operator said no, because the reserve would be exhausted faster than the costs of the new equipment could be recovered. Depletion is very much in the mind of a mine operator when making economic decisions.

Energy costs are also causing headaches.

Modern aggregate operations are very energy intensive operations. Surface mining equipment burn through gallons of fuel an hour and shipping via truck increases in cost the further you have to drive it. The processing plant requires a significant amount of electricity to run. All of these input costs have been rising.

One mine operator estimated that it took him 150,000 gallons of diesel to produce 500,000 tons of aggregate in an average year. As prices have more than doubled in the past few years, so too have aggregate costs. Trucking firms add an additional surcharge for their added fuel costs.

Although most sites do not use natural gas, they do consume copious amounts of electricity to run their crushers, sorters, screeners and conveyer belts. An operator capable of processing up to a million tons per year in this county currently uses 40% of the nearest substation's current. The utilities consider these such intensive users they offer them cut rate power if they agree to completely shut down during power emergencies. If they do not agree, they have to pay higher than residential rates for their power. The ISO is starting to get nervous about this summer and as a result a number of mine operators have switched to interruptible in case of power emergencies. During the 2000 and 2001 power crisis, these operations were routinely interrupted at significant expense to their firms.
The mine operators are getting increasingly edgy about the future. Like most other individuals that sense of unease is directed at the wrong issues. The most common complaint heard today is in regards to the great difficulty in opening a new mine due to mountain of bureaucratic read tape and "rampant environmentalism." Their collective fear is that without super-long extended permits they will not be able to meet tomorrow's demand. To that end one mine company requested a 65 year permit and sucessfully permitted a 120 year permit in an another county.
120 years is a long, long time. In all liklihood that mine will never be exhausted. In fact, it may never come close to 1/20 th of the capacity. Declining energy availability will hit the mining sector harder, faster and more severely than others. Without cheap fuel, the material becomes more difficult and costly to extract at the same time most work will dry up. People simply will not be able to afford to build anything any time soon.
Most miners are not aware how dependent they are on the continued flow of cheap energy. The next few years will bring that fact close to home for them. Afterall, depletion is a concept that they are well accustomed to understanding.


Anonymous Anonymous said...

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6/06/2005 7:15 AM  

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