Owning and Operating Costs

(O & O costs)
 Owning and Operating Costs
• Mine owner/operator needs capital cost for;
– Owning the mining equipment
– Running or operating the equipment

and therefore, the relevant costs are termed as:

– Ownership Costs
– Operating Costs
 Ownership Costs
• Ownership costs are based on the estimation of the
total ‘hourly costs’ or ‘per ton costs’ with reference
to the calculation of the depreciation, interest rate,
insurance and taxes liabilities against the capital cost

• Example: A dozer that operates for 4000 hours per

year and has an expected life of 20,000 hours has an
initial capital cost of Rs. 50 million. What is the
hourly ownership cost, assuming the company seeks
a 15% return on investment
 Ownership Costs
• Solution
– Data:
– Initial investment (delivered price) :Rs.
50,000,000
– Machine life (n) : 5 years
– Average yearly investment
 n  1
 deliveredprice    : Rs. 30,000,000
 2n 
– Required return on investiment : 15%
– Taxation : Disregarded in
this method
 Ownership Costs
• Solution
– Ownership cost associated with depreciation
– = Capital cost/life (operating hours)
– = Rs.50,000,000/20,000 hours = Rs. 2500 per hour

– Ownership cost associated with return

– =(Average yearly investment X Rate%) / Yearly
ownership hours
– =(Rs. 30,000,000 X 0.15)/4000 hours =Rs. 1125 /hour

– Total ownership cost (Rs. 2500 + Rs.1125) = Rs.3625

/hour
 Ownership Costs
• Example: Suppose the capital cost is Rs. 400 million and if
the machinery is depreciated over an average life 50,000
hours; yearly working hours are 5625, then ownership cost
for the production of 2.1 million tons of ore per year will
be:
– Ownership period = 50,000 hours / 5625 hours/year
– Ownership period= 8.8 years
– Tonnage = 2,100,000 tons x 8.8 years
– Tonnage = 18669000 tons
– Ownership cost per ton= Rs. 400,000,000/18669000
– Ownership cost per ton= Rs. 21.40 per ton
 Operating costs
• Operating costs are defined as those onging or
incurred costs during normal functioning of the
project.
• Typically operating cost is expressed as “Rs. per ton”
or “Unit cost”
• Unit cost in use are:
– Rs. per ton of overburden removal
– Rs. per operating hour of equipment
– Rs. per foot/meter of drill development
– Rs. per man-shift
– Rs. per ton produced
– Rs. per foot/meter of shaft development
 Operating costs
• Also these cost are expressed in terms of a percentage of
some other major cost items
• For instance;
– Indirect cost  10 to 30% of direct cost
– Payroll burden  40% of direct labor cost
– Repair & Maintenance  2 to 5% of equipment capital
cost
– General & Administration  2 to 5% of production cost
– Insurance  1 to 3% of capital equipment investment
 Operating costs
• In general, total operating cost can be divided into 3
primary categories:
– Direct
– Indirect
– S&GA costs
– Direct or variable cost
• are considered as “prime cost” and can be traced directly to the
product being produced
• Labor: (a) direct operating (b) Operating supervision (c) Direct
maintenance (d) Maintenance supervision
• Materials: (a) Maintenance, repair materials (b) Raw materials (c)
Processing materials (d) Consumables (fuels, oils, water, power etc)
• Development: (production areas)
• Royalties
 Operating costs
– Indirect operating cost
• Labor: (a) administration (b) safety (c) technical (d)
services (clerical, accounting, general office (e) payroll
burden
• Materials: Utilities, office supplies etc
• Development: general and reclaimation
• Depreciation, Interest, Insurance and Taxes
• Travel, Meetings, Donations etc
• Public relations
 Operating costs
– General or overhead expense mostly are
considered part of operating costs but represent
off-site charges, such as;
• Marketing
• Advertisement
• Sales
• Administration
• Research, engineering and geological aspects
Ex: 1. Cost Schedule for a small BWE
• Operational features:
– Working life of BWE : 5 years
– Actual working time available per shift : 6 hours
– Actual working hours per year : 4000 hours
– Average advance rate per shift : 30 ft
– Excavation rate per hour : 5 ft
– Fragmented rock yield per ft : 10 tons
– Hourly production : 50 tons
– Machine Designation:
– Assumed price/factory price : Rs. 35,000,000
– Freight charges : Rs. 600,000
– Delivered price (Factory price + Freight) : Rs. 35,600,000
– Salvage value @ 10% of delivered price : Rs. 3,560,000
– Depreciable value : Rs. 32,040,000
– Tyre replacement @Rs. 400000/tyre x 4 tyre/unit :Rs. 1600000
– Interest, Insurance and taxes : 25%
– Fuel consumption : 5 gal/hour
– Lube and Preventive maintenance :45% of fuel cost
– General Repair and maintenance :60%
– Labor cost : Rs. 1200/hour
 Solution
• Ownership costs:
– Average investment
 n  1 year
 deliveredprice    
 2n  4000hours
 5  1 year
 Rs.35600000     Rs.5340 / hour
 2(5)  4000hours
• Depreciation 5 years @ 4000 hr/year:
 1  year
 Rs.32040000     Rs.1602/ hour
 5 years 4000hours

• Interest, Insurance, Taxes @ 25% for investment/hr

 Rs.1325 / hour
 Rs.5340  0.25

Total Ownership Cost = Rs. 8267 /hour

 Solution
• Operating costs:
– Fuel cost (diesel) =
• Suppose Fuel price is Rs. 500 per gallon
 Rs.500 / gal  5gal / hour  Rs.2500 / hour
• Lube and Preventive maintenance @45% of fuel cost
 Rs.2500  0.45  Rs.1125 / hour
• Maintenance & repair @ 60% of 5 years
Rs.35000000
  0.60  Rs.105 / hour
5 years  4000hours / year
• Tyre replacement cost
Rs.1600000  Rs.400 / hour

4000hours

Total Operating Cost = Rs. 4130/hour

 Solution
• Labor costs:
– Assume 3 workers are required to operate the
BWE
– Labour cost is Rs. 1200/hour
 Rs.1200  3  Rs.3600 / hour

TOTAL COST PER TON

(Ownership cost + Operating cost + Labor cost) / Hourly production
Rs.8267 / hour  Rs.4130 / hour  Rs.3600 / hour

50tons / hour

 Rs.319.94 / ton
 Ex: 2. A Dozer-ripper machine
• Operational features:
– Working life of ripper : 2500 shifts
– Average advance rate per shift : 13 m/shift
– Tonnage rate : 300 tons/shift
– Single shift : 8 hours
– Machine Designation:
– Assumed price/factory price : Rs. 30,000,000
– Bit cost : Rs. 50,000
– Bit life : 4 hours (approx:)
– Interest, Insurance and taxes : 25%
– Fuel consumption : 15 gal/shift
– Lube and Preventive Maintenance : 50% of the fuel
cost
– Operator’s cost : Rs. 1000/hour
 Solution
• Ownership cost
– Depreciation of ripper
Rs.30000000  Rs.12000 / shift

2500 shifts

• Interest + Insurance + Taxes @ 25%

 Rs.12000  0.25  Rs.3000 / shift

Total Ownership Cost = Rs. 15000/shift

• Operating costs:
Solution
– Fuel cost (diesel) =
• Suppose Fuel price is Rs. 500 per gallon
 Rs.500 / gal 15gal / shift  Rs.7500 / shift

• Lube and Preventive maintenance @50% of fuel cost

 Rs.7500  0.50  Rs.3750 / shift

• Bit replacement cost (Bit life=4 hours and 1 Shift=8 hours i.e 2
bits/shift)
 Rs.50000  2  Rs.100000 / shift

• Operator’s cost @ 1000/hour

 Rs.1000  8  Rs.8000 / shift

Total Operating Cost = Rs. 119250/shift

 Solution
Total Cost = Rs. 119250/shift + 15000/shift
= Rs. 134250/shift

Now total cost per ton at tonnage rate of 300

tons/shift will be:

Rs.134250 / shift
 = Rs. 447.5/ton
300tons / shift