Codan (ASX: CDA) is a manufacturer and supplier of communications, metal detection, and mining technology. One of its businesses is called Minetec. It’s a location tracking system that promises to add value to underground mining operations around the world, and has already been adopted by the likes of Newmont and BHP.
I have previously published a number of posts about Codan, a holding of The Montgomery Fund for quite some time that has contributed to performance by more than doubling in value during the last two years. Unfortunately, we have not held as large a position in Codan as we would have wanted, as we impose a liquidity constraint on ourselves and Codan’s shareholding register is tightly held by the founding families.
On September 25, Codan published its annual report and it contains some interesting information that was previously not known to the market.
One of Codan’s divisions is a business called Minetec, which is looking to commercialise a technology that was originally developed by CSIRO called WASP, which stands for Wireless Ad hoc System for Positioning. In simple terms, what WASP and the additional development that Minetec has done is to provide a system that enables location tracking very similar to GPS but in locations without a view of the sky. The specific use case Minetec is focusing on locations tracking and wireless communication in underground mines.
Location tracking of all underground assets provides a mine operator with a number of advantages including but not limited to:
Codan and Minetec partnered up with Caterpillar, the world’s larger mining equipment maker in 2018, and Minetec’s solution is now incorporated in Minestar which is Caterpillar’s underground productivity solution.
To prove the benefits of the Minestar system, Minetec and Caterpillar partnered with Newmont (one of the world’s largest gold producers) and in January 2019 a trial was initiated in Newmont’s Tanami mine in the Northern Territory.
The idea with the cooperation is to use the results from this trial as a marketing tool. Minetec and Caterpillar therefore installed the system at no initial cost to Newmont but with the agreement that they would get paid if the productivity increases were large enough.
The annual report mentioned detailed results from the trial and the results are interesting. For the two production areas that the system was installed in, they could show an increase in production of 5%. This might not sound like very much but when it comes to mining, even small improvements in productivity can result in significant improvements to the bottom line.
Let’s us do a little calculation using numbers from Newmont’s latest result presentation:
Now, a gold mine is a complicated operation consisting of several mining fronts producing ore for a crusher that process the ore to extract the gold. We do not know what the limiting factor in production in Tanami is, but if we assume that it is not in the crusher but in the production of ore, the 5% increase in production should drop directly to the bottom line and Newmont should see a close roughly US$37m benefit from installing the Minestar system in their whole mine. If the crusher is the limiting factor, the savings will probably be substantially less but there would still be savings from not having to deploy as many machines to reach the same production level.
We do not know what it would cost to fit out the whole of Tanami mine with the tracking system but what we do know is that Minetec has been paid approximately AUD20m during the last two years to equip a large part of BHP’s Olympic Dam mine in South Australia with a similar system. Olympic Dam is one of the largest underground mines in the world with roughly 3x the number of employees that Tanami has, so it is hard to see how it could cost as much to fit out Tanami.
Therefore, depending on the limiting factor in a particular mine, it is possible to calculate the payback period of installing Minetec’s system, which could be as low as one year and that is not including the soft benefit of significantly increased safety for underground personnel. This should be a very powerful marketing tool for Minetec and Caterpillar.
Minetec has up until now not contributed meaningfully to revenues for Codan (about 4% of revenues in FY19) and operated at a small loss. There are a large number of underground mines in the world and if the productivity benefits can be established, the division might be able to contribute very meaningfully in the future.
You can read previous articles about Codan here:
Why Codan satisfies my inner geek – and meets my search for quality
Exclusive interview with the Codan CEO
Why do we like Codan?
The Montgomery funds own shares in Codan. This article is prepared 30 September 2019 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Codan you should seek financial advice.