Redefining profitability

Lappeenranta University of Technology in Finland has recently developed a new model to help companies gain a more detailed understanding of mining investment from the point of view of profitability. Companies can use this new system-dynamic model to plan their investments with greater precision and make better-informed decisions in order to optimize the profitability of future investments.

The new model has already sparked considerable interest among international mining companies. Mikael Collan is a professor of strategic financing at LUT in Finland and has been responsible for the development of the model.

“The idea is to enable the kind of thinking that can easily be called ‘Optimize, then decide’, which is actually the inverse of what is done today in many industries,” he says.

The extensive techno-economic system model looks at mining companies’ activities with regard to profitability. It comprises four parts – production, cash flow, a project’s balance sheet and profitability. Each part is interlinked, and a change in one part of the model has an effect on the others. By examining the interactions it is possible to create a more realistic picture of the reality of mining investments.

According to Collan, the demand for creating such a model came from three different directions. “Firstly, we have contacts with some of the world’s largest mining companies. Some said they would be interested in such work and that it would be beneficial for the industry. Secondly, one of our team members has a long background in mining, and we got him interested in system dynamics. We were confident enough to start the project from the point of view of understanding what we are doing. Thirdly, because using system dynamics in profitability analysis in general and in mining specifically is new and something that has hardly been tested before. We can define our interest as being in ‘better modelling for supporting important investment decision-making under uncertainty and imprecise information’. This project falls exactly into this category.”

The system models can be used for modelling many different kinds of investments, provided that the system that is to be researched is sufficiently familiar. Such a base model is new in the mining industry, having been previously used in more traditionally engineer-oriented work. With the ever-improving possibilities of computer technology and programs comes the opportunity to use economically based models to improve future profitability.

“The research is ongoing, but the base version of the mining model is ready,” Collan says. “It is important to state that it is not a fixed set-up, but rather is flexible and must be tailored for the specifics of any investment project. If a company makes one right decision regarding a new mining investment, then they can have a very profitable situation on their hands. The potential savings for mining companies can potentially run to tens of millions of euros.”