Stronger coal prices and volumes have been welcomed by all in the coal mining industry. Profits and share prices of many coal companies have reached levels not seen in a lot of years. Although thermal coal prices peaked mid year and have since dropped sharply, they are still better than a few years back, and coking coal prices appear likely to stay strong for a while longer.

So, compared to a couple years ago, life is good for most of our coal customers. Now is probably a good time for a reality check. Your revenues will have increased dramatically, but how does your current cost per tonne compare to 18 months ago?

We have noticed a trend towards rising costs as mines chase short term increases in production.

Yes, you are thinking: "Of course our costs have gone up because we are spending on major maintenance activities, ramping up production capacity and generally doing a number of things we couldn't afford to do two years ago."

But are those the only reasons? Have you had the time to look at your cost structure and truly understand if the increases you've seen are directly attributable to only these planned expenditures? Which costs are opportunistic "capital" cost and contribute to lower cost in the long term? Which costs are due to chasing more tonnes in the short run? What is the marginal cost and profit on each additional tonne? Which costs are fat creeping into the system that can only be shed with pain when the prices fall? Are you starting to wonder if the cost improvements that you have used to justify recent or imminent capital expenditures are realisable?

Up until late last year, with seemingly endless lower coal prices, a lot of attention was placed on cutting costs with limited recognition of the real goal: optimising the overall profitability of your mine over its life (or maximising net present value). In some cases, due to the extreme attention to costs and the resultant lack of flexibility in planning and operations, revenue opportunities were lost due to inability to produce either extra tonnes or the right quality products.

Conversely the current focus in many operations is to "make hay while the sun shines", often with a loss of focus on costs. Your profits are probably bigger than they were two years ago, but are they as big as they could be? In order to survive both the good times and the bad, your planning and decision making process must incorporate the full impacts of all cost and revenue streams and be flexible enough to react quickly to changes in customer demands and operational variances. Clear understanding of the economic relationships of your entire geological resource, your human resources, your equipment/infrastructure costs, and your revenue/marketing opportunities is crucial.

Focusing on quick fixes in improving costs in a particular process or productivity in one pit is important; but it must complement the whole picture of your resource and cost and revenue structure. It adds no value if you can improve the costs in a given pit when you should really be mining from a more profitable area of your resource in the first place.

Understanding the relative profitability of every block of ore in your resource is a key to sustainable cost improvement and profitability over a wide range of market scenarios. Runge has helped a number of our customers to add tens of millions of dollars to the net present value of their operations. We have achieved this by using our systematic planning process to develop better understanding of the capital and operating cost and revenue relationships of their entire resource and overall business.

I have addressed coal here due to its current position in the commodity cycle, however these thoughts obviously pertain equally to other commodities. As there are indications that base metal prices may have reached bottom (fingers crossed) and are starting an upward turn, are you confident that you will be able to maintain your cost structure and reap the full benefits of a long awaited commodity price recovery?

Although there have been no earth shattering thoughts presented here, we all know how easy it is to get caught up in daily decisions and lose focus on that sometimes elusive "big picture".