After ten years of booming commodity prices and volume expansion, mining companies have returned to the basics of mining, i.e., safety, production, and costs. However, despite multiple cost saving initiatives, many companies still find themselves running in the red. For example, it has been estimated that over 80% of Australian coal mines are cash negative. So what do we do and where do we go next for more cost savings?
We describe what we are seeing in the market and provide some ideas on how to proceed.
Wave #1 – "Cancel Projects"
Commenced in 2012, mining companies slashed exploration and cancelled new projects, resulting in immediate savings. This has produced very high returns and was relatively easy to do. This wave has largely run its course.
Wave #2 - "Sweat the Assets"
This wave kicked off in 2013 and is continuing with great vigour right now - high returns, but harder to execute – with relentless squeeze on suppliers and multiple rounds of redundancies. This is the phase of "Productivity Reviews", "Simplification", and "Standardisation". This wave is more traumatic for the workforce and suppliers. Companies maximise production, if low on the cost curve, or 'high-grade' if high on the cost-curve. M&A is also part of this wave, by divesting the poor performing assets.
Wave #3 - "Process Re-engineering"
This wave commenced in 2014, and is now kicking in hard. The mining industry is probably at the bottom of this price and exchange rate cycle, but the long, slow grind back can still break you. You may even be cash-positive now, but how will you survive as the equipment wears out and the orebody inevitably gets deeper and/or lower grade? Unfortunately this wave involves long dated returns, and is tough to execute - this wave is the hardest, but it is what splits the pack between the stayers and the "also-rans".
So what should mining companies do about it?
- Upskill: Get good at process re-engineering, prudent technology adoption, and look at alternative commercial arrangements.
- Sustainability is critical: Ensure every initiative has a strong focus on People, Processes and Technology to make sure the cost savings are genuinely sustainable.
- Keep it Simple: Only implement the changes that have been piloted and make sense in any price environment.
- Focus: Better to focus on the vital few and really nail it, rather than try and boil the ocean with a myriad of initiatives. There are fewer people at site now, so their time and effort are more precious than during the boom years.
A problem that many mining companies face today is that critical business improvement skills have been lost. The last time the industry seriously did Process Re-Engineering work was 10+ years ago (in the 1999-2003 downturn). Experienced people have been lost and many employees now at Manager or GM level were not even in the industry ten years ago.
So… where next?
- Get the skills back: Either get a good in-house training or get a good partner. Techniques such as lean, theory of constraints, just-in-time and six sigma are well proven. Short term support is readily available from external providers, but training your own people on how to help turn the business around is cost-effective and has a positive effect on morale.
- Experience counts: The Captain/Coach model is more applicable than ever before. 'Captains' are still needed to run the ship at site (Managers and GMs). But the baby boomers want to work and have so much to give. Technology today means that a well-chosen Mentor/Coach can provide enormous bang for the buck, given the depth of experience at (relatively) low costs. Who do you know who has the right combination of experience and attitude?
- Tune in to technology: Sensible, prudent adoption of proven practices can deliver big time. For example, for mining companies, the orebody keeps changing as production progresses. Technology today is enabling dynamic integrated production and scheduling using real time data, more than ever before. This is a genuine revolution. Mining has seen a +200 year long journey of mechanisation and automation. Integrated operations are all about using the data, workflow and the power of collaboration.
- Step 1..... A simple and low cost starting point is to partner with an appropriate technology Systems Integrator (SI), or a 'Hard & Soft' technology consortium (hardware and SI). Start with an audit/assessment of what systems and data that you already have, and step out from there.
We would love to hear your thoughts on this. Please leave your comments in the section below.