Over the past year, mining executives have received one message, loud and clear: markets will no longer tolerate production at any cost, according to a report by Deloitte.
During the height of the mining boom, record-breaking commodity prices notionally supported the development of marginal high-cost, low-productivity mineral deposits. As commodity prices dropped, companies responded by slashing costs – a traditional response to a shifting market cycle. Which begs the question: When the cycle turns again, will costs once more rise to unsustainable levels?
To prevent this constant cycle of cost takeout and cost creep, miners must go beyond traditional cost cutting measures. Instead, industry productivity (defined as the GDP value contribution an average worker creates in an hour of work) needs to rise before companies can reclaim shareholder support and deliver bottom line value.
Miners can’t control the vagaries of the world economy that shift currencies and commodity prices. However, they can control how they operate. As companies refocus on becoming lowest-quartile cost producers, they will need to move away from reactionary cost cutting and towards sustainable cost management programs. Here are some strategies to consider, from Deloitte’s “Mining spotlight on sliding productivity and spiraling costs.”
1. Strengthen mine planning
To improve sector productivity, companies can:
- Refocus on high quality production by increasing cut off grades.
- Reduce capital expenditures in properties with lower production potential and shorter mine lives.
- Consider the benefits (and potential risks) of reducing reserves.
- Optimize mine sites through enhanced sequencing.
- Ramp up production from lower cost mines and prioritize lower cost projects.
- Attract and retain experienced mine planners capable of improving operational performance and tracking daily adherence to production volumes, mining locations and mineral content.
2. Improve budget and risk management
Independent project analysis in Australia shows that approximately 65% of mega-projects in excess of AU$500 million fail to deliver targeted value. To improve project outcomes, mining organizations can:
- Establish a clear line of sight on actual expenditures, including costs per unit of production.
- Share key metrics with engineering, procurement and construction management (EPCM) operators, mine operators and manufacturers.
- Strengthen working capital management.
3. Get serious about workforce planning
To maximize workforce productivity, companies must properly define their workforce assumptions and improve management across the talent lifecycle.
- Strengthen the owner’s team by clarifying the business model governing mines, plants, infrastructure and sustainability.
- Foster a culture that discourages rampant spending.
- Keep employees engaged through programs such as flexible rosters, training and long-term career development.
- Have a system for identifying global resource requirements.
- Adopt less cost-intensive work practices, such as work clusters, cross-training and automation.
- Train local populations in key job functions.
4. Improve efficiencies through technology
Productivity is about maximizing throughput per unit of time, per unit of quality and per unit of cost. Mining companies may wish to apply a better use of technology to achieve these goals:
- Seek out innovative technologies capable of unlocking deposits and improving productivity on the mine site.
- Use system transformation to address core business drivers, such as operating time and rate.
- Replace disjointed reporting systems with streamlined management dashboards that report on actual operational performance.
- Use production visibility tools to get an automated visual of mining operations from pit to port.
5. Pursue operational excellence.
To bring costs down in a sustainable way, mining companies can:
- Re-evaluate their operating models to ensure they have the management and reporting systems necessary to build a cost management culture.
- Adopt Lean/Six Sigma methodologies and techniques such as shareholder value analysis to identify and close operational efficiency gaps.
- Look to lessons that can be learned from other industries, e.g. process manufacturing.
- Instill a culture of sustainable operational improvement.
6. Invest in analytics
It is impossible to reduce the costs of safety, maintenance and other cost-intensive programs on a sustainable basis simply by examining component costs. Using analytics, companies can:
- Assess the costs of entire processes to uncover the underlying cost base and identify exceptions and outliers.
- Improve decision-making and asset performance by measuring both financial and non-financial indicators that affect overall profitability.
- Transport data from a wide range of disparate sources to deliver on-demand reports, enabling miners to improve asset utilization and reliability, minimize downtime, streamline mine planning and optimize fleet resources.
- Use emerging metrics to manage operational costs, such as measuring the mineral content of each shovel load to determine whether or not it is below cut off grades.
7. Rationalise the supply chain
To reduce costs, companies frequently ask suppliers for steep—and often unsustainable—cost concessions. Rather than pushing the service sector to the wall, companies can:
- Establish global sourcing contracts.
- Build partnerships with those suppliers who have delivered demonstrable value.
- Renegotiate with major suppliers to win price concessions.
- Streamline supply chains by integrating processes with key input producers.
8. Right-size capital projects
To get capital costs under control, miners can:
- Transition to quick-start modular plants and projects that can be expanded as industry fundamentals improve.
- Put marginal mines into care and maintenance.
- More appropriately scale operations to suit individual projects.
- Build stronger funding practices by better understanding the difference between a project’s value and the price the market sets.
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