14 th Americas School of Mines

Transcription

1 Cost Reduction in the Mining Sector Normand Champigny, Paulo Petroni, Aaron Carter and Fabio Buckeridge

2 Contents What the Industry is Experiencing Sustainable Operating Cost Reduction Capital Productivity Improvement Looking to the Future Question and Answer Time

3 What the Industry is Experiencing

4 What the Industry is Experiencing Operating and capital costs increased dramatically in the five years leading up to the GFC PwC Mine Publications Increasing production volumes was the primary focus for 5 years. World s 40 largest mining companies: Operating costs increased from $85bn in 2003 to $176bn in 2007 Investing cash outflows increased from $20bn in 2003 to $126bn in Growth in energy, maintenance, consumables and labour costs outstripped historical averages. Capital project cost overruns were being experienced by late $bn Worlds 40 Largest Mining Companies Operating Exp. Net Profit Year Investing Cashf lows Slide 4

5 What the Industry is Experiencing Despite best efforts, it has been difficult to compress costs during the recent down cycle PwC Mine Publication 2010 Operating costs of the Top 40 only decreased by 6% against a revenue decline of 15% in Sources of cost reductions have largely been cuts to discretionary spend on items such as exploration, contractors and head office costs. Higher unit cost operations placed under care and maintenance. Limited sustainable reductions to the operating cost structures of existing assets; energy, labour and transportation costs have been very difficult to strip out in the short-term. Despite the Top 40 investing approximately $200bn in capex between 2007 and 2009, global production has remained flat across most commodities. Slide 5

6 What the Industry is Experiencing Mining companies are experiencing some common issues that are contributing to cost escalation Supplier bases are fractured and not strategic. Pricing is often never challenged and charges for expedited materials have become excessive. The budgeting process is inherently broken. Budgets are based on previous years % with a limited understanding of cost drivers. Internal performance reporting does not sufficiently disaggregate results, identify the root cause of variances or establish accountability. Contracting costs are not understood or available to the executing entity. Experienced operators and managers are retiring or leaving the industry at an accelerated pace. Ad-hoc planning centred around this experience and done in the absence of rigourous process has become the culture. Insufficient challenge of project economics and detailed designs of capital projects is leading to unproductive capital. Slide 6

7 What the Industry is Experiencing Cost reduction and operational efficiency are key issues for mining industry leaders Newport Consulting (2010) survey of mining industry leaders found: >50% of mining executives are focusing on reducing or closely managing their organization s cost base 44% are focusing on improving operational efficiency Recognition of the significant opportunity to improve cost efficiency at existing production assets to drive shareholder value. Many companies are outlining plans for growth, but with a desire to reduce the capital intensity of new investments to improve project returns and maintain flexibility in light of a still uncertain future. Slide 7

8 Sustainable Operating Cost Reduction

9 Sustainable Operating Cost Reduction Many cost reduction initiatives fail to achieve their desired benefits Over 80% of cost reduction and operational improvement initiatives fail to achieve their targeted benefits. Of those that do, many benefits tend to be short-lived. Primary reasons for failure: Lack of a strong foundation built on planning and ownership; Continually dipping into the same well; Failing to address cost management and control (incl. spend culture); Inability to measure results. Slide 9

10 Sustainable Operating Cost Reduction Common approaches to cost reduction and lessons learnt Slide 10

11 Sustainable Operating Cost Reduction A sustainable approach to cost reduction is the key to realizing and maintaining savings Sustainable cost management identifies and implements lasting reductions to a company s cost structure. Planning, ownership and a well controlled spend culture is crucial. Eliminate bad costs and support or even increase a good cost. Focus on reducing cost per unit of output at operations level and total cost at corporate level. Not just cost reduction, important to increase operational effectiveness, asset utilization and production volumes. Slide 11

12 Sustainable Operating Cost Reduction Sustainable cost reduction at mine sites is driven by improvements in operational effectiveness and reductions in total operating costs Slide 12

13 Sustainable Operating Cost Reduction Achieving a state of sustainable cost management is a journey that typically takes several years to fully embed Slide 13

14 Sustainable Operating Cost Reduction Targeted cost reduction projects are an important sub-set of any mining company s sustainable cost management initiative Targeted cost reduction projects can be of particularly high value when: Operations are consistently underperforming relative to corporate targets, internal peers or external peers; Costs are rising faster than production volumes; Controllable costs are increasing as a percentage of fixed costs; Acquisitions have not fully realized synergy savings; Divestments have left behind orphaned costs; Savings from previous initiatives have not been realized. The most successful programs typically adopt a cyclical or wave based approach to finding, implementing and embedding initiatives. Uncommon that all cost reduction opportunities can be converted on the first attempt. Slide 14

15 Sustainable Operating Cost Reduction A cyclical approach to cost reduction projects leads to far more sustainable results than traditional approaches Slide 15

16 Sustainable Operating Cost Reduction In addition to the typical 10 to 15% in sustainable cost savings achieved, targeted cost reduction projects deliver many other benefits Revenue enhancement from an increase in production volumes. Improvements in the reliability of production and asset utilization. Improved understanding of the value added by key process and activities. Develops deep knowledge of key cost and value drivers. Builds the skills and necessary culture for achieving ongoing and sustainable continuous improvements. Slide 16

17 Sustainable Operating Cost Reduction Value driver models are excellent tools for identifying potential cost reductions and understanding the drivers of performance variances Coal Mine ($/ROM t) Value Driver Model Baseline and improvement scenarios can be compared in the model The top level of the VDM is typically cost per unit of output w ith greater levels of detail cascading dow n the tree. Variances betw een baseline data and the modelled scenario are detailed in real and percentage terms. A greater level of detail can be accessed beyond these cost totals by double clicking on each tree node Unfavourable variances are denoted w ith red shading, favourable w ith green. Slide 17

18 Sustainable Operating Cost Reduction Value driver trees are also an excellent platform upon which monthly cost management discussions can occur Variance analysis traditionally focuses on what, how much and why; value driver tools automatically highlight this. Cost discussions should focus on financials and physicals together; cost is often an outcome of operational performance. Focus must be on developing remedial actions rather explanations. Instills a performance culture at the mine site level. 2. Identify Major Variances Against Plan 3. Determine Causes of Major Variances 1. Collate and Analyse Monthly Results 4. Define Mitigation Projects/ Action Steps 5. Monitor And Track Progress of Action Steps Slide 18

19 Sustainable Operating Cost Reduction A number of immediate opportunities exist to drive mining companies towards sustainable cost management It takes longer than 12 months to embed sustainable cost reduction and a culture of continuous improvement and cost consciousness. Targeted cost reduction projects are extremely valuable. Some immediate actions that mining executives can take to drive towards sustainable cost management include: Establish an environment for cost reduction; Agree cost ownership; Challenge the financial plan; Look for contract leakage; Gauge performance by measuring results; Rigorously control spending; Stabilize cost controls. Slide 19

20 Sustainable Operating Cost Reduction Across almost all mining operations, opportunities for cost reduction presently exist in the following areas Do more and better maintenance scheduling and planning Increase mobile equipment utilization Improve strategic sourcing Optimize shift changes/downtime Do less rebuilds and component replacements Maximize truck dispatch system Reduce overtime Implement effective warranty tracking processes Slide 20

21 Capital Productivity Improvement

22 Capital Productivity Improvement Capital effectiveness is critical to drive value creation for the shareholders of mining companies Mining projects have the potential to be enormously earnings accretive. Significant risks stemming from: Long-term planning horizons; Volatile commodity markets; Significant up-front capital requirements. As projects mature in their life cycle level of influence diminishes. Imperative that the business need and detailed design of mining projects is challenged early on. Slide 22

23 Capital Productivity Improvement Asset intensive industries can effectively manage capital in three ways Levers Effective capital managers do the following: Manage the demand for capital Ensure standardized, rigorous financial justifications for capital projects. Avoid non-financial justifications of projects (eg strategic considerations ). Rigorously prove the need for the capital outlay Reduce capital costs Analyse total project costs, rather than focussing on incremental components. Analyse risk/reward and opex/capex tradeoffs. Seek multiple design options and actively debate out-of-the-box alternatives. Seek fit for purpose rather than gold-plated solutions Improve execution Develop and nurture strong project management disciplines with rigorous controls around project costs and scope. Mandate rigorous financial justifications for changes in scope. Slide 23

24 Capital Productivity Improvement 14th Americas School of Mines On mining projects, focus too often shifts from business imperatives to detailed engineering design challenges Key reasons why capital levers are not always optimized: Project familiarity ; Big project excitement ; Just trying to get the project over the line. Almost always significant potential for capital cost reduction. Value most likely to be realized when projects are comprehensively and systematically reviewed and challenged by multi-disciplinary teams. Slide 24

25 Capital Productivity Improvement 14th Americas School of Mines Capital Productivity Improvement (CPI) programs offer a proven methodology for reducing the cost of major capital projects CPI programs challenge the need, scope and cost of proposed capital solutions to business problems. Three perspectives/phases: Challenge the business case and investment proposal; Challenge the design of the process solution; Challenge the design and cost of the engineered solution. Relentless focus on justifying the ROI for every dollar spent. Relies on an iterative idea generation and evaluation methodology driven by an independent project team and supported by business and external content experts. Each idea is subjected to a detailed screening process to evaluate NPV, capex, opex and risk trade-offs and the probability of success. Slide 25

26 Capital Productivity Improvement 14th Americas School of Mines CPI programs typically comprise of a steering group, core project team, engineering staff and external content experts Slide 26

27 Capital Productivity Improvement 14th Americas School of Mines High level approach to capital productivity improvement 1. Challenge the business case and investment proposal Purpose: Activities: Devise a strategy on a superb Match the project design to business proposition to maximize investment returns the business proposition (scope) Examine the underlying business assumptions and project economics Identify and measure impact of critical assumptions Challenge the defined business problem and analysis of the underpinning the business case Ensure that the proposal presents best value based on those assumptions Redefine project scope Value Target: 2. Challenge the design of the process solution Few ideas that account for a 20 to 25% capital saving Review and rethink the proposed process flow Break process into component- parts to understand drivers of cost and commercial value 3. Challenge the design and cost of the engineered solution Commercial and technical review of all aspects of the project to eliminate unnecessarycosts Disaggregate engineering design into its component-parts Rigorouslytest each part to ensure design is lowest cost and best practice efficiency Pin-point inefficiencies, bottle- Focus on ensuring design is fit necks, discontinuities, latent capacityand lazy capital for purpose and not gold plated with an abundance of nice to haves Think big picture and challenge traditional operating paradigms Manage trade-offs between NPV, opex, capex, flexibility and risk. Many ideas that account for a 10 to 15% capital saving Manage trade-offs between NPV, opex, capex, flexibility and risk. Numerous ideas that account for a 5 to 10% capital saving and up to a 15% operating expenditure saving. Slide 27

28 Capital Productivity Improvement 14th Americas School of Mines CPI programs are particularly valuable when a company is experiencing issues in their capital planning processes Urgency to complete project planning and approvals to meet stakeholder or market expectations. High level of project complexity leading to difficulty in optimizing whole-of-life costs. Design decisions determined by engineering rather than commercial considerations. Gold-plating of assets rather than off-the-shelf solutions. Adoption of a no-risk approach to design solutions. Lack of clarity around the trade-offs between technical and commercial objectives. Bundling of nice to haves with must haves. Slide 28

29 Capital Productivity Improvement 14th Americas School of Mines CPI programs have consistently yielded significant capital cost savings and many other benefits Consistently yielded capital cost savings of 20 to 25% across a range of commodities without compromising performance. Projects easier to finance. Increased financial flexibility. Life-of-mine operating cost reductions. Enhancement of revenues. Reduction in investment risk. Compression of project time frames. Slide 29

30 14th Americas School of Mines Looking to the Future

31 Looking to the Future 14th Americas School of Mines A sharp focus on operating and capital cost reduction will be crucial to maximizing shareholder value over the coming years Volatility will remain in the short-term, however all evidence points towards long-term demand fundamentals driving a strong upward cycle. During the recent downturn cost structures at the operational level did not reduce materially. Weakening US dollar, stable labour costs and increasing parts, consumables and energy prices present a real risk of further cost pressures. Capital cost pressures will again become one of the key impediments to maximizing returns from growth projects. Critical that mining companies better insulate themselves from potential downturns during this cycle by reducing the capital intensity of proposed investments. Slide 31

32 Question and Answer Time 2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.