Mike Bunch Executive Vice President & Chief Operating Officer, Summit Mining International Inc. Controlling Costs Through the Price Cycle

Transcription

1 Mike Bunch Executive Vice President & Chief Operating Officer, Summit Mining International Inc. Controlling Costs Through the Price Cycle Buenos días compañeros! I'm Mike Bunch from Summit Mining, a subsidiary of Sumitomo Corporation. I'm going to give you a few nuggets today with some ideas on how to control your costs during the downcycle. A little bit about Summit Mining International I ll talk about who we are and what we do, show you some of the industry trends that you ve already seen, and get back to the cost quartiles that we've lost over several years. And then our business model that we have been developing over the last decade. Summit Mining is a newly incorporated subsidiary of Sumitomo Corporation. We re a Delaware company located in Denver, formed in Our primary focus is our operation; our lead, zinc, silver mine in Bolivia. We also support other Sumitomo subsidiaries and departments within our metals and energy, looking for joint ventures, mergers, and acquisitions. We also have exploration projects in the US, Mexico, Bolivia and we re moving into Canada this year. We want to be a leading mineral resource company and we want to develop, operate it s kind of interesting to hear that coming from a trading company and optimise our global mineral resource interests. Minera San Cristobal it s a large open pit mining and milling operation. We produce zinc silver and lead silver concentrates. It s located in the southern part of Bolivia in the department of Potosi. It s the largest mining operation in the history of Bolivia actually the largest private investment in the history of Bolivia. As a mine alone, it s the world s seventh largest zinc producer, the eighth largest lead producer and the fourth largest silver producer. We produce as an individual mine about a million ounces of silver every month Session 4: Mining & Production: When in a Hole Stop Digging 1

2 We have 1500 direct employees and 3000 indirect employees most of them are Bolivian nationals and 65% of them come from the local indigenous communities. Our location. We are about 500 kilometres south of La Paz, a very high elevation in the Altiplano at 4000 metres. We are close to the Chilean border by dirt road and we have administrative offices in La Paz and Potosi, so the location of this project is very remote and there's really nothing there except for us. Industry trends: We all know what's been going on here s an interesting graph I picked up from Booz and Company. This is a consolidated metals and coal trend in regards to what's happening in Australia. They ve indexed all the minerals and metals there and you can see here over the last 10 years from , that there's been an 18% annual growth in revenues, but margins have remained flat. Some of you here attended the Denver Gold Forum this last year, I wasn t able to attend but I go back to 2012 and the conclusion of the Denver Gold Forum was that prices were up 20% but you know, the costs were up 20%. And then at the 2013 conference, prices went down 20% and everybody said, well, you know, we've got to cut our costs now by 20%. And it was funny when my senior management in Tokyo said, well, look, everybody s cutting their costs 20%, what are you doing Bunch, you're going to cut your costs 20%, right? I said, no, we've already done that. Take a look at the margins we have delivered over the past 5 years. We've been focusing on our cost-cutting during the high cycle and I'm going to share with you what we've done. There's an interesting study here as well. As miners over the last 10 years go back 20 years ago, we were very good at operating, very efficient. But this study shows over the last 10 years, (this comes from SME published in 2013), that we've lost 40% in our mine operating efficiency. This is not a very good graph but you can get the idea here. This is the copper business. You go back from 1990 to 2002, there's been a steady reduction in cost 4.5% per year was the trend; it was very good. Then comes the big tidal wave where we just got out of control and Session 4: Mining & Production: When in a Hole Stop Digging 2

3 costs from 2003, the last 10 years to 2012, have increased about 167%. That s what we've been doing as an industry. So now we finally get back to the graph that everybody should be focusing on. And that s what quartile you're in with your production. This is our game. But most of us kind of forgot about this graph. Everything was more production, it didn t matter what it cost we re going to make money. For me, the last 40 years, I think this is cycle number 7; depending on what you want to call a cycle. But this last one, guys, we completely forgot what we were supposed to be doing. We (Summit) actually have this as one of our strategic goals, we want to be in the first cost quartile. We produce significant amounts of silver, but 55% of our revenues come from production of zinc. So we compare ourselves against other zinc mines. This is a zinc graph. A Mckenzie graph and from We ve moved from 41% into the 35% category, still focusing on this 25%. So how well are we doing? We re doing okay. Are we making the money we want to make? No. Are we laying off our people? No. And are there dramatic changes in our production? Yes, going up and our costs are continuing to go down. This is the game we play and everybody seems to have forgotten it over the last 10 years. In all the conferences I attended, I didn t see this graph, not one time! But this is what we do. When times are bad, you have to be better than the other guy. You ve all heard the story about the two hikers hiking in the woods, they encounter a bear and one of the hikers pulls out his tennis shoes and starts putting them on, and the other guy says, you can't outrun that bear, and that guy says, I don t have to outrun the bear, I just have to outrun you. And that s what this is about. If you're on the right hand side of the curve, the bear s going to eat you up. This is your job as operators. It s not waiting for the down cycle, but we need to be focusing on our costs and our productivity all of the time. We invest our capital. What does it do to our cost side of our business is it expensive production? We have built so many things and Session 4: Mining & Production: When in a Hole Stop Digging 3

4 invested in so many projects over the last 10 years, now here we are in a very down-cycle. It s typical, we continue to do the same thing over and over for me, this is cycle number 7. Our (Summit) strategic goal number 1. We want to be in the 25th percentile of zinc operators in the world. I'm going to share with you our business model. There's three things that we focus on at Summit Mining we didn t invent these terms, you can Google them You can find millions of hits if you Google these terms we focus on value-based leadership; we focus on teamwork and organisational development, and then this is really key the foundation of our organisation is how we use our corporate systems and structure and I ll explain what that is. First of all, value based leadership is using your values to make decisions. It is values that are demonstrated by leaders and then the decisions that we make are based on what goes on in here (inside). And many of the decisions that we make are very difficult ones, but it s the right thing, based on our values. And so you hear all that crap that companies talk about in regards to their values. When you come to our site, you visit with our managers; you'll see that it s real. This is what we do we make our decisions based on doing the right thing and if we happen to hire one of you guys out there that don t fit in with those values, you can't stay very long in our organisation. So it s pretty simple. When we hire our leadership, it s not very easy and this is what most companies focus on - to find out what they ve done, their experience, and what they're capable of doing, and what they know. Those are easy to find out. The difficult part is to find out what goes on in there (inside) and this is what we focus on as a team when we recruit our leadership to run our mine. Now this is an interesting graph. You get into organisational development, and those of you with MBA s out there, this is typical of any OD course. There's two focuses on organisation development, there's tactical implementation and there's strategic development, and when I ask operators, whether CEO, COO, General Managers, Mine Managers, Plant Managers Do you empower your people? Oh yeah, yeah, we empower we focus on that. Okay, how Session 4: Mining & Production: When in a Hole Stop Digging 4

5 do you that? Well, you know, we listen to their ideas and you know I say, well how do you do that? Well, you know, we have meetings and The truth is that most people in our business don t know how to do empowerment. This is how it s done! The problem on the left side of the curve is you ve got too many people focusing on the day to day tactical implementation, too many managers out there telling everybody what to do. When you move your management team up the leadership curve to focus on the things they should be focusing on, strategic development, there's a void that s left there and what happens? Empowered people emerge it s that simple! Get the hell out of the way and let your guys go do the work. Support them give them the resources and training and tools that they need. Give them a strategic focus and a direction where they need to go and get the hell out of the way! But we can't do that as an industry, so I feel we've failed on empowering our people. Guys, if you want to cut costs in this business, you can't do it on your own. You're going to have to get your people involved all of them! So how do we do it? A little bit more about empowerment. We use what's called a matrix organisation you can Google that, we didn t invent it. It s a very flat organisation. We don t have managers managing managers! We really do focus on a high level strategy. We actually take our management team completely off-site twice a year, for a week and focus on teamwork and strategic planning and we leave the operation there 1500 employees and a huge open pit operation, to be run by superintendents and supervisors. People tell me, Mike, are you crazy? Are you crazy, you can't do that? Oh yeah, you can. Guess what happens every single time we take the managers off site and we don t just take them off site, I mean, we ll take them to Chile, we take them here to Peru, we get them the hell away from the site and our superintendents and our supervisors run the site. What do you think happens to production? It goes up every time. And then when they come back, the superintendents are all empowered, they're all excited, and they tell the managers, why don t you guys just stay away, go have a cup of coffee and let us run this place. You know, there's a lot of wisdom in that. Session 4: Mining & Production: When in a Hole Stop Digging 5

6 We allow testing of new ideas and screw-ups. The only screw-up we don t allow for is safety and environmental. And then there's the non-value added corporate BS! Let me explain what that is. We did a study, we hired a consultant to come and take a look. We would consider ourselves if we were a public company we d be a mid-sized market cap company from $1-3 billion. We did a study on these companies and the bubble size represents the size of the market cap, 1-3 billion, and on the left side, shows how many head office employees you have compared to total employees so you see, we kind of fit right in there. Most mid-cap companies have about 1500 employees but look at the number of people in the head office look at the one up on top; more than 100 people in a small company now what the hell do they do in there? Take a look at these companies and ask who they have in their home office? Well I have a Senior Executive Environmental Manager. Well, what do you have that for? Well, he's really good. But the environmental stuff is done at the site, it s not done siting on your butt in the home office it s done at the site. Well, we have a Vice President of Safety and Health. He's a good guy too. Well, you know what? It s not done in the home office, it s done at the site. Put your good people where they need to be. In our office in Denver, we have about 12 employees total, including myself. That s it. So in my opinion, we have too many senior executives out there in our industry that are delivering non-value added work to the operation. It loads them down. I've been on the receiving end of this for many decades so I know exactly what non-value added corporate BS is. But that s what they do. To justify their job, these executives that sit in the home office, they give work to the guys at the site and it s all non-value added. We don t have any of that at Summit Mining. Now let's get into the model. This is how we run our business. Systems and structure. You have to have some type of structure to run your business. If you want to cut your costs, you have got to get your employees involved. How do you do that? You empower them first by getting the heck out of the way, then you put them in a group and listen to what they have to say. Session 4: Mining & Production: When in a Hole Stop Digging 6

7 Here's our model. On the left side, we take what we know, input it into our process. Processes form systems and systems form the enterprise. And how we stick our people in there is on the right side. We have identified 125 key processes in our business 125! And then for each process we have a process leader -the process owners. Those process owners have teams of subject matter experts for example, in flotation; flotation has maybe a supervisor that s the team leader. He's the process owner, and in that team you may have obviously some operators, maybe a metallurgist, maybe a supply chain guy, a mechanic. No more than 7-8 people in each team. We have hundreds of our front line employees involved in improving their processes, so for us as managers, are we going to improve the processes? No, it s the guy that does the work every day; empower them, give them something to do, listen to them, formalise it, this is our system. The processes form systems - we have production systems, we have environmental systems, we have HR systems, we have logistics systems, etc. Your managers then are the owners of those systems and the enterprise owner is the general manager. It s a top down approach on how you do your strategic and business planning; very formalised, but a bottom up approach on how you run your business. Another key thing we do that most companies don t do. We eliminate the paperwork. You have to have procedures for the way you do your business but we don t write that stuff down, we put it on process maps. So our paperwork is controlled in a database and there is very little of it; it s all on process maps. You take a look at the guy in flotation instead of having 150 pages of how you do flotation, he's got eight pages of process map but he can explain everything on those eight pages. It s process mapping versus documentation the old way of procedures and policies. This is our enterprise model. I worked at Candelaria years ago in Chile, and I believe they became the first mine in the world to achieve ISO Certification Environmental; They were the first in Chile and I swore that I would never look at ISO Certification again it was the most non-value added Session 4: Mining & Production: When in a Hole Stop Digging 7

8 exercise that I had ever done, I hated it and I thought I'd never do it again. Any operation I work with in the future, we re not going to do ISO, I later took a look at process mapping and I thought to myself, you know, ISO s got some pretty good stuff in there, I mean, these are internationally accepted best practices so why wouldn t you want to do them? Because it s burdensome! We've taken all the international best practises and other practices that we have developed and other practices that we have stolen from other people, and all those general legal and regulatory requirements - the whole long list and folded them all into one package, one quality system and that s our business management system. For example, every one of them has general requirements well, we don t have general requirements for each one, we have one general requirement, and that s our business manual. We have one manual one quality manual. Then there are documentation requirements we have information management within our manual. We have integrated all of this into one quality policy, one quality programme. And our guys just keep stacking on the certificates. We re still looking for somebody else that s done this but we believe we were the first mine operation in the world to achieve simultaneous triple ISO certification , 14001, OHSAS All in one. We did it in 12 months, start to finish. We also used some very difficult auditors TUV man those guys were tough. They were shocked, said it can't be done nobody s done that they said. Well, we did it in 12 months. They were nervous because they said, well, geez we can't sign off on this well, you have to because we did it! It was easy. Well, it s not easy but easier than the old way with written documents and procedures. And we've gone on, there are other certifications laboratory certified 17025, the guys just did a that kind of surprised me. I said, what did you guys do that for, information systems? Well Mike, we thought there were some pretty good best practices in there we wanted to implement in our processes. So this is what it can do very quickly for you guys, this model. Session 4: Mining & Production: When in a Hole Stop Digging 8

9 Then everybody goes, well, you know, Bunch, you guys have got a heck of an ore body that s world class ; no it s not. It s a high volume, low grade deposit out in the middle of nowhere. With our head grade we started out in our early days, 2% zinc, now this year, 2015, we re going to be 1.4%. Look at our silver, 70 grams per tonne, now we are down to 45. I visited the Red Dog Mine in Alaska this last July/August. I think they produce about a billion tonnes of concentrate, they ve got some silver and gold and they were really worried because in 2015, their head grade drops from 20% down to 18%. Their cut-off grade is 6%. Hell, I said, what's that on the mountain over there, it looks like there's a fire?! They said, oh yeah, that s a fire, our waste dump is on fire! There's so much sulphide in their waste dump, they're putting out fires all the time because it oxidizes. I said, give me some of that so I could mill it, right? No, we re a very low grade high volume operation. We don t have a world class ore body. Typical of every mine the more you mine, the grade goes down, stripping goes up. In our case we started with 40 million tonnes a year, now in 2013, we had to buy a bunch of equipment, now we re at 90 million tonnes a year increased strip ratio. So that s our challenge. There's only three ways you can look to improve your cost structure in regards to production. The amount of tonnes that you mill, the head grade you can't change that and the recovery and that s limited based on the technology you ve constructed in your plant. So the only way to do it then is more tonnes. We saw this coming years ago, we said look, we need to increase our mill throughput, so by the end of 2014, we want to go from a 40,000 tonnes per day milled, to 52,000 tonnes per day as our first step. So in 2009, we spent about $5 million on a feasibility study. At the same time we re implementing this business management system. I'm telling you about this as this project is part of the business management system. The feasibility study showed 60,000 tonnes per day, you can do that for $311 million, it s got a great NPV. Well, let's just go build it, right, let's just go do it! Session 4: Mining & Production: When in a Hole Stop Digging 9

10 We decided, let's start with 52 that s our permit, we don t have to get another environmental permit for that, we can just do 52 and that s a 30% increase in our through put and we've got a Board approved $174 million capital project in front of us to go do the expansion. So power, water, tails, infrastructure and our guys said, look, Mike, we appreciate that $174 million but we think we can do it for a lot less than that. We think we can de-bottleneck this place because we don t think it s been optimised. Now these are the guys telling me that! The guys telling me I'm not telling them, they're telling me. I've got it approved! 174 million go build it right? They said, no, what we re going to do is, we re going to take a look at our capacities and the red line is where we need to go. This is where we were by the end of 2013 we had a little bit to do on our lead roughers, zinc roughers and our tails thickener. So they went through from crushing and conveying to milling to flotation to tailings etc, They looked at all the bottlenecks and began to optimise the business. Working in the system, working in the teams. Not me, not the manager, not the superintendent the supervisor and his guys out there working on it. You got to get your people involved. We set that up. Here's what happened. Folks, this is incredible. We did the project for $23 million. Actually, into this year, we think it s going to be 25 we just completed it. Does anybody out there have any example where you do a 30% increase in mill throughput for $25 million? It does not exist guys, but this is what happened. By the way, the mill yesterday did 56,000, the day before it did 58,000. This is what a system approach can do for your business. Now there are some other secrets in here, I want to tell you about. How about produce more and use less water and use less power? You miners in Chile, we can solve your issues if you listen, if you pay attention, and if you do these things here, the power and water issue in Chile goes away. Session 4: Mining & Production: When in a Hole Stop Digging 10

11 You know, I had an investment banker one time tell me, Mike, you guys have a competitive edge you shouldn t be sharing this with everybody! I said, that s no problem. I've shared this before. Everybody goes, wow Mike, that s a great presentation, man! But nobody does anything with it. Everybody thinks they're the best miner but you know, I'm a good miner because very little I do is on my own, I always steal it from somebody else that s what makes me a good miner! I find a good practice I don t care who made it, I want that. I want that in my place. Most of this stuff here, I stole from somebody else. Look at this power trend, we peaked out at 25 kilowatt hours per tonne back in 2011, today we re at 22. Folks, we ve knocked off 5 Megs total! Not just the per tonne 5 Megs off our power! We didn t need any more power for this expansion we need less! People say, well, how did you do that? We had a guy that said look, why don t we slow our mill down? Slow it down? You can't do that. More tonnes, faster mill right? No, we slowed it down while producing more tonnes. The water, we focused on our tailings thickener. Tailings thickener, we were getting 45% solids recycled back into our plant. We hired a Chilean laboratory and they did some tests on our stuff, the most you'll ever do is 50%. Guys we are doing 55%! Recycling of our water directly from our tailings thickener 55%! And in fact, we've got a patent application on that idea. Every thickener in the world needs our little device that we invented at site by one of our site guys underneath the system. We re using half the water we used to use. So there are some examples. This is a proven system. I did this in another life, in another industry. I actually retired from mining here about 10 years ago. I said I was done and I took a little job working at a utility in fact, I ran a sewer utility in Tucson, Arizona and my family and friends used to call me The King of Crap and the Pope of Poop that s what I did. I implemented this system back then too, same results. I thought, wow, this thing really works. I stole this put it together - stole it from somebody else. Session 4: Mining & Production: When in a Hole Stop Digging 11

12 We did it here, here's the result. First mine in the world to achieve simultaneous triple ISO certification. Record ramp up times, Colorado School of Mines did a study a few years ago that says it takes months to ramp up to name-plate design, we did it in 12. Our company went bankrupt because of a financing deal they did back in We had a cash call to Sumitomo for $10 million in February At the same time we start implementing this system. Folks, we ended the year with a $200 million net income. We went from bankruptcy the same year, and 10 months later, $200 million net income. I don t know of any company in the world that s done that. I don t think that s been done anywhere. We did the debottleneck versus just go buy it on our mill expansion. Significant operating costs reductions the first year we implemented the system, $60 million reduction in operation costs our very first year. Folks, there are other things to talk about that the system does, we don t believe but we know not as arrogance - you come and look for yourself we believe we have one of the best environmental programs out there in the world. We know for sure that we are one of the best if not the best, in our social corporate responsibility. That s another time for another discussion but it just trickles down to other things environmental, safety want to take a look at our safety, want to take a look at our CSR all those other areas, you have to have a system. You have to get your employees involved. So very simple. Hire and retain the right people, develop the right work environment, and implement systems and structure. Thank you. Session 4: Mining & Production: When in a Hole Stop Digging 12