Mining Industry: Five Leadership Issues Worthy of Board and Executive Attention

Mining Industry: Five Leadership Issues Worthy of Board and Executive Attention 1

2 Introduction Mining companies operate in a complex business environment where they face many challenges in terms of price volatility, access to financing, geopolitics and regulation. At the same time, the effects of technological innovation, changing market conditions and a host of other major risk drivers are contributing to dialogues in boardrooms and executive offices. Most significantly, executives are asking if they have the right leadership talent in light of the challenges they face. From our conversations with board members and CEOs in the mining industry, the following five issues and their implications on leadership talent have emerged as top of mind for the executives: Optimizing assets and operations Continuing to earn the license to operate Leveraging technology and innovation Injecting diversity in leadership Building a board for a complex business environment We hope this executive briefing document will serve as a discussion starter for thinking through how to attract and retain the right leadership talent in the face of these challenges.

3 Optimizing Assets and Operations In the current down cycle, the focus of mining companies is on restructuring asset portfolios and driving productivity improvement programs. The companies with a strong balance sheet are seizing the opportunity to grow through mergers and acquisitions (M&A). There is demand for leaders adept at cost discipline, operations improvement, and project development and management, and at the same time for those who can drive strategic and successful M&A and new business model innovations. COMMODITY PRICES HAVE Dropped in recent years Consequently, MINING INVESTMENTS HAVE DECLINED, especially in iron ore Commodity Metals Price Index 1995-2014 A 300 200 100 Major mining project costs, US$ billion B +17% +4% 146-25% 135 141 125 +3% 110 74 76-27% 55-51% 69 0 1995 2000 2005 2010 2015 Gold Copper Iron ore 2012 2013 2014 A large proportion of senior mining leaders have stepped into their roles during the downturn Share of executives appointed since 2012 C 50% of CEOs 52% 71% of CFOs of COOs For companies engaging in M&A activity, talent management should be a key priority D PRE-ACQUISITION: Talent evaluation DURING ACQUISITION: Support from key stakeholders locked in POST-ACQUISITION: Talent assessment (both sides) to ensure smooth integration and allocation of roles REQUIRED COMPETENCIES FOR EXECUTIVES IN THE DOWNTURN D Key points Strategic mindset to prepare for the next cycle (e.g., M&A) Change management skills Industrial relationship management skills Driver of productivity and operational efficiency Financial acumen and knowledge of capital markets Ensure that board members and key executives include people with experience from transitions between mining cycles. Take the opportunity to review candidate base and inject talent from industries with similar CapEx requirements and cyclicality such as oil and gas and infrastructure. Make sure the high-potential talent remains engaged. This time provides an important learning experience for the next generation of leaders.

4 Continuing to Earn the License to Operate Mining companies need to address a number of issues in their operations. These include navigating regulation and government policies, confronting sustainability concerns from investors and local communities, and managing on-site health, safety and environmental issues. An increasing focus on sustainability is fueling the need for more proactive stakeholder management to mitigate the reputational risk and to future proof the business. MINING EXECUTIVES ARE OPERATING IN AN INCREASINGLY COMPLEX POLITICAL ENVIRONMENT where STAKEHOLDER MANAGEMENT IS critical Latin America Mexico introduced a 7.5% tax on mining revenue. C Chile announced a tax reform that will see corporate taxes rise to 25%. D Bolivia has nationalized mines. E Asia/Pacific Indonesia banned the export of unprocessed ore. A Australia saw multiple protests against coal mining. B Africa Multiple governments continue to take stakes in mining companies or demand that indigenous groups are given stakes in individual mines. F Investors Certain types of investors have new governance rules that prohibit investment in non-sustainable assets. Some investors are increasingly concerned about the health and livelihood of the mining communities and are introducing sustainability ratings. Very few mining CEOs have worked in government or been in diplomacy to hone their skills in relationship management g 29% FINANCE 15% ENERGY 9% GOVERNMENT 9% LAW The majority of investor relationship executives and CFOs industry experience comes from mining g 65% INVESTOR RELATIONS EXECUTIVES 73% MINING CFOs REQUIRED COMPETENCIES FOR Corporate Affairs leaders H Leadership and influencing skills Advocacy and strong relationship skills Strategic mindset and creativity Communications skills, especially relating to transformation Key points Hire diverse and culturally astute board members and executives who have firsthand international working experience. Treat stakeholder engagement as a strategic priority and hire experienced professionals. CEOs and CFOs need to engage with stakeholders beyond the numbers. Ensure that health, safety and environmental and wellness efforts span the entire organization to improve employee attraction, retention and engagement. Particulary, environmental and wellness efforts should extend to the wider communities in which mining companies operate.

5 Leveraging Technology and Innovation Following more than a decade of sparse adoption of innovative infrastructure, mining companies should evaluate how they best embrace technologies such as automation, mechanization and data analytics. Doing so can significantly improve productivity and will transform the industry s operating model and redefine what will be required of future leaders. Harnessing talent who will successfully drive value-adding technological change across the organization requires considering pools of talent in adjacent sectors. The specific targets depend on the scope and scale of the company s technological vision. EXAMPLES OF TECHNOLOGY ADVANCEMENTS IN MINING A Unmanned trains to be used for cargo delivery Drones to monitor stockpiles, map exploration targets, track equipment and deliver parcels 3D printing machines to simplify the procurement of replacement parts Off-grid power solutions to potentially reduce the use of diesel generators, bring down electricity costs and minimize carbon footprints Shiftable conveyor belts rather than off-highway trucks to reduce diesel costs Automated underground mining processes and remote control centers to supervise operations Robots to replace idlers on conveyor belts to increase efficiency and safety Telematics systems to remotely monitor fleet activity and identify hidden inefficiencies Simulation training that provides a safe but realistic environment for employee training and development Exploration technologies and evaluation of big data analysis that can dramatically reduce CapEx The majority of mining executives do not think they have the right talent and structure to succeed in digital transformation B Respondents say their company has lack of digital skills and insufficient management bandwidth are key barriers Lack of digital skills and expertise 31% 29%... the right people to set a digital strategy... the right people to execute a digital strategy 19%... the right structure to realize digital opportunities Insufficient management bandwidth Digital not seen as important by leadership REQUIRED COMPETENCIES FOR MINING TECHNOLOGY LEADERS C Experience from a CapEx-intensive industry Strong track record of driving technological change Ability to drive technical solutions across projects and operations Motivational skills and ability to bring people on board with agenda Commercial acumen to ensure the value-add from technological transformation Key points Assess the technological and digital capabilities of the current board and leadership team. Establish a dedicated career path for future innovation leaders, grooming critical competencies from the start such as entrepreneurship, strong drive for results and timely decision making. Attract technology leaders from outside the industry (e.g., engineering, procurement and construction; infrastructure; oil and gas; aviation; manufacturing).

6 Injecting Diversity in Leadership Given the cyclical nature of the mining business, there is demand for leadership talent with a long-term perspective and, for certain roles, a track record in the industry. However, the mining industry has become very insular and would benefit of more leadership diversity in terms of gender, ethnicity, generation and industry experiences to tackle the future challenges. CEOs of mining companies are even less likely to be external appointments than Oil and gas CEOs A Internally appointed 88% 12% Previous role of internally appointed CEOs CFO 13% President or chairman 17% Divisional CEO 20% Internal 82% Senior vice president 27% COO 23% Previous role of externally appointed CEOs Oil and gas CEO appointments B Externally recruited Divisional CEO 25% CEO of another company 75% Internally appointed CEOs have stayed with the same organization, on average, for 15 years External 18% COOs are mostly internal appointments, whereas just over half of CFOs come from outside A 80% of COOs are internal appointments COOs mirror the lack of diversity found among CEOs 80% of COOs are of these five nationalities 52% of CFOs are external appointments THERE IS LITTLE DIVERSITY AMONG THE CEOs 74% 0% of CEOs are of CEOs of these five are female nationalities 0% of COOs are female... Whereas CFOs are a little more diverse 70% 21% of CFOs are of CFOs of these five are female nationalities Key points Increase diversity of gender, ethnicity, generation and industry background in the leadership to instill new behaviors, learning and change in the organization. Develop internal candidates for future CEO pipeline and inject talent from other companies and industries, especially into functional positions. Identify and hire senior leaders with a vision and understanding of the market evolution and business model changes, as opposed to overly operational leaders.

7 Building a Board for a Complex Business Environment Mining boards should include a diverse and multi-disciplinary roster of professionals to help solve issues in an increasingly complex business environment. Apart from key tasks such as CEO succession planning and remuneration, boards need to respond to challenges like regulation, price volatility and productivity, shareholder activism, technological advancements, M&A and cyber security. Mining board members tend to be men from the developed world A Currently only 19% of mining board members are women. Little national diversity 59% of board members nationalities are the same as the country of the company s main operations. The vast majority of board members are from developed markets, though mining sites mostly reside in emerging markets Share of board members from developed markets 83% MINING BOARDS must address MANY CHALLENGES B Regulation Geopolitics Operations and productivity Cyber security Shareholder activism M&A activities Share of board members from emerging markets 17% Local community issues and activism Technology advancements Risk management CEO succession planning Mining boards favor finance, government, mining and energy experience a Nearly A THIRD OF THE MINING BOARD SEATS COULD be changing in the next few years, compared with almost a quarter among fortune 500 Companies A MINING BOARDS FORTUNE 500 BOARDS 6% 3% 20% 32% 20% 24% 42% Age 68 and above 46% have a finance background 26% have mining in their background Of the board members with mining experience, 44% have held a CEO position, and 15% have been in an operational position. 53% 27% have worked for a government 22% have worked in energy 56-67 46-55 45 and younger Key points Conduct regular director and board evaluations this will help ensure that director performance is aligned with the company s strategic objectives. Prepare for changes in the composition of mining boards both in terms of improving gender and national diversity and bringing in board members who can ask questions around risk and governance. Monitor all advance warning signals. Assess and address vulnerabilities and maintain an effective, ongoing shareholder outreach program.

8 Endnotes OPTIMIZING ASSETS AND OPERATIONS A Commodity Metals Price Index 1995-2015, Index Mundi, 2015; Indices of Primary Commodity Prices, 2005-2015, International Monetary Fund, 2015 B E&MJ s Annual Survey of Global Metal-Mining Investment, Engineering & Mining Journal, 2014; E&MJ s Annual Survey of Global Mining Investment, Engineering & Mining Journal, 2013; Pulling Back Across the Board: Project Survey 2015, Engineering & Mining Journal, 2015 C Proprietary analysis of executives from leading mining companies, Russell Reynolds Associates, 2015 D Proprietary research, Russell Reynolds Associates, 2015 CONTINUING TO EARN THE LICENSE TO OPERATE A Indonesia Holding Firm on Iron Ore Ban amid More Investments, Bloomberg, 2014 B Top five unusual mining protests, Mining Australia, 2014 C Mexico s senate approves reforms, including 7.5% mining tax, BNAmericas, 2013 D Chile enacts tax reform, Ernst & Young, 2014 E Bolivia s Morales nationalizes zinc and tin mines licensed to Swiss group, MercoPress, 2012 F African Governments Tussle With Mining Firms, The Wall Street Journal, 2014 G Proprietary analysis of executives from leading mining companies, Russell Reynolds Associates, 2015 H Proprietary research, Russell Reynolds Associates, 2015 LEVERAGING TECHNOLOGY AND INNOVATION A Tracking the trends 2015, Deloitte, 2015; Business risks facing mining and metals 2014-2015 ; Ernst & Young, 2014; Engineering & Mining Journal, 2014-2015; Mining.com, 2014-2015 B Digital Pulse Survey, Russell Reynolds Associates, 2015 C Proprietary research, Russell Reynolds Associates, 2015 INJECTING DIVERSITY IN LEADERSHIP A Proprietary analysis of executives from leading mining companies, Russell Reynolds Associates, 2015 B Proprietary analysis of integrated exploration and production oil and gas CEOs, Russell Reynolds Associates, 2015 BUILDING A BOARD FOR A COMPLEX BUSINESS ENVIRONMENT A Proprietary analysis of boards of leading mining companies, Russell Reynolds Associates, 2015 B Tracking the trends 2015, Deloitte, 2015; Business risks facing mining and metals 2014-2015, Ernst & Young, 2014; Proprietary research, Russell Reynolds Associates, 2015

9 Russell Reynolds Associates is a global leader in assessment, recruitment and succession planning for boards of directors, chief executive officers and key roles within the C-suite. With more than 300 consultants in 45 offices around the world, we work closely with both public and private organizations across all industries and regions. We help our clients build boards and executive teams that can meet the challenges and opportunities presented by the digital, economic, environmental and political trends that are reshaping the global business environment. www.russellreynolds.com. Follow us on Twitter: @RRAonLeadership Global Offices Americas Atlanta Boston Buenos Aires Calgary Chicago Dallas Houston Los Angeles Mexico City Minneapolis/St. Paul New York Palo Alto San Francisco São Paulo Stamford Toronto Washington, D.C. EMEA Amsterdam Barcelona Brussels Copenhagen Dubai Frankfurt Hamburg Helsinki Istanbul London Madrid Milan Munich Oslo Paris Stockholm Warsaw Zurich Asia/Pacific Beijing Hong Kong Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo Copyright 2015, Russell Reynolds Associates. All rights reserved.

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