Productivity is now widely identified as the most pressing challenge facing mining companies. But despite productivity becoming the mining mantra in recent years, and many companies achieving significant initial productivity gains, most companies are still struggling to make impactful, transformational changes.
Productivity in the mining industry declined steadily throughout the high-price cycle of the last decade as mining companies chose speed over efficiency in their race to capture revenues. Productivity sank -8.3% per annum in 2004-09 as miners scrambled to increase production and rose only +0.6% per annum in 2009-14, according to McKinsey's MineLab Productivity Index¹.
Productivity in Latin American mining fell slightly less than the global average in the 2004-09 period at -7.2% per year, and grew slightly faster in the following period at +0.8%. But while the industry overall has stabilized and improved productivity, some mines have improved performance and others have worsened. The mines that have raised output have had better success in improving productivity, McKinsey says.
A 2016 study of the world's top 40 mining companies by PwC showed combined operational expenditure fell to US$419bn in 2015 from US$502bn in 2014, mostly thanks to increased production volume from existing plants and equipment. The companies "worked smarter and implemented more productive methods," PwC says.
Indeed, companies across the sector have been squeezing existing assets to achieve incremental production increases, with successes mainly attributable to finding ways to reduce equipment and people downtime.
Codelco, the Chilean state-owned world's largest copper miner, is a good example to represent what's going on in the industry. The company racked up US$500mn in cost savings in 2015 and is targeting up to US$300mn in 2016 and another US$2bn in 2017-20, slashing cash costs from US$1.64/lb in 2012 to US$1.28/lb in 1H16 and targeting a further US$0.30/lb reduction, CEO Nelson Pizarro said at the recent Mining Strategic Excellence conference organized by Metal Bulletin in Santiago.
BHP Billiton, meanwhile, reported opex reduction of US$2.7bn and productivity-led volume efficiencies of US$1.2bn in 2015. Rio Tinto aims to trim another US$1bn per year off its cash costs in 2016-17.
Companies have also slashed capital spending on exploration and development, reduced staff and renegotiated supply contracts. Such cuts have helped miners stay afloat as metal prices fell and were the industry's first front against waning prices, but amounted to "an almost improvised reaction," according Pizarro.
Portfolio optimization has also been a key strategy at the world's biggest mining companies. Codelco has continually reevaluated its projects and reduced what was a US$27bn 10-year investment pipeline to US$18bn. Brazil's Vale has offloaded a series of non-core assets including its Chile copper mine, Mozambique coal mine, iron ore carriers and logistics assets and earlier in 2016 said it aims to sell another US$15bn of assets by end-2017. Anglo American downsized its portfolio to keep only commodities it views as strategic, with plans to sell up to 60% of its mines. The company even sold smaller copper mines in Chile despite copper being defined as a core product. BHP Billiton spun off a collection of assets into a new company, South32, which incidentally has been doing quite well.
Metal prices have recovered somewhat in 2016 after a precipitous fall from their peaks in 2011-12, but most market watchers agree that price recovery remains uncertain and is likely to be slower and flatter than many had imagined, meaning productivity and optimization will continue to be an urgent imperative in the near term.
However, the problem of increasing productivity is looking more complex now than ever because the obvious cuts have been made. More importantly, cutting can only go so far and reflects a short-term reaction to market conditions. Furthermore, a large part of miners' US dollar-denominated cash cost reduction is attributable to more favorable exchange rates and lower prices for oil and other inputs, factors beyond mining companies' control that could easily reverse in the future.
The concern is how to embark on more transformational change and to embed long-term productivity mechanisms that will remain sustainable in time, regardless of market conditions, and how to reconcile this with short term demands. "Companies have applied rather intensive cost-cutting, but in terms of the larger challenge of increasing productivity we are still in the early stages," says Juan Carlos Guajardo, director of Chilean consultancy Plusmining.
The answer has to do with innovation, end-to-end integration and the cultural metamorphosis necessary to make these possible. Most mining companies are cognizant of this and even working to apply changes, but these are complex, slow-moving initiatives. While it's not easy to break up the status quo, the good news is that, in all its broadness, the concept of productivity still has much to contribute to the operational success of the mining industry.
¹ McKinsey's MPI is based on the Cobb-Douglas production function commonly used to gauge national economies' productivity, adjusted to focus on the areas that are within mining companies' control - capital and labor invested, production processes, spending on goods and services, the way mining operations are organized - and excluding exogenous factors such as ore grades. MPI has four elements: physical mining output, employment at the mine site, the value of assets at the site and nonlabor costs.