Optimising NPV

by Guy Mitchell

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Innovative Problem Solving – Scottish Style

A man in Scotland calls his son in London the day before Christmas Eve and says, I hate to ruin your day, but I have to tell you that your mother and I are divorcing; forty-five years of misery is enough. 'Dad, what are you talking about?' the son screams. We can't stand the sight of each other any longer,' the father says. 'We're sick of each other, and I'm sick of talking about this, so you call your sister in Leeds and tell her.' Frantic, the son calls his sister, who explodes on the phone. 'Like hell they're getting divorced,' she shouts, 'I'll take care of this,‘ She calls Scotland immediately, and screams at her father, 'You are NOT getting divorced. Don't do a single thing until I get there. I'm calling my brother back, and we'll both be there tomorrow. Until then, don't do a thing, DO YOU HEAR ME?' and hangs up. The old man hangs up his phone and turns to his wife. 'Okay,' he says, 'they're coming for Christmas - and they're paying their own way.'

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NPV Challenges Machiavelli 1573 advised:

It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than the creation of a new system.

For the initiator has the enmity (ie, deep seated hatred!) of all who would profit by the preservation of the old institution & merely lukewarm defenders in those who would gain by the new one!!

However, successful achievement especially in tough times requires people to work as a team and have & maintain an open mind!!

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Key Investment Indicators

In descending sensitivity and priority:

– Revenue ($/t) has the biggest impact on NPV

– Exchange Rate

– Production

– Yield

– Operating Costs

– Capital Cost

– Tax

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Operational Responsibilities

• Operations activities can influence revenue – mainly downward movement though!!

• Can’t influence Exchange Rate or Tax levels

• However, operations can control:

– Production levels

– Operating costs

– Capital costs

– People performance

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Why Wider Longwall Faces? Benefits include: • Reduction in development tonnes to sustain Lw tonnes mined • Alternatively, maximise Lw tonne : Dev metre ratio • Increased productivity with reduced time for wedge cuts & face end

turnaround time for each shear cycle • Shearer can operate at optimum cutting speed for longer distances • Increase reserve recovery with fewer panels • Reduced construction work each year & LoM associated with

setting up a new panel and include: – Roof and floor cut out the panel conveyor – Civil, mechanical and electrical installation – Allows high installation costs to be amortised over longer time – Similar outcome for secondary support

• Simpler ventilation system with fewer operating panels • Simpler management focus on fewer activities eg fewer panels

operating to achieve annual production budget

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Simple Ratio Analysis & Assumptions

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Panel Longwall

Width

(m)

Longwall

Extract

Length (m)

No of

Headings

No of

Pillars /

Panel

Pillar

Length

(m)

Pillar

Width

(m)

Development

(m)

Develop

ment

(Mt)

Longwall

Reserve

(Mt)

Lw Res (t) :

Dev (m)

Mains 250 2,500 6 3 83 35 2,309 0.202 2.813 321Gateroad 2 28 100 35 6,690

8,999

Mains 300 2,500 6 3 100 35 2,610 0.210 3.375 361Gateroad 2 28 100 35 6,740

9,350 (12% higher)

Mains 350 2,500 6 4 88 35 3,060 0.222 3.938 400Gateroad 2 28 100 35 6,790

9,850 (25% higher)

Mains 400 2,500 6 4 100 35 3,360 0.230 4.500 441Gateroad 2 28 100 35 6,840

10,200 (38% higher)

Simple Ratio Analysis

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Panel Longwall

Width

(m)

Lw Res (t) :

Dev (m)

Tonnes /

Retreat

metre

Retreat

M for 4.5

Mtpa

Lw

Panels /

Year

Required

Dev / Yr

(m)

Units/Yr @

120m/wk for

48 wk

Dev

units

Req'd

Mains 250 321 1,125 4,000 1.6 13,694 2.4 3

Gateroad

Mains 300 361 1,350 3,333 1.3 11,583 2.0 3

Gateroad

(12% higher)

Mains 350 400 1,575 2,857 1.1 10,351 1.8 2

Gateroad

(25% higher)

Mains 400 441 1,800 2,500 1.0 9,760 1.7 2

Gateroad

(38% higher)

Broad Cost Comparisons

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Panel Longwall

Width

(m)

Capital for

Dev Equip

($M)

Capital

for Lw

Equip

($M)

Total

Capital

($M)

People /

Unit @

40 / Unit

Labour

Cost @

$180k ea

($M)

Simple Total

Cash Cost

($M)

Mains 250 120.00 119.00 239.00 160 28.80 267.8Gateroad

Mains 300 120.00 132.50 252.50 160 28.80 281.3Gateroad

(5.0% higher)

Mains 350 80.00 143.70 223.70 120 21.60 245.3Gateroad

(8.2% lower)

Mains 400 80.00 156.10 236.10 120 21.60 257.7Gateroad

(3.8% lower)

People Management & NPV Effects

Arguably, successful HR practices are more important to a business its financial success than great equipment. Having effective or great HR requires: • Unrelenting focus on optimising management, staff,

operators and trades performance is critical • Positive organisational development is essential • Continually support & emphasise positive behaviours even in

difficult times: • Maintaining high morale • Positive teamwork • Turning “Can’t into Can!” • Not turning a ‘blind eye’ to problems • Proactive action

• It’s hard to regularly deliver but it creates huge value or worth to the business 10

Other Critical but Low Cost Issues Nothing new here but people choose not to continually focus on the following (perhaps they can’t be bothered!! Why? Panel Question?):

• Effective & coordinated teamwork is required across the entire mine, • Develop and maintain consistency of approach and application

across all shifts • Systematically identifying and addressing issues till they’re fixed –

not just equipment but people as well • Ongoing training & development of all levels especially in business &

people management principles eg positive teamwork • Introduction & routine use of automation & remote control • Gather & analyse performance data for effective monitoring,

decision making and response • Fear isn’t a sustainable motivator!! • Positive contributions need to be encouraged especially in difficult

times or challenges

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Other Critical but Low Cost Issues

• Create a culture of sustainable creativity • Identify the Burning Platform and why there is a need to

change or react positively • Move from an ‘Entitlement attitude’ to an attitude of ‘self

motivated contributions’ • Create a performance culture that has new work practices • Positive Safety approaches are non negotiable • Productivity is key to optimising NPV & ROI • Facilitate change – eliminate blockers & negative thinkers! • Like successful football teams, coaches and businesses

need to assess people for their talents and skills

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Other Critical but Low Cost Issues Designing and implementing an effective organisation that has: • Competent & motivated people • Robust systems • Ongoing regular refresher training • Aligned & stable teams who focus on achieving safety & production budgets • People ‘don’t point the finger!’ but work as part of a team to resolve problems and

achieve improvements • Everyone accepts they need to contribute, be responsible individually and

collectively for delivering:

• great safety outcomes • production targets • effective cost control • & therefore optimise the Mine’s NPV.

• Approach delivers positive results & lowers investment risk now and the future!! • Note: Great football teams and their coaches (eg Wayne Bennett) have these key

features!!

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Case Studies – Creating Value

Numbers & assumptions in an evaluation are vital to deliver the best solutions. If the assessments and evaluations are done professionally, objectively and based on:

• Best facts & information • Personal and team integrity • Relevant experience

It will deliver above expected NPV outcomes as long as the initiative is efficiently and effectively executed. Failure to execute to plan means the investment wallets stay closed & in their pockets!!

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Crinum Mine 1994

Scenario was to justify extending the Longwall from 200m to 270m to improve Project NPV & ROI Project only required 2.5 mtpa from the Longwall Justification projected that for 35% (ie 70m) face extension for a cost of $6.0M, the longwall would produce an extra 0.5 mtpa, lower cost & improve NPV each year & for the mine’s life. The result has been:

• Crinum has been a consistent top 5-6 producer for the next 15 years • All the people at the mine have contributed to its success • Annualised at 6.9 mtpa for extended periods • Average production has been 4.75 mtpa since 1997 • With vision, application, some additional capital in the Project phase

and a team approach, there has been a significant lift in financial success through additional tonnes, lower development costs

• Achieved an overall 44% increase in production YoY since FY1998

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Broadmeadow Mine 2005

During project phase, 2 of us assessed & justified extending the width from 200m to 320m.

The 120m extension (ie a 60% increase) on the basis of reduced operating (ie development) costs and no additional tonnes to be produced (market was flat!)

Hardest financial justification ie investing capital to lower opex & improve NPV. Benefits are:

• Maintain annual Lw production at 2.4 mtpa • Higher Longwall T : Development m ratio • Lower Longwall m : Development m retreat ratio • Amortise panel set up costs over 60% more time • Lower annual secondary support costs • Longer time between longwall moves – less than 1 per year • Management focus is simpler • Less time per shear cycle in face end turn arounds and pushover • If market improves, can increase shearer speed & rate to increase annual production

Deliverables & outcomes: • Project Capital required = A$46m • NPV = $44m • Capital intensity = NPV/Capex = 0.96 – an excellent outcome!!

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US Longwall Face Lengths

US Mines have been incrementally increased face lengths for many years.

Since 2008, Bailey Mine has extended the face width on their 2 Longwalls from 358m to 450m

Similarly, McElroy has increased from 380m to 425m

Foundation Coal’s Emerald Mine has increased from 378m to 470m & Cumberland has had a another recent but modest extension from 378m to 415m

Other operations have these face widths: • Blue Mountain Mine – 378m

• Enlow Fork – 450m

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US Longwall Face Lengths

Reasons for wider faces at Emerald are: • Reduction in gateroad development / tonne of longwall

mined by up 38%

• Increasing productivity by 9.3% with reducing wedge cutting time Increase resource recovery with less entry development

• Reduced entry development results in less construction work

• Once the Panel has reached its super critical width, further increases will not change the loading condition on the pillar entry system and have no greater impact on face support loading especially in the middle portion

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Closing Summary

Optimising NPV requires time to describe & address the problem & objective required. Considered solutions are essential Optimising NPV fails due to a lack of objective thought & intellect Understanding the quality & quantity of geological & geotechnical information will provide a changed risk profile. Key challenge is to engage the team’s minds, constructively deal with their beliefs & behaviours and people’s willingness to be involved. To widen a face, need to understand the risks, quantify, develop solutions that may involve adopting trade-offs and apply an implementation or execution plan Wider longwalls are shown to create better NPV under certain situations – the geological domain can cause failure though!

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Closing Summary The biggest problem with underground coal mining is:

• Achieving optimal safety & productive outcomes

• Optimising longwall face length vs highest capacity coal clearance systems

• 100 hours / week utilisation is normal practice

• Achieving optimal cost structures – both capex & opex

Optimising NPV involves sensible & balanced capital investment & most importantly, creating a dynamic and participative workplace to achieve needed goals.

Can’t do it without effective leadership, constructive, capable & motivated people operating in a team environment team

Sounds daunting!!

The Best Team’s win or win more often!!

So, start doing things very differently!

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Remember!!

Slaying sacred cows make great steaks!!

Quote Dick Nicolosi

Nicolosi Advisors & fmr CEO Samsonite Corp

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www.guymitchell.com.au

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