operational innovation & excellence...operational excellence lead in mining his clients span...

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Operational

KPMG GLOBAL ENERGY INSTITUTE

Operational Innovation & Excellence

August 2, 2012

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Presenters

Wayne Jansen

Partner, KPMG in South Africa

In his 25 years of experience, Wayne has worked extensively with leading mining companies like Anglo, Lonmin, Xstrata etc.

H h i t d i ti i th d l t fGlobal Head of Mining

Hiranyava Bhadra

Principal, KPMG LLP (U.S.)

He has assisted organizations in the development of strategy, strategic business plans, risk mitigation plans and organizational design

Hiran has worked extensively in OpEx, Continuous Improvement, BPR, cost reduction, operations Strategy, etc., across Africa, Europe, and APAC.

His clients span multiple minerals including iron ore


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Operational Excellence Lead in Mining

His clients span multiple minerals including iron ore, thermal and metallurgical coal, manganese ore, etc.

Introduction

Global commodity softening being driven by Eurozone crisis and China slowdown

Impact differs across commodities and geographies

Mining cost inflation still on the increase

Reduction in Opex/Capex on board agenda

Potential for breaching of loan covenants and refinancing

Requires an innovative way to look at margin improvement


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KPMG’s global mining focus

Assetlife cycle

Expansion1–2 years

Exploration2–10 years

Evaluation3–6 years

Development1–3 years

Production10–50 years

Closure1–10 years

Your asset life cycle – How KPMG can help

PerformanceGrowth

Geographic expansion

Transactions

Financing and M&A

Projects

Project development

Feasibilities

Operating model development

Cost and tax optimization

External audit

Enterprise risk management

OperationsRisk &

Compliance

Compliance


Tax structuring

Due diligence

Integration

Financing

Tax structuring

Project execution

Supply chain transformation

Business intelligence

Finance/IT/HR transformation

Internal assurance

Tax compliance

Sustainability

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Knowledge check #1

Do you see the price of Metallurgical coal increasing or decreasing in the next 6-12 months.

A

B

Increase

Decrease

B Remain constant


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Session agenda

Role of OpEx in driving shareholder value in mining

Opportunities for improving Operations in this sector

Innovating operational excellence


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Knowledge check #2

Do mechanized underground coal mining companies need different approach to operational excellence compared to opencast mining?

A

B

Yes

No


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B4 Picture to be chnaged by Markets teambidyutchakraborty, 10/12/2011

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The U.S. mining sector has gone through difficulties in recent times

Sales and Profit of Top U.S. Mining Companies* in USD Billion


■ Profits of top U.S. mining companies declined last year despite robust growth in revenue

■ Even for companies that remained profitable through these two years, net profit margin declined from 12.3 percent to 10.1 percent

*Top U.S. companies refers to listed mining companies with headquarters in U.S.A. that have sales of greater than $500 Mn

Source: Dow Jones Factiva, KPMG Analysis

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US Companies are finding it extremely difficult to increase revenue profitably

Adverse Opinion* by Respondents in the Fraser Institute Annual Mining Survey (2011–12)

*Mildly deterrent, highly deterrent and Would not pursue investment are the options taken as representing adverse opinion


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Source: Fraser Institute Annual Survey of Mining Companies (2011-12)

■ U.S. companies are facing unprecedented challenges in terms of decline in the availability of resources that can be profitably pursued and high energy costs

■ Some states and minerals are more disadvantaged than the others

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Globally too, mining players are left with fewer levers to drive performance going forward

Most sources of superior performance however are challenged going forward

Key ratios (%)

five-year Sales

growth

NPM RoA RoE

BHP 13 24 25 45

Rio 24 28 16 30 g g g(valid for leaders as well as others)

Rio 24 28 16 30

Vale 20 42 20 36

Industry 4 19 11 20Note: Data as on June 30, 2011

Areas of challenge in future Challenges faced by Mining Companies

Increasingly complicated business environment

■ Rio Tinto was under recent pressure from Competition Tribunal to share Robe River railway line with third parties

■ 26 percent proposed charge on profits in India

Source: OneSource , Yahoo Finance, Reuters, KPMG analysis


Source: KPMG analysis based on publicly available news reports etc.

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Depletion of resources ■ In the last 45 years, the grade of Pb in Australia declined by over 50 percent

■ In the last 30 years, known reserves for Zn in Canada have declined by over 75 percent

Higher input costs ■ Tire prices have increased by 5–9 percent CAGR in the last 10 years■ Energy prices (fuel, power etc.) have increased by over 100 percent in

some countries in last 5 years

In the face of increasingly difficult extraneous performance drivers, industry Players have turned to operational excellence for some time now

Alcoa • Alcoa Production System (Started late 1990s)

• 30 percent CAGR in profitability after the program despite Al price plunge

Operational initiatives Overall business impact

Rio Tinto

Newcrest

• Business Excellence System (Started ~ 2007)

• Profit surge of 158 percent and cash flow from operations increase by 163 percent despite cost inflation of 8.2 percent

p g

• Improving Performance Together Program (Started ~ 2005)

• For example in RT Coal Australia, the program contributed $975 Mn in three years


Lonmin

• Operational Excellence Program (Started 2010–11)

• Consistent production increase at an annual rate greater than 7 percent is being targeted

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Source: Company Websites, KPMG Analysis

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Knowledge check #3

Are you running a company-wide Operational Excellence Program? Are your Operational Excellence Programs continuing to deliver the same quantity of benefits year-on-year? (Answer “Yes” if both are affirmative)

A

B

Yes

No


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Session agenda


Opportunities for improving operations in this sector



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Companies look to improving performance in various ways

OBJECTIVE: COST REDUCTION OBJECTIVE: PRODUCTIVITY IMPROVEMENT

Rio Tinto Lonmin

STATED ELEMENTS OF THE “IMPROVING PERFORMANCE TOGETHER” PROGRAM

STATED ELEMENTS OF THE “OPERATIONAL EXCELLENCE” PROGRAM

1. Fewer equipment failures

2. More capable employees

3. Collaboration and synergies

4. Better planning

5 F i

1. Build culture of high performance

2. Capability and competence

3. Reward and recognition linked to performance

4. Removal of technical bottlenecks


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5. Fewer surprises

6. Extended lives

7. Less duplication

8. Enhanced revenue

9. Equipment utilization

4. Removal of technical bottlenecks

5. R&D, modification and application of appropriate equipment & technology

Source: Company Web sites

In keeping with the focus of the program the practice areas that need to be impacted are different

Customer

Customer & Market Strategy (incl. Pricing & Service strategy)

Human Resource

Finance, Accounts, Risks and Control

Mining Operations

Customer Management &

Logistics

Production Planning (incl. geological

consideration)

Resource & Asset

Processing Operations

Asset Management Support

Mine Strategy, Planning &

Design

Production Planning

I t M t i l/

Legal/ Regulatory/ Environment Management

Mine/Facility Development

Detailed Exploration &

Survey

Asset Strategy (Lease/Own,

etc.)

Market &

Business Strategy & Planning

Vision & Mission Setting

Ongoing Sourcing & Procurement

Customer Relationship Management

Logistics Planning & Scheduling

OEE Management

Maintenance Planning & Scheduling

Partner Relationship

Asset Condition Monitoring,

Replacement or Life Extension

Customer Contracting and

Order Management

Town & General Administration

Human Resource (incl. ongoing manpower planning)

Execution – D&B, R&C, L&H, Back‐

fill, etc.

Resource & Asset Roster

Deployment/ Fleet mgt

Mine to Mill Integration

(bottleneck & stockpile mgt)

Maintenance Execution

LoM & Reserve Strategy

Resource Planning (Capital,

Progressive Development Planning

Process Design & Evacuation Planning

Partner/ Contractor Operations Management

Quality Management

Execution –Crushing,

beneficiation, waste handling

Input Material/ Stockpile

Management

Quality Management

Partner/ Contractor Operations Management

Infrastructure Construction

(incl. evacuation infra)

Land Acquisition

MDO Contracting and Equipment Procurement

Rehabilitation & Resettlement

Geological Modeling

Bottleneck Management

Box‐Cut or Initial Drilling etc

Spare Management

Information Technology Management

Health, Safety & Environment

Inventory Management

Market & Business

Environment Assessment

Product Portfolio Planning

Stakeholder Management

Corporate Strategy

Development, Implementation & Monitoring


pManagement

( p ,Equipment & Manpower)

Financial Feasibility

Management

Operational/ Annual Planning

Management

Project Monitoring

Recruitment & Deployment

Drilling, etc. Management

Maintenance Network/

Infrastructure Management

Transport Infrastructure Maintenance

Transport Execution (Rail,

Jetty, Port operation)

Environment

Ongoing Corporate Social Responsibility

Technical/ Engineering Services

Technical/ Engineering Services

Research & Development/

Product Development

Knowledge Management & ImprovementRetaining Cost Leadership Position Managing Operational Flexibility/Integration Ensuring Investment Effectiveness

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Aggressive targets can be set for operational improvement in mining

Sustainable “EBITDA” improvement levels

Sample initiatives Examples

• OEE improvement

• Energy efficiency

• Consumable optimization

• Crusher uptime improvement

• Electrical wiring overhaul

• Tire life improvement

• E-Procurement

• Recovery improvement

• Haulage efficiency

• Reverse auctions

• Flotation cell circuit improvement

• Conveyor layout optimization

• Process centralization • Shared services

5–8 percent

8–15 percent


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• Integrated value chain initiatives

• Capex operating model

• Supplier collaboration & strategic LCCS

• Innovative asset ownership models

20–25 percent

Knowledge check #4

Do you believe that improvement efforts/programs can help deliver benefits to your top line and bottom line?

A

B

Yes

No


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Session agenda


Opportunities for improving operations in this sector



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Operational excellence needs to be continually refreshed to retain its relevance

Change in program architecture Stakeholder interventions

• Change of tool (6σ, Lean, TOC) • Innovation in reward & recognition (inclusion of contractors and value chain

• Strategic fuel mix optimization

• Operational excellence to operational innovation –

• R&D integration with OpEx program

• Technology use to improve performance

• Shared service and collaborative i ti

(inclusion of contractors and value chain partners)

• Design for empowerment

• Specific performance-culture and employee engagement building initiatives

• Competence building programs


innovation

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Most of our clients are already innovating on these lines

Client Large coal mining company

OpEx area Procurement Transformation

Key issue Transformation required for the

Client SE Asian energy company

OpEx area Cost Optimization Diagnostic

Key issue Cost optimization and other Key issue Transformation required for the

company to maintain its standing as a cost leader

Benefits accrued

Estimated financial benefits is ~200 mn USD in 2017

process improvement opportunities in two coal assets in Indonesia

Benefits accrued

Savings potential identified ~65 mn USD every year

Client Russian metal & mining company

O E L B i P

Client South African mining company

Client Indian coal mining giant with 435 MT of production

OpEx area Continuous Improvement & Evacuation De-bottlenecking

Key issue Inefficient coal transportation flow leading to higher congestion, longer circuit kilometer travel, ultimately leading to higher landed cost of coal for the end consumers

Benefits d

Savings potential is ~2,400 mn USD i 2012 t 5 300 kC l/k


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OpEx area Lean Business Process Transformation

Key issue Transformation required for the company to maintain its standing as a cost leader

Benefits accrued

EBITDA improvement of $371 mn (base case) - $884 mn (stretch case)

OpEx area Process Improvement

Key issue Fin. performance of the coal mine poor due to inefficient ops, lack of org controls, etc.

Benefits accrued

Multiple benefits accrued through various Process Improvement initiatives

accrued USD in 2012 at 5,300 kCal/kg GCV of imported coal

Knowledge check #5

Does your operational excellence program suffer from any of the following:

■ Lack of clarity of career path for team members

■ Reduced flow of benefits

A

B

Yes

■ Lack of proper structure to your improvement efforts

No


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Contact us

Name e-Mail Telephone

Wayne Jansen [email protected] +27 11 647 7201

Hiranyava Bhadra hbhadra@kpmg com 2140-840-2291Hiranyava Bhadra [email protected] 2140 840 2291


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Closing remarks

Thank you for joining us.

Please send any questions to [email protected].

For more information,

visit the KPMG Global Energy Institute atwww.kpmgglobalenergyinstitute.com.


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operational innovation & excellence...operational excellence lead in mining his clients span...

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