Saturday, August 27, 2016

Mining companies sweat the big and small stuff

As big as houses and capable of carrying more than 200 tonnes of ore, giant haul trucks are the workhorses of vast mines from Mongolia to Chile. Chief executives have found a new use for the yellow monsters made by Caterpillar and Komatsu: as proof of the narrow focus and limited horizons of today’s global mining industry.

The captains of a sector that was ablaze with dealmaking at the height of the commodities boom, from 2006 to 2012, have firmly turned away from grandiose ambitions. In today’s depressed commodities environment, with persistent doubts over the direction of prices, mining companies’ leaders are determined to show they can sweat the small stuff — or in the case of haul trucks, the large stuff.
From BHP Billiton down, the largest mining groups are on a quest for productivity improvements. And in doing so, they are making a virtue of their willingness to grapple with seemingly mundane issues such as the amount of operating time they get from their vehicles. BHP, Rio Tinto and Anglo American have all highlighted increases in truck efficiency in presenting their latest financial results in the past month.
This exercise has been likened by Andrew Mackenzie, BHP’s chief executive, to the tiny improvements that have cut pit stop times for Formula One motor racing teams — albeit that the mining companies’ vehicles are much larger, and much slower.
“Our truck hours in coal are up 7.5 per cent in a year … that is an additional month of operations per truck per year, with more to come,” said Mr Mackenzie, as BHP last Tuesday reported a record net loss of $6.4bn for 2015-16, mainly because of asset writedowns.
Mr Mackenzie’s talk of higher productivity lacks the excitement generated by his predecessor-but-one’s call to arms a decade ago. Chip Goodyear suggested the mining industry should get ready for a once in a lifetime increase in demand for commodities, as a consequence of China’s integration into the global economy.
But the investment that mining groups subsequently unleashed in response to that natural resources supercycle often missed the mark. Practically every large company has had to write down billions of dollars worth of assets that were bought or built during the past decade.
Today’s hair-shirted drive for improved productivity therefore lays bare how mining groups let standards slip when they were awash in profits just a few years ago.
The rush to invest, with little heed for efficiency, made the industry significantly more flabby and expensive. For example, salaries for truck drivers in remote Australian mines rose into the hundreds of thousands of dollars.
When commodity prices went into sharp reverse, cutting costs became the mantra for the new cohort of executives at the top of the mining groups — with strong backing from investors.
“The mandate from shareholders is that ambition is a bad thing,” says Ben Davis, analyst at Liberum. “They are wanting miners to do little other than take down debt and costs.”
First to go was capital spending on new projects, with annual budgets at the likes of BHP now at just a quarter of peak levels.
Job numbers have been cut. Rio has reduced its staff numbers from 66,000 in 2013 to 55,000 last year, while Anglo’s numbers have fallen from 105,000 in 2012 to 91,000 last year.
Payments with suppliers have also been cut. Iván Arriagada, chief executive ofAntofagasta, says the Chilean miner has revised its maintenance contracts with equipment suppliers at its large Pelambres mine, triggering 15 per cent cost reductions.
“The instinctive cost-cutting reactions [by the mining companies] from two to three years ago were fairly straightforward,” says Thomas Vogt, associate director at Boston Consulting Group. “Over time these opportunities get exhausted.”
That means more focus on increased efficiency that goes beyond simply reducing expenses.
Jean-Sébastien Jacques, who inherited three years of cost-cutting from his predecessor Sam Walsh when he became Rio Tinto’s chief executive in July, says improving productivity “is not only about costs but it about the top line as well. It is really about ‘How can we extract more cash flow from our existing assets?’”
Hence the focus on trucks — and the amount of time they are working rather than parked up or in the maintenance shed. Anglo is getting on average 5,200 hours out of a truck each year. Mark Cutifani, chief executive, says: “We need to be getting better than 6,000 hours … We still have a lot of potential to improve the utilisation of the assets on the ground, and it remains a great opportunity for us to improve.”
Rio’s best mines are getting 30 per cent more use out of their trucks than the worst performers, according to Mr Jacques.
Mr Vogt says lots of mining groups’ productivity improvements come from “smoother baton changes” — at shift handovers, or when equipment is brought in and out of maintenance, for example. Interim results give executives chance to highlight progress on deleveraging plans
Some innovations are less intuitive. Anglo, which spends $900m each year on fuel, says it can cut 3 per cent from its diesel bill, and prolong component life by 25 per cent, by filtering out impurities.
The search for productivity gains has extended right across companies’ operations. Rio says improved scheduling cut waiting times for ships in its Australian iron ore ports by 41 per cent last year compared to 2014, and saved more than $20m in fees to shipping lines.
Another example Mr Jacques uses is Rio’s US copper smelter — which was operating below capacity, fed only by the company’s own output. Now, Rio has started to process competitors’ production.
Across several years, the mining groups’ hope is that the productivity gains will add up to a step change in performance.
Mr Mackenzie says BHP has made $10bn of these improvements since 2012 and halved its unit costs over that period, reversing a decade of industry inflation. “I am still not satisfied,” he adds. “I still see utilisation rates [for equipment] far short from what I think we should ideally get to … we can go a lot further.”

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