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Deloitte tracks the trends in the mining industry – Part 1

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World Coal,

Deloitte has released its 6th annual Tracking the Trends report, examining the top ten issues affecting mining companies around the world. Topping the list for the third year in a row was the rising cost of mining, followed by low commodity prices caused by a supply/demand imbalance. The need for innovation to solve the industry’s challenges rounds off the top three, while at number six – but set to have a much bigger impact for the coal sector – is increased regulatory and environmental pressure being put on the mining sector from local communities.

The first part of this three-part article discusses the culture of rising costs in the mining industry and the subsequent need to raise productivity.

Mining doesn’t pay: the impact of rising costs
In 2012, the per tonne production costs of thermal coal hit US$ 176; in 2009, they had been US$ 61. This would be harmful in an industry enjoying high commodity prices – but with prices for thermal coal hitting a low of US$ 80/t in September 2013, high costs have been disastrous.

In response, the mining industry has begun to focus on cutting costs: “They are shrinking their talent pool, reducing executive compensation and limiting funding approvals to only the highest quality projects in mining-friendly geographies,” notes Deloitte. However, these reactive measures may not hold the key to long-term cost reduction: “Companies that slash their workforce now may find themselves scrambling to recruit new teams as the market recovers. Other cost cutting measures – from reducing travel to tightening cash management – tend to creep back up to historical spend rates over time and many companies get caught in a continuous cycle of coast takeout and cost creep.”

Sustainably reducing mining costs
Instead of reactive cost cutting, Deloitte suggests a programme of sustainable cost management to ensure costs remain competitive that includes:

  • Pursue operational excellence: Ensuring productivity improvements are maintained by establishing methods to track and monitor costs using appropriate operating models and reporting systems. This could also require changing a company’s internal culture in order to drive continuous improvement.
  • Improve efficiencies through technology: Using production visibility tools to view mining operations from pit to port, allowing management to identify inefficiencies, track productivity levels, streamline processes and re-plan based on actual performance and conditions.
  • Rationalise the supply chain: Building partnerships with suppliers who have delivered demonstrable value rather than demanding unsustainable cost concessions from the service sector.
  • Go modular: Utilising a modular approach to project development to quick-start production.
  • Right-size capital projects: Understanding the difference between a project’s value and the price the market sets can help companies build stronger funding practices.

Getting mine productivity back on track
Looking beyond costs, mining sector productivity has suffered huge declines. Australia last achieved a productivity increase in 2003, since when productivity has dropped 30%; productivity in the South African mining sector hit a 50 year low in February 2013; in Canada, productivity in the mining and oil and gas sectors has dropped 37% in the last decade.

Consequently, productivity has become the new Holy Grail of the global mining industry. Deloitte notes four core areas in which the mining sector should focus in order to achieve sustainable performance gain.

  • Ensuring the next generation of mine planners are trained and ready to replace those nearing retirement in order to avoid the significant value erosion that can result from placing inexperienced or under-qualified staff into critical mine planning roles.
  • Ensuring clarity on actual project expenditure that provides insight on costs per unit of production.
  • Planning and managing the mining workforce to rebuild lost skillsets and foster workplace practices that restrain spending while keeping employees engaged.
  • Turning often disjointed reporting frameworks into a set of streamlined management dashboards that report on actual operational performance – improving both individual accountability and onsite decision-making processes.

Part 2 of this article is available here, with a discussion of market imbalances and the innovation imperative.

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