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Maximizing the Value of Your Operations
PwC Brazil Mining DayC l S l P C C dCalum Semple – PwC Canada
While there has been some recent recovery we While there has been some recent recovery, we believe there is a disconnect between mine company performance relative to commodity pricespe fo mance elative to commodity p ices
D J
1,2Global indices (January 2011 = 1) • Mining industry stocks
started strong in 2011, 11 March – Fukushima 5 August - S&P downgrades
FTSE 100
Dow Jones Industrial Average
1,0
1,1 • But, as the year progressed, significantly underperformed the broader markets
nuclear disaster US credit rating for the first time in the history, from AAA to AA+
FTSE 100
8
0,9
broader markets
• HSBC Mining Index fell by 29% over the year
26 September - US president
HSBC Global Mining Index
0,7
0,8 • The Top 40 did marginally better, falling by 25%
• Recent performance has
26 September US president, Barack Obama, says the debt crisis in Europe is "scaring the world" and that leaders in the Eurozone are not dealing with issues quickly enough Ongoing –Concerns of a slow-
down in China’s economic
0,6jan fev mar abr mai jun jul ago set out nov dez jan fev mar abr
improved, but fundamental issues remain
2011 2012
S Bl b
down in China s economic growth
PwCMaximizing the Value of Your Operations - Calum Semple
2September 24, 2012
Source: Bloomberg
and from historical earnings…and from historical earnings…
• In 2011 the Top 40 posted record profits of over $130 billion, an increase of 21% 2930
Top 40 price-to-earning ratios
from 2010
• Strong earnings, but a 25% drop in market capitalisation, drove Top 40’s PE
1920
25
ratio for 2011 down to 9
• Lower than the dismal PE ratio seen in 2008 during the global financial crisis
19
1415
20
10 9
5
10
Source: Capital IQ PwC Analysis
-2007 2008 2009 2010 2011
PwC
Source: Capital IQ, PwC Analysis
3Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Typical client situations in MiningTypical client situations in Mining
• Our clients share common concerns around their performance
• Concerns around escalating costs
• Challenges in meeting production targets / inconsistent production results
• High levels of unplanned equipment failures resulting in low availability
• Missed budgets / failure to deliver anticipated financial results
• Failure to implement or meet internal improvement project expectations
• Cost over-runs on capital projects and/or projects that miss scheduled p p j / p jcompletion
• Lethargy with regard to continuous improvement initiatives
Potential loss of credibility with investors and analysts
PwC Page 4Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Leading mining companies are respondingLeading mining companies are responding
• Enhanced cost management supported by an improved understanding of key Enhanced cost management, supported by an improved understanding of key cost drivers / behaviours
• Improved linkage and alignment between operations and finance in the l i t i di t bilit f lt d t planning process to improve predictability of results and more accurate
guidance to the “street”
• Alignment across the organization – from mine site to Corporate office – to common goals, objectives and key performance metrics
• More accountability / responsibility for performance integrated at all levels
B tt d i i ki i O ti b d t/b fit d th b t • Better decision making in Operations, based on cost/benefit and the subsequent impact on financial outcomes
• Better management of cash / investments in capital equipment
• Improved management information - transparency, speed, timeliness
• Training at the superintendant and supervisor role in business drivers and d i i ki
PwCMaximizing the Value of Your Operations - Calum Semple
5
decision making
September 24, 2012
For today’s discussion operations improvement For today’s discussion, operations improvement opportunities focus on approximately 80% of typical mine spend
Freight1%
Other
2011 Operating Costs by Category
typical mine spend
Human Capital 20%
Other Costs
7%
%
Operating Material
Maintenance and Repairs
16%
p g19%
Contractors 18%
Energy 19%
Illustrative data
PwC 6Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Common areas where most mining companies can Common areas where most mining companies can drive improved value
Operations:
• Productivity improvement and waste reduction• Productivity improvement and waste reduction
• Value driver models / Enhanced cost management
Procurement & Supply ChainProcurement & Supply Chain
• Spend analysis, sourcing, inventory etc.
• Supplier risk & performance management
Asset Utilization
• Enterprise Asset Management
PwC 7Maximizing the Value of Your Operations - Calum Semple September 24, 2012
The overall approach to operations improvement The overall approach to operations improvement has three phases that must be addressed
Keep the MoneyR i i
Find the Money• Understand current • Restructure organization
• Improve skill set
• Implement technology
enablers
• Understand current performance
• Identify gaps to leading practice
enablers
• Establish performance
monitoring
• Provide compliance Process Change
Get the MoneyMake changes to capt e sa ings
mechanisms
• Streamline process
• Align culture
Process Change
• Make changes to capture savings, move to new ways of working:
• Process• Organization
Technology
PwCMaximizing the Value of Your Operations - Calum Semple
8
• Technology• People / Skills
September 24, 2012
Improvement initiatives should start with Find the Money
Improvement initiatives should start with developing an understanding of the current state / baselinebaseline
• Understand the key drivers of mine performance and assess current state operations:current state operations:
• Understand key drivers that impact cost and drive financial performance
• Review key financial and operational metrics and processes (e.g. productivities, maintenance, asset availability/utilization)
• Interview key stakeholders:• Interview key stakeholders:
• Validate initial hypothesis, conduct further analysis and discuss additional improvement opportunities.
PwCMaximizing the Value of Your Operations - Calum Semple
9September 24, 2012
Value driver trees are a useful tool to understand Find the Money
Value driver trees are a useful tool to understand what factors are driving costs
Key Success Factors:Key Success Factors:
• Focus the mindset of management and staff on where the money is
• Disaggregate major cost types using a branch-like structure, helping to build an understanding of operating cost structuresoperating cost structures.
• Assist management and staff by helping them to financially quantify opportunities for quantify opportunities for improvement
• Highlight key operational metricsmetrics
PwC 10Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Once the cost drivers are understood those factors Find the Money
Once the cost drivers are understood, those factors with the largest impact can be identified
Key Success Factors:Key Success Factors:
• Perform sensitivity analysis to identify the impact of each value driver on operating profit or mine production.o ope a g p o o e p oduc o
• Perform scenario analysis to:
o Quantify the trade-offs of different i i strategic options, or
o Measure the impact of potential improvements.
• Use variance analysis to explain the source of differences between modelled scenarios and baseline data.
• Maintain flexibility in managing mine capacity constraints to understand bottlenecks and improve performance.
PwC
p p
11Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Spend Analysis typically indentifies significant Find the Money
Spend Analysis typically indentifies significant opportunities based on a review of spend data
Review of A/P and Procurement data: Tiered SpendingReview of A/P and Procurement data:
• Number of suppliers for each commodity type (spend aggregation)
Tiered Spending
• Distribution of spend to identify leakage (in the case where a strategic contract is in place) and/or volume/ vendor consolidation opportunities
Less than $1k15%
$50k to $100k8%
$100k to $200k6%
More than
$200k11%
consolidation opportunities
• Distribution of spend against transaction count and vendor count, for a given category to identify anomalies that
$1k to $5k23%
$5k to $10k$10kto $25k$
16%
$25k to $50k10%
category, to identify anomalies that would drive higher total cost of ownership.
11%16%
1. Only 11% of suppliers have more than $200K in spend directed to them
2. 17% of suppliers receive more than $100K in spend annually
PwC 12Maximizing the Value of Your Operations - Calum Semple
p y
3. 65% of suppliers receive under $25K annuallySeptember 24, 2012
S d Di ti
Find the Money
Spend Disaggregation
By examining the distribution of spend within a nutrient group allows users to identify leakage (in the case where a strategic contract is in place) and/or volume/ vendor
1. Total bearing spend for Div 1 is approx. $2.1M – of which Ann A bo I d s lies $997K de a
consolidation opportunities
Arbour Ind. supplies $997K under a strategic alliance contract
2. The next three vendors supply
Row Labels PHO POT Grand TotalBEARING 2,142,206$ 2,389,908$ 4,532,114$ APPLIED INDUSTRIAL TECHNOLOGIES 997 227$ 2 013 681$ 3 010 908$
Div 1 Div 2
Ann Arbour Industrial Supply
pp yapprox. $1.015M
3. Total bearing spend for Div 2 is approx. $2.4M – of which Ann
b d l d APPLIED INDUSTRIAL TECHNOLOGIES 997,227$ 2,013,681$ 3,010,908$ GIW INDUSTRIES INC 532,707$ ‐$ 532,707$ MOTION INDUSTRIES INC 391,299$ 391,299$ SOURCE ATLANTIC 309,646$ 309,646$ ELLIOTT COMPANY 91,348$ 91,348$ WEIR CANADA INC 66,581$ 66,581$
Ann Arbour Industrial SupplyNorthbrook IndustriesMotive IndustriesSource AlliancesWeitz & Co. W it & B
Arbour Ind. supplies $2.01K under a strategic alliance contract
4. Source Alliances supplies an unusually large amount of spend for ,$ ,$
WEIR HAZELTON INC 36,137$ 36,137$ WEIR MINERALS‐LEWIS PUMP 35,046$ 35,046$ NEW LOGIC RESEARCH INC 32,808$ 32,808$ FLANDERS ELECTRIC MOTOR SERVICE INC 25,634$ 25,634$
Weitz & Bro.Minacs Tool Co. Algorithmics Electric Inc. Fujitsu Motors
unusually large amount of spend for Bearings with an amount of $309K. Is this leakage off-contract or is it a case of Source supplying a site where Ann Arbour cannot reach?
PwC 13June 2012Maximizing the Value of Your Operations - Calum Semple
Spend vs Vendor Count vs Transaction Count Find the Money
Spend vs Vendor Count vs Transaction Count Requires the ability to examine and compare spend levels against transaction count as well as vendor count.
By examining the distribution of spend against transaction count and vendor count, for a given category, the user is able to identify anomalies that would drive higher total cost of ownership. In the case identified below, having to manage more than 200 vendors for less than 3% of total spend is not strategic.
60%
70%
250
300
% of Spend% of TransactionsVendors
1. For this category, % of spend and % of transactions is under 3% of total spend and transactions
40%
50%en
tage
150
200
of V
endo
rs
2. For this same category, the number of vendors is > 200, a number that is significantly disproportionate to the overall percentage of spend
20%
30%Perc
e
100
150
Num
ber o
3. For this category, % of transactions is more than 10% of total transactions while % of spend is less than 3% of total spend.
F h h b f
0%
10%
ls Acti
veSoft
warepo
rtatio
nxc
ipien
tsHyd
robe
l Cou
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wareServ
ices
umab
lesna
l Item
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taine
rsCap
sules
ies - G
asCon
tract
Calibra
tinSup
plies
&Pumps
Reg Fl
atch
anica
lOthe
r
0
504. For the same category, the number of vendors is >160, a number that is significantly high given the overall percentage of spend and transactions
PwC 14
Raw M
ateria
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ves/E
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isc C
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Mec
June 2012Maximizing the Value of Your Operations - Calum Semple
Assessing the opportunities within Maintenance Find the Money
Assessing the opportunities within Maintenance starts with understanding how work is done today
• Planned vs. Reactive work orders
• Better understanding of maintenance costs (more planned, less reactive) gives more predictability to costs – results in better forecastsmore predictability to costs – results in better forecasts
• Better able to anticipate and quantify impacts of changes to planned maintenance activities
• Allow trade-off between asset availability and investment in maintenance
PwC 15Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Maintenance costs represent a significant Find the Money
Maintenance costs represent a significant opportunity to drive increased value
•The objective of Asset Management is to strike the optimal balance The objective of Asset Management is to strike the optimal balance between maximizing asset productivity while minimizing Total Cost of Ownership (TCO)
•Reduced maintenance spend from more efficient and effective use of maintenance resources
•Increased output/ capacity through increased equipment availability & •Increased output/ capacity through increased equipment availability & utilization
•Improvements in working capitalp g p
•Reduction in business risk and improved safety / environmental compliance
•Improved access to maintenance and spend data
•Enhanced Fixed Assets tracking
PwC 16Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Once the baseline is understood opportunities are Get the Money
Once the baseline is understood, opportunities are developed to bridge gaps between current and leading practiceleading p actice
Mine Operations Maintenance Supply Chain
Leading Practices
Formal integrated planning
Unplanned Work < 10%Focus on availability and
Documented Supply Chain strategy Integrated KPI’s
Rolling structured Life of MineIntegrated risk planning
Maintenance / Development / Mill /
reliabilityIntegrated inventory
managementTotal Productive
Maintenance Preventative
Strategic sourcing for 100% of spendFull use of top tier Enterprise
Resource Planning (ERP)Utilization of e-commerce
Vendor management system in useDevelopment / Mill / OperationsUtilization >95%Plan compliance >95%Integrated performance
Maintenance, Preventative Maintenance, Reliability Centred Maintenance (RCM), Condition Based Maintenance etc in use
d i
Vendor management system in useFocused on cost reductions
throughout the supply chainJust-In-Time supply / consignment
inventory set up with vendorsmanagementCost performance targets
reviewed for ability to exceed
Integrated Enterprise Asset Management (EAM) / Computerized Maintenance Management System (CMMS)Integrated planning &
y p
Integrated planning & schedulingIntegrated performance
managementRoot cause investigation
i l d
PwC
routinely used
17Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Savings opportunities are significantGet the Money
Savings opportunities are significant
• Operations Improvement• Operations Improvement
• Cost Reduction / Cost avoidance typical savings 5%-15%
• 10% -20% improvement in productivity10% 20% improvement in productivity
• Sourcing savings typically yield a 10%-20% reduction in cost for sourced commodities
I i ti f l d i t d i t t • Improving proportion of planned maintenance can reduce maintenance costs by 5% - 15% and improve asset availability 5% - 10%
PwCMaximizing the Value of Your Operations - Calum Semple
18September 24, 2012
Typical Procurement SavingsGet the Money
Typical Procurement Savings
Sourcing and Supplier Management:• Unleveraged spend
Quality and Safety:• Visibility into materials and Unleveraged spend
• Purchasing leverage• Supplier consolidation• Vendor rebate management
• Visibility into materials and services being consumed
• Visibility into Supplier spend and volumes
• Product standardization• Vendor integration
Compliance
• Quality is a total cost of ownership component
Inventory Reduction:Compliance:• Off-contract spend reduction• Consequences applied for non-
compliance
Inventory Reduction:• Track how much is bought, vs.
how much is consumed, vs. how much is stocked, vs. how much is l t t t
p• Compliance and monitoring for
overcharges, service levels, etc.• Budget compliance
lost to waste• Visibility to frequency of use and
order cycle time leads • Enhanced demand managementg
PwC 19Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Typical Opportunities to reduce Maintenance CostGet the Money
Typical Opportunities to reduce Maintenance Cost
• Improve collaboration between Maintenance, Operations & Finance
• Need to align goals and performance measures of these teams based on Need to align goals and performance measures of these teams, based on common corporate objectives
• Align financial and operational metrics to link asset performance to overall t bj ticorporate objectives
• Provide visibility into all aspects of the asset lifecycle in addition to having real-time information about asset conditions
• Invest in analytics and dashboards to provide role based visibility to the workforce for effective decision making
P id hi t i l d l ti t f d t t l f • Provide historical and real time asset performance data to employees for efficient decision making
• Integrate plant floor and business systems
• Connect EAM with business applications to increase responsiveness and provide ability to make quick and intelligent business decisions
PwC 20Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Balanced Scorecards are often used to establish Keep the Money
Balanced Scorecards are often used to establish performance targets and accountability
Cascading KPI hierarchy example - Mine
•Emphasis on focusing on the ‘right’ KPIs
•Starts with the strategic objectives as the basis for defining the ‘right’ metrics for
Six key “level 1” cost metrics for each key mining value chain process beneath the total Mining ($/t ) metric.
the Corporate level (e.g. Cost per ton, cost per oz) based on business drivers.
•KPIs are then cascaded down through
Three key “level 2” metrics driving Drilling ($/m) – one financial, two operational.
the organization to individual sites / operating departments
•Provides opportunity to drive
Three primary “level 3” metrics driving Operating Costs ($/hr).
accountability to all levels of the organization, while integrating all staff to common objectives
In mining, operational metrics frequently drive cost outcomes – this linkage is critical when reporting operating cost outcomes to management levels that have the ability to ‘influence”.
PwC 21Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Optimize use of Balanced ScorecardKeep the Money
Optimize use of Balanced Scorecard
• Once a set of scorecards has been established, set appropriate targets for
fi, pp p g
each metric; define the ending point (long-term target), then the short- and medium-term mileposts that need to be achieved along the way
4. Define Mitigation Projects /
Action Steps
3. Determine Causes of
Major Variances
achieved along the way.
• Targets should be aggressive but achievable. 5. Monitor
and Track 2. Identify
Major • Set appropriate tolerance levels for
metrics that alert management when metrics are on track, when action is required as well as provide trending of
and Track Progress of
Action Steps
1. Collate and
Major Variances
Against Plan
required, as well as provide trending of performance.
and Analyze Monthly Results
Leading practice KPI reporting and f i i i i performance management in mining companies
is a virtuous cycle focused on developing, monitoring and tracking action steps to improve performance on a monthly basis.
PwC 22Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Changes need to be embedded in a continousKeep the Money
Changes need to be embedded in a continousimprovement program
An effective continuous improvement program within a mining company includes the 14 design principles listed below.
PwC 23Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Sustainability depends on change managementKeep the Money
Sustainability depends on change management
Formulating best fit change management approach • Develop a compelling vision for change f h h d b ll i t d
Organization Design
for change, shared by all impacted stakeholders.
• Gain broad stakeholder engagement
Project & program management Talent
management
g
Change impact & readiness
through communication
• Engage leaders, define their change leadership roles and equip them to
Transition and Adoption
CommunicationLeadership Alignment
p q pbuild commitment
• Ensure consistent messages are delivered.
Skills and knowledge transfer
Cultural changesStakeholder engagement
Program vision and case for
change
delivered.
• Develop an efficient and effective training delivery approach
• Ensure that the performance management system supports the changes that are being driven by the
PwC
program.
24Maximizing the Value of Your Operations - Calum Semple September 24, 2012
Thank you
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