Productivity in mining machines
Productivity in mining has been on the slide for years, but now that commodity prices are taking big hits, this is the ideal time to halt that trend. Guy Richards reports.
As miners scramble to slash their costs in the wake of the slump in prices of many commodities, there is a case for arguing that on top of these short-term measures they should also be looking at the longer term, and addressing the issue of productivity.
According to professional services firm Ernst & Young (EY), productivity in mining has been in steady decline for the past 10 years as miners focused on output at any cost while commodity prices were unprecedentedly high. It says it is difficult to define the exact size of the productivity problem because it depends on a multitude of factors, such as labour, capital and material resources, but it adds that, for example, labour productivity in the gold sector in South Africa has fallen by 35% since 2007, while capital productivity in Australia is down 45% since 2000. Meanwhile, management consultancy McKinsey says mining operations worldwide are up to 28% less productive now than 10 years ago.
It’s widely agreed that the key causes behind these falls are a combination of shortages of skilled labour, inefficient allocation of capital, and declining reserves and ore grades. During the boom years, competition for staff caused labour costs to rise, while growing numbers of experienced workers have retired or are nearing retirement, so miners are resorting to using less experienced – and therefore less productive – people.
At the same time, capital productivity has been impacted by long lead times between investment and production, over-spending on labour and production, and investing in marginal mines that can no longer produce profitably. And all these issues are exacerbated by the fact that more – and lower grade – ore now has to be mined to try to maintain revenue. This last issue is not new but, in trying to achieve economies of scale, many mining operations have become larger, and this too has lowered productivity because not enough thought has been given to managing the extra complexity this has created.
The time is now
Experts agree that, while cutting costs is necessary, measures to improve productivity should also be addressed now. As Dr Stefan Rehbach, Senior Practice Manager at McKinsey, says, ‘The process for implementing both measures can – and maybe should – start at the same time. The impact of the short-term measures will by definition be visible earlier than the ones for the long-term productivity performance, but the earlier those are addressed then the earlier their positive impact will be achieved.’
This broadly chimes with the views of Paul Mitchell, Global Mining and Metals Advisory Leader at EY, who adds, ‘Given the time frames for both, pushing costs first and then targeting productivity is the right way to go about it – provided you are careful that in your cost-cutting you do not eliminate things that may reduce costs in the short term but have a negative impact on productivity now or in the future. There is a lot of pressure on listed companies to show quarter-on-quarter results, which adds to the temptation to take short-term actions that may not necessarily be in the long-term interests of the business.’
However, there might be a snag here – improving productivity requires investment, not something many mining companies want to consider in the current climate. As Mitchell explains, though, ‘Investing in real productivity gains is part of the complexity of this issue. Maintenance provides a good analogy here – when you embark on a maintenance improvement programme, you first have to get all the maintenance up to date through investment, and costs go down from there.
‘Similarly, if you buy an older car but invest money up front in re-fitting the engine, your maintenance costs will go down after that – if you don’t invest up front, your ongoing maintenance costs are likely to be high. It is investing for the long term rather than cutting costs for the short term.’
He stresses that this is just an example, and that what is really needed is an end-to-end transformation of mining operations. ‘Most productivity measures in isolation are missing the real value increases available,’ he says.
But what does that transformation entail? Phil Hopwood, global mining practice leader at professional service firm Deloitte, provides a good illustration. ‘The industry needs to change from a mining mindset to a manufacturing mindset – it’s been said that mining is, in fact, a lot like the manufacturing industry was 20 years ago. There’s a lot that mining can learn from manufacturing industries, such as controlling its internal "ecosystems" and wider surrounding systems such as its relationships with OEMs.
‘That means integrating things like equipment suppliers, IT and energy systems with mining systems – that’s the end-to end transformation, something process manufacturing did years ago.’
This integration inevitably means embracing innovation and technology, although the two are not necessarily the same thing. As Hopwood points out, ‘Innovation is vital, but it’s not just a question of technological innovation – one of the biggest issues is labour costs in general. For technological innovation to happen you need staff with the right skillsets to drive it through.’
Dr Rehbach adds, ‘A fully integrated and automated mining supply chain, for example, may not be universally realised in the near future, but it is more than mining science fiction – it is the logical end-point in a series of technology deployments that some mining companies have already initiated.
‘The key to unlocking value from innovation will be to see innovation as an undertaking that encompasses all aspects of the business, rather than a pure technology effort,’ he says. ‘To make these changes happen, mining companies must adapt their organisations by creating clear ownership among the top executive team, refining the organisational design to create meaningful senior roles for people with technical skills, and redesigning the annual planning and performance management process to create space for innovation.’
Collaboration is key here. As Mitchell says, ‘Miners that do [collaboration] well have a seamless integration between operations and maintenance, between operations and development and between operations and the supply chain. They tend to have better structured communications in place, with regular meetings, more data sharing, and making sure each area understands the schedules and plans.’
Whether any of this innovation and transformation will prove lasting, though, is open to debate. Hopwood says, ‘As regards upswings in commodity prices, miners will of course tend to go for volume production at all costs, but by then they will have moved more towards a manufacturing environment. Next time around, when commodity prices across the board have fallen again, it’s the miners who have been successful with improving productivity who will be OK.’
Mitchell adds, ‘If prices swing as high as the peak of the supercycle again, that would provide a strong incentive for a “production at any cost” focus to return – however, you’d hope that there would have been some lessons learnt and that some of the focus on productivity would be retained.’
The MineLens Productivity Index
It’s all well and good implementing strategies to improve productivity, but how can mining managers tell whether what they are doing is actually working? One approach, the MineLens Productivity Index (MPI) from McKinsey, sets out to do just that.
The MPI is based on the Cobb-Douglas production function used to measure productivity in national economies, but has been adjusted by McKinsey so that
a similar approach can be used to measure productivity in mining operations. The index focuses on capital, labour and non-labour operating expenditure – ore grade is deliberately excluded from the calculation. The three elements are then linked with a measure of physical mine output, which is not affected by changes in the ore grade and stripping ratio.
Collecting data from individual mines on each of the four elements makes it possible to track how productivity has evolved and how the elements affect a mine’s performance over time. In addition to being used for analysis of individual mine performance, the data across mines gathered through the MPI can be collated to create a picture of sectoral performance. It is also possible to apply the same MPI analysis to identify trends in productivity across a whole country’s mining sector.