Proudfoot Quarterly Mining E-Bulletin, September 2006
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You Are What You Eat
Merger Dos and Don'ts
Less than one week after we published "Managing Merger Mania" in our last edition, two enormous M&A
announcements rocked the industry: Phelps Dodge's planned acquisition of nickel miners Inco and Falconbridge,
and Mittal's proposed takeover of Arcelor SA. Ample drama ensued with the eventual acquisition of Falconbridge
by Xstrata, while CVRD acquired Inco.
Several other deals are pending with billons of dollars in play on any given day.
The shopping frenzy is understandable — mining companies are flush with cash owing to the three-year run-up in metals prices, so the purchasing of rivals to gain share, increase purchasing power and enhance production is only natural. As additional incentive, development projects are long in the making and large new sources of supply are increasingly hard to find. The bidding wars for a relatively scarce set of acquisition targets are sure to continue. But what will the long-term effects be?
According to Standard and Poor's, the significant increase in M&A activity has negatively impacted balance sheets and credit quality in the mining and metals sector. And it's not just short-term financials at risk — a bad deal can undo decades of progress (just look at Movie Gallery or AOL/Time Warner). Below, we note several "lessons learned" that smart companies are applying in order to avoid M&A mistakes of the past.
WHAT NOT TO DO (common points of failure)
- Over-valuation of acquisition target companies
- Lack of planning for the post-deal asset integration period
- Poor contingency planning
- Under-communicating to employees on both sides
- Poor integration management in the post-deal period
- Failure of management trust and integrity
- Value keys not fully identified and used
- Failure to win hearts and minds of key employees
- Not dealing with the legacy silos
- Not measuring post-deal impact to employee and production efficiency
WHAT TO DO (critical success factors)
- New senior management team agree pre-deal
- Integration planned pre-deal; top management ownership post-deal
- Integration team well resourced with right mix of skills and know-how
- Speed and decisiveness at all junctures
- Cultural issues identified pre-deal and tackled quickly post-deal
- Clear vision and frequent communication to all stakeholders
- Positive, early wins closely monitored and achieved
- Guidance from in-house or externally resourced deal experts
- Risks mapped, understood and managed
- Success factors are identified and measured well beyond deal closure
During this tumultuous market cycle, many M&A blunders will occur that may go unrecognized until commodity prices decline and companies regain a cost and efficiency focus. The wise will learn these "digestion" lessons early and apply them sooner rather than later.
Struggling with a merger, or have one planned? Click here for a free,
no-obligation consultation.
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Spare Change
Nickel Mine Production Improvements
When you next grab a stainless steel fork or recharge your cell-phone battery, there's a reasonable chance that the nickel content in both of these everyday items originates from the Indonesian island province of Sulawesi, an hour's flight north of Bali. Soroako, Sulawesi, is home to the world's largest open cast Nickel mine, operated by Canada-based Inco Ltd, a Proudfoot Consulting client since 2004.
"Soroako is more than just the world's largest mine of its type, it's also a processing operation for Nickel laterite, the mineral ore we dig out of the ground. There are four electric arc furnaces, a hydro-electric power plant, sixty 100-tonne trucks and a whole host of other mechanical equipment that we depend on to keep production moving. It's hard to convey just how big the maintenance task alone is," says Mike Sylvestre, President, Manitoba Operations at Inco.
"Proudfoot had been referred to [us] after doing good work for Newmont Mining, which mines copper and in Batu Hijau, Sumbawa. We both knew we had a major task on our hands. It wasn't just a maintenance reduction issue, more an entire change in the way we worked. We had process, cost and procedure issues, and all of them were negatively impacting productivity performance," Sylvestre explains.
With several thousand regular employees, including 350 supervisors, and another couple of thousand contract workers, the first hurdle was to put solid systems in place. Proudfoot's Jon Wylie started by working with supervisors, equipping them with skills in 'active' management. It was very expensive to run the large-scale operation so naturally there were many areas where expenses piled up. Jon and his team picked a few of the biggest cost areas and worked out ways to reduce them.
The results have delighted Inco, with record production levels achieved successively for the last three years. Nickel production in 2004 was 154 million pounds. A year later it leapt to
168 — each man-shift producing 25% more than before.
A major expense for Inco was the cost of heavy fuel oil, which leapt from USD 29 to 50+ a barrel in just one year. The oil is used as fuel in giant drying furnaces, which in turn are used to remove moisture from the mined ore.
"One of our major areas of focus in phase two is to reduce the moisture content of the ore before it enters the furnaces," explains Proudfoot's Arnold Orlina. "The ore going in can have up to 40% moisture content and we aim to get that down significantly to save on furnace heating costs. With oil at record prices, just a small reduction in use translates into a big cost saving. We've also ensured that furnaces are fully loaded on a consistent basis,
so all fuel is used efficiently; it's all about managing consumption and reducing variability in this and all other activities at the mine."
>> Click here to read the complete Inco story!
Struggling with cost or production issues? Click here for a free,
no-obligation consultation.
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COOL IDEA: EMPLOYEE PROGNOSTICATORS
Arcleor Steel is experimenting
with prediction market software to leverage employee insights in predicting quarterly variations in sales volume and the price of hot rolled steel. Employees with the most accurate predictions win tropical vacation trips!
Experts say prediction markets can work well for companies because they give a voice to employees who might not otherwise speak up. The markets are particularly useful in areas such as consumer goods or technology, where change is rapid and companies need to adapt quickly or get left behind.
"Firms are comfortable with markets; it's a bit puzzling why they don't use them more often internally," says Todd Henderson, a professor of law at the University of Chicago.
Source: BusinessWeek Online, click here for the complete story
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Maxed Out
Controlling Project Budgets and Timetables
In response to global growth in commodity demand, many organizations are building new or expanded production capacity. Board sanctioned or approved projects have funds committed and the Board's and investor's clocks are ticking for delivery of expected returns on investment. Unfortunately, that ROI is increasingly threatened by our industry's escalating costs of labour, energy, chemicals and consumables.
Once development contracts are signed or construction is commenced, effective project management is vital to achieving on-budget and on-time delivery of product, revenue, and returns. Further, project managers must proactively manage the issues that inevitably arise during construction and commissioning phases. In the worst cases, out-of-control projects must be brought back under control.
Successful delivery of sanctioned or approved projects involves surmounting a variety of hurdles:
- Rapid raw material and labour cost escalation
- Procurement and inventory management e.g. materials are ordered to arrive when needed and not necessarily at project start
- Buying power is leveraged between contractors and project owners
- Contractors are effectively managed and lessons learned are exchanged when contractors and commissioning staff hand over to operations staff
- Engineering design changes are tracked and the impact on scheduled activity is reported and managed
- Workers do scheduled work rather than 'firefighting' problems
- Backlog or recurring problems get managed effectively to eliminate creep and delays
- Addressing chronic skills shortages via training and cultural solutions, safety and skills programs
Our next edition will contain more a detailed discussion of this all-important topic!
Is your project challenged by cost or timeline overruns? Click here for a free,
no-obligation consultation.
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Dig Deep
Mining for Trapped Value During Boom Time
For most mining organizations, the last few years have been fast, fun and frenetic. Executives and engineers that have served in the mining industry for any length of time recognize the euphoria of the boom phase of our cyclical industry. They also know that the boom is inevitably followed by a down phase that is a lot less enjoyable. The good news is that planning and improvements during boom time can make for a much softer landing when the "bust" arrives.
That's why top mining companies are using this time of unprecedented commodity prosperity to improve productivity and get costs in line. Proudfoot is currently working with several mining companies around the world who rank in the top quartile of benchmarked performers, but who have adopted the mantra of "let's be as good as we can be, not just as good as our competitors."
When we do a granular analysis of the entire mining activity chain — mine planning and engineering, drill and blast, load and haul, crush and convey, process and ship — we often find a lot of opportunity for improvement or "trapped value" buried in work processes, dashboards and the management skills.
In our experience, one of the ripest areas of opportunity is the skills of the first-line manager. At this level, most individuals are promoted to management because they worked hard, were good at some particular skill or were good at fixing things that had gone wrong. However, not all of these individuals are sufficiently prepared or suited for the role of managing others. The optimum skill-set for a supervisor includes:
- Making assignments to ensure understanding and a commitment to meet them
- Giving direction
- Solving problems through root cause analysis
- Following up to identify variances
- Providing timely and specific feedback
- Coaching and supporting through participation and positive modelling
- Reporting with complete information and actionable insight
First-line manager skills are just one example of "trapped value" opportunities realized by expert process analysts. By addressing this "trapped value," typical results, even among top performing companies, include:
- Productivity gains of 20-30%
- Yield gains of 3-5%
- Reduction of equipment downtime in the 15-25% range
- Reduction in direct costs per ton of 10-25%
- Overtime hours reduced by 50-55% vs. base
- Increased concentrator throughput by 5%
- Increased face advance by 20-25%
Lastly, boom times represent the best time to get employees feeling positive about improvement initiatives. Cyclical up-times present narrow windows of opportunity to frame efficiency efforts as "getting better" initiatives, rather than waiting until downturns, when the efforts are interpreted as "we're in trouble and need help." Reduced employee defensiveness translates into improved buy-in and improved end results —
the freeing of "trapped value" to the bottom line.
Do you suspect your organization has "trapped value"? Click here for a free,
no-obligation consultation.
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Sustainability
Real Commitment, Real Results
Proudfoot is grateful to guest author Darrell Smith of the Industrial Minerals Association - North America (IMA-NA) for the following story.
When most people consider employment at a mining company, the phrase "best place to work" rarely springs to mind. But Badger Mining is putting a new shine on our sector — this IMA-NA member company is among the "Best Small Companies to Work for in America," according to listings released this year by the Society for Human Resource Management. This list ranks the top 25 small and medium-sized companies in America that use smart people management strategies to develop successful organizations with highly productive and satisfied workforces.
Communication is key at Badger. Twice a year, team meetings are held which every associate attends. These meetings cover everything from benefits and safety information, to financial summaries and the direction the company is going.
As a mining company, safety is a very strong initiative, and Badger has some of the best safety records in the industry. Badger also has one of the richest benefit offerings, including full medical premium payments for associates and families, dental, vision, profit sharing (20% of profits are handed out equally to associates quarterly), achievement pay (a form of gain sharing), 401(k) with a 3% match, long term care insurance, wellness programs and more.
A portion of Badger's Mission Statement declares, "We are committed to environmental responsibility, safety, health, and integrity while providing a rewarding and enjoyable place to work." That pretty much sums up what Badger is all about.
>> Click here to read Darrell's complete article about IMA-NA member companies that serve as examples of the commitment the industrial minerals industry has made to sustainable development.
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Feedback & Contribute
Proudfoot's E-Bulletin team would greatly appreciate your feedback, contributions and ideas. Are we right on the money, or off the mark? Don't be shy, send us an e-mail and share your thoughts! We want to provide you with operational thought leadership that will impress and intrigue you every quarter.
Proudfoot E-Bulletin Editor: Channing Rollo. Editorial Board: Joe Farrell, Marius Ellis, Cay Mims, Damian Walsh, Alan Steelman, Carol Bresnicky, Jon Wylie, Mark Bagster and Jonathan Clegg. The Board thanks Darrell Smith of the IMA-NA for his contribution.
Proudfoot Consulting is
an international firm with 60 years of experience in helping clients achieve sustainable financial and
operational improvements. Proudfoot's mining experience was developed over more than 150 mining projects on five continents.
Some of Proudfoot's most prominent clients include:
Anglo Coal,
BHP Billiton, Centennial Coal, Inco, Inmet Mining, Newmont Mining, Placer Dome (now Barrick Gold
Corporation), RAG Coal International, Rio Tinto and more.
For more information or to speak with a member of the Proudfoot Mining Practice Team,
please call +1-561-624-4377 or e-mail
mining@proudfootconsulting.com
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