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Proudfoot Mining E-Bulletin, August 2007
Greetings! We have some exciting stories to share with you. As you may know, we are privileged to currently serve clients representing approximately half of the mining
industry's market capitalisation. Recently, we've detected a clear shift in executive perspective
from one of "throughput, throughput, throughput" to a more cautious approach balancing cost and production.
We continue to witness and participate in supervisory and behavioural transformations around the world,
two of which are detailed in this edition (PT Inco's Indonesian nickel mine and Cerro Matoso's Colombian
nickel and smelting operation). Lastly, we understand the continued challenges around safety and ensuring
those efforts are in sync with operational improvements. We'll explore that issue in our next edition.
Articles in this edition include:
Thanks as always for being a subscriber. We're delighted to share that our readership
has grown to over 500 mining executives in more than a dozen countries.
Sincerely,
The Proudfoot Mining Practice Team
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Minds Turn to Cost Reduction
Change in Executive Focus as Cost Pressures Grow
By Channing Rollo and Damian Walsh
By speaking and collaborating with hundreds of mining executives each year, our global team
has recently noted a distinct shift in the mining executive mindset. From a singular focus on increasing capacity
and throughput, we've observed a growing emphasis on cost reduction. Soaring costs and scarcity of inputs —
from labor and energy to equipment and parts — are combining to cause escalating stress on both operational
performance and capital expansion projects (including critical brownfield and greenfield expansions).
Perhaps nowhere was the pain of escalating costs more apparent than in the recent first-half results announced by
Rio Tinto, where despite soaring commodity prices and higher production, the group experienced a drop in
profits. Executives vowed to pursue new methods of cutting costs and they are not alone — we've heard
similar plans from dozens of mining executives over the last few months. This new mindset is apparent in the following
recent public comments:
- Cynthia Carroll, CEO Anglo American (Interim Results Announcement 2007)
"Operating challenges have persisted, in particular cost pressures at certain operations. Base Metals and Anglo Platinum experienced labour disruption associated with difficult wage negotiations. Port and rail logistics in Australia remain an issue for Anglo Coal and we continue to focus intensively on cost containment across the Group."
- Tom Albanese, Group CEO, Rio Tinto (Half Year Results Announcement 2007)
"We are putting in place measures to mitigate the future impact of costs through productivity improvements, the sharing of best practice and a
review of our functional and support costs.”
- Chip Goodyear, CEO BHP Billiton (Full Year Results Announcement 2007)
"Continued strong global demand for resources has led to increased costs across the industry for labour, contractors, raw materials, fuel, energy and other input costs. In addition, port congestion and other third party infrastructure constraints resulted in increased demurrage costs and shipping, freight and other distribution charges..... Specific areas of cost increase include labour and contractor charges, consumables and fuels, maintenance and other operating costs."
If the largest mining companies (with all their internal resources) are struggling with this issue,
imagine how the rest of the industry is coping. So while the massive demand from China and India may keep prices aloft for the foreseeable
future, rising costs are wiping out much of the resulting profit gains. As illustrated in the chart below, of
publicly traded companies revising their earnings forecasts, the share of announcements by mining companies
indicating lowered guidance has gradually risen over the last three years. Conversely, the share of
announcements by mining companies increasing their corporate guidance has fallen, revealing that fewer
and fewer companies are outperforming expectations (and a greater share is failing to meet plan).
As aforementioned, our current clients represent approximately half of the mining industry's
market capitalisation,
so we can say with some degree  of certainty that the mindset shift we are witnessing is representative of
the market at large. We forecast a strong push in the coming months to squeeze cost out of every aspect
of operations. Clearly, executives are realising that now is the time to move aggressively to reduce costs — not only for the sake of today's profits, but to prepare for the inevitable drop in demand in years to come.
>> REPORT: Register to receive our upcoming printed Perspectives piece, "Making the most of
today's boom time in mining"
For more information on cost containment strategies, contact us for a no-obligation consultation.
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Improving Supervisor Behaviour at Cerro Matoso
Achieving Sustainable Productivity Improvement
Of all employees with management responsibility, supervisors are closest
to the revenue-generating action.
Supervisors are a critical group; a fact not lost on Wayne Clowery, Vice President of
Finance at Cerro Matoso SA, an integrated nickel mining and smelting operation in northern Colombia
and part of the US$39bn turnover BHP Billiton group.
Over the last twelve months, Clowery has witnessed a transformation in supervisor behaviour, skills
and competency in his organisation, following a Proudfoot business review and subsequent
project.
"Cerro Matoso is recognised as one of the world's lowest cost, major ferro-nickel producers.
But most of the prime ore at this site has now been mined. And although we're part of a group with a strong
culture of continuous improvement, the level of nickel-per-pound mined here has been falling and will continue
to do so over the next five years. That's the broad operational and strategic context," says Clowery.
"The other factor driving the project was much more specific. There was a growing
recognition that workforce supervision was key to achieving better productivity but historically we hadn't
been so good at training and developing these people in a consistent way, or transferring best practice
horizontally at this level."
As is the case in most organisations, Cerro Matoso's supervisors are promoted from within
the ranks of the general labour force. Supervisors had been largely left to cope on their own with the
often-difficult transition from co-worker to figure of authority over former colleagues. (More)
>> FULL ARTICLE: Read the full Clowery interview in "The Transformation of a Mining Operation"
Need help improving supervisor behaviour? Contact us for a no-obligation consultation.
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Impressing a Sceptic
Cerro Matoso's Wayne Clowery admits
he was wary of consultants:
"It's fair to say I had a pretty dim view of consultants before this project. Everyone's heard the joke
definition of a consultant as someone who borrows your watch to tell you the time and then keeps the watch.
Well, that had a real ring of truth for me," he explains.
"The five-month test project certainly brought to life the maxim that 'you don't know what
you don't know'. Yes, we almost certainly knew everything about mining and smelting, but it became clear
we knew a lot less about being better managers. Proudfoot, as outsiders, could be very objective with us.
They showed us how to see things for what they really were, placing us on a firmer footing to realise the
productivity improvements we needed," he says.
Clowery's top 3 tips for change
1. Choose a consultancy that works at a fast pace to counteract the inevitable inertia from within.
2. Don't get too hung up on financial measures of success. Recognise, value and celebrate the intangibles too.
3. Work hard to ensure you have a good cultural fit between the consulting team and the client team. Don't be afraid to ask for replacement consultants if you encounter problems.
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Productivity and Efficiency
Top Drivers Cited by Executives
Every year, Proudfoot conducts a global study of workforce productivity (our 2007 edition is currently underway). The results consistently confirm that reducing waste and unproductive time is not just an issue for one particular nation or industry sector but for all. Whether viewed at company, industry or national level, there are some organisations that are clearly better at managing productivity than others, and no doubt there are lessons that could be shared more effectively to transfer best practice.
One thing that we can be certain of is that, at the individual company level, senior executives
must be the driving force. Moreover, it is investment in workforce and management skills that yields the greatest
efficiency returns, not mere slashing of costs through offshoring or outsourcing. Below you will find a quick snapshot of the top efficiency drivers, as perceived by senior executives around the world.
(Click to view larger version of full results)
>> Download the full 2006 Productivity Study.
Need help improving workforce or management skills? Click here for a
no-obligation consultation.
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Getting Engaged
PT Inco Indonesia's Community Engagement Initiatives
"The creation and maintenance of high employee engagement . . . [is] one of the few determinants
of profitability largely within a company's control," asserts James K. Harter, chief scientist of The Gallup
Organization. Understanding that companies with an engaged workforce are more profitable and attractive places
to work,  PT Inco (part of CVRD Inco) recently collaborated with Proudfoot to improve employee engagement in its
Indonesian operations (site of the world's largest open-cast nickel mine).
While other management consultants working in mining have
tended to limit their efforts to 'within the fence' of the mine, the team realised that the keys to achieving
employee engagement lay in also involving the local community.
This observation proved to be crucial in winning over the 3,500-strong, predominantly
Muslim workforce at PT Inco's Sulawesi island mine.
PT Inco's engagement programme combined 'within the fence' efforts (such as balanced scorecards
down to the team level and Employee Values programmes) with community-based initiatives. The
community outreach
included
comic strips, guest visits by authors, TV presenters and chief executives; educational and poster design
contests involving local children, and American Idol/Pop Idol-style training as theatre. All of these efforts
allowed workers and other members of the community to experience the messages of
behavioural transformation in a highly memorable way.
Changing behaviour in the mine by involving the community at large has proven a wise strategy.
Formal coaching compliance is now averaging 90% or more, while mine production during the last quarter of
2006 was the best in 30 years.
>> FULL ARTICLE: Read more about the positive cultural transformations achieved at PT Inco Indonesia
Need to increase employee engagement in your mine or facility? Contact us for a
no-obligation consultation.
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Safety Is Still Job #1
Importance of Behaviour
Our very first E-Bulletin was entitled "Safety is Job #1," and that job has only increased in
importance and prominence over the last year. Certainly the recent mining tragedies have weighed heavily
on the hearts and minds of every miner and mining industry executive, as well as the public at large.
Mine safety continues to be a highly sensitive and challenging issue for companies, communities,
politicians and governments. And while much recent legislation has focused on tangible changes for accident
mitigation — safety equipment and rescue resources — we continue to see growing interest in
innovative behaviour
techniques geared toward accident prevention and loss control. Approaching safety as a behavioural change
(and a component of the mine culture) instead of mere training and procedures requires an examination of the
actual behaviours, cues and prompts in the field.
While safety equipment is easily procured and programmes legislated, the most important aspect of safety —
changing human behaviour — is more challenging. We'll discuss this topic in greater detail in our next edition.
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You're In Good Company
It was one year ago that Proudfoot launched this E-Bulletin to a small group of
interested recipients. We're delighted to share that in the twelve months hence, our subscriber
base has grown to over 500 mining executives in more than a dozen countries, including nearly
three dozen company CEOs and presidents. Thank you for forwarding our messages and helping to spread the word!
 Tell a Friend or Colleague!
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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 Consulting is an
international firm with 60 years of experience in helping clients achieve sustainable financial and operational
improvements. We have deep global expertise in mining and metals having partnered with major mining and metals
companies on five continents. Some of Proudfoot's most prominent clients include:
Anglo American,
BHP Billiton, Centennial Coal, CVRD Inco, Inmet Mining, Newmont Mining, RAG Coal International and Rio Tinto.
>> Register to receive our upcoming printed Perspectives piece, "Making the most of
today's boom time in mining"
For more information or to speak with a member of the Proudfoot Mining Practice Team,
please call a regional office at the numbers below or
visit
www.proudfootmining.com
Proudfoot E-Bulletin Editorial Board: Alan Steelman,
Carol Bresnicky,
Cay Mims,
Channing Rollo,
Damian Walsh,
Joe Farrell,
Jon Wylie,
Jonathan Clegg,
and Mark Bagster.
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Tell a Friend or Colleague!