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Improving MiningEfficiency throughMechanization,Automation andContinuous Improvement

MMMM Symposium

Harmeet Katari

Associate Director

KPMG Advisory Services Pvt. Ltd

28 30 September 2012


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Session Agenda

A brief introduction to KPMG

The Business Environment inMining

2012 KPMG, an Indian limited liability company and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The Opportunity in OperationsExcellence

Methods of Improvement

Continuous Improvement &Automation

1


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KPMG in India is a member firm of the global network of member firms,providing Audit, Tax and Advisory services, affiliated with KPMG International

We turn knowledge into

value for the benefit of our

clients, our people and the

capital markets

IndiaIndia among theamong the fastest growingfastest growingmember firms in the global networkmember firms in the global network

NEW DELHI

1993:1993:2020 People22 Partners CHANDIGARH


2

Double digit

annual growth

rates

152 countries

145000 people

7100 Partners

One of the

leading

professional

services firms

Over USD 22

billion in

global

revenues

MUMBAI

HYDERABAD

BANGALORE CHENNAI

KOLKATA

PUNE

7000 +7000 + People200 +200 + Partners &Directors1010 Offices

2012:2012:COCHIN

AHMEDABAD


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KPMGs Advisory Services provides specialized offerings by combiningtechnical, business and market skills for delivering workable service offerings

AUDIT TAX

ADVISORY

Management

Consulting

Risk

Consulting

Transactions and

Restructuring

U.S. GAAP(including SOXattestation)

International

Global InternationalCorporate Tax andLitigation Services

Indirect Tax

BusinessEffectiveness

FinancialMana ement

AccountingAdvisoryServices

Climate

CorporateFinance

TransactionServices


3

FinancialReportingStandards (IFRS)

InternationalExecutive Services

M&A Tax

Transfer Pricing

Advisory IT Advisory

People andChange

Shared Services

and OutsourcingAdvisory

change andSustainability

Financial RiskManagement

Forensic

Governance,Risk andCompliance


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Offerings for Mining Industry

Growth & OperationsStrategy

Large Capital ProjectImplementation

Corporate Strategy andBusiness Planning

Valuations; Financial andTax due-diligence

Counterparty Search: Buy-side assistance; Sell-side

Corporate Finance/Transactions Advisory

Operations Excellence(Lean/ Six Sigma etc.)

Cost Optimization

Peo le & Chan e Advisor

OrganizationalEffectiveness Improvement

Business Transformation/ Capability Building/ Organizational Strengthening


4

Management Business Integration

Business ContinuityManagement

Market Entry Strategy

Bid Assistance

assistance Joint Venture assistance

Assistance in raising debt

Investment advisory to PEsin auto/ component

situations IPO Advisory

Business ProcessReengineering/ Risk &Controls Review

Supply Chain & Logistics

Technology Implementation

Mine DevelopmentServices

Shared Services


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Session Agenda




5





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Growing nations causing a structural shift in commodity demand


Increasing intensities due to demand shift for commodities in emerging markets

Multiplier effect on commodity demand

Energy consumption to rise sharply in growing nations Chinas per capita energy consumptionto double by 2020

Source: Xstrata: Mining opportunities and challenges, CIA Factbook


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Global mining sector is facing increasing commodity price variability whichendangers profitability

Commodity Price Fluctuation and EBITDA Margin of Mining Companies


Commodity price volatility today is much more than it was a decade back

Companies continue to struggle to insulate their profit margins from the industry cycles

2000 2010

Source:BloombergEBITDA Margin of Top 40 Mining Companies by market cap in 2010All prices in respective units were normalized to 1 as on Jan-2000


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Going forward, most of the traditional levers of profitability in this sectorappear to be challenged

Increasingly ComplicatedBusiness Environment

Depletion of Resources Higher Input Costs

Reserves

Source: Natural resources, Canada, CanadianMinerals Yearbook 2003-2006 Review & Outlook

Source: Coal mining cost escalation 2003-2008anal sis b Marston

Country Coal Mining CostEscalation 4 years

Australia 45%Indonesia 46%

South Africa 47%

Venezuela 49%


8

Impacts:

Mining Rights &Ownership

Infrastructure Creation &

Operating Model

CommunityCompensation/Involvement Model

Impacts:

Unfavorable geology-driven costs

Pricing flexibility

, ,

Impacts:

Operating margin

Operational flexibility

Quantum of risk to becarried by the miner


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Session Agenda




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Operational excellence is imperative for bridging the strategic gap

Mining companies are differentiatedless by their portfolio of miningproperties than by the:

Effectiveness with which theyexploit those resources

Ability to bring project on schedule

Deliverance of ro ects within costs


Deft management of labor (one ofthe highest expenses in the sector)

Managing energy costs

Source: Xstrata presentation on Mining: opportunities and challenges by Mick Davis, CEO in June 2011


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Level of mechanization remains low in Indian mining industry


Source: Report on Working Group for Coal and Lignite for Formulation of 12th Five Year Plan, Planning Commission, GoI, Nov 2011

Mining Operations, especially in UG, there remains ample opportunities to move fromcurrent semi-mechanization levels of SDL/LHD to mechanized CM and LW

At the same time, it needs to be ensured that these assets (mechanised equipment)are utilized properly


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Session Agenda




12

The Opportunity in Operations

Excellence

Methods of Improvement Continuous Improvement &Automation


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In the face of increasingly difficult extraneous performance drivers, IndustryPlayers have turned to operational excellence for some time now

Business ExcellenceSystem (Started ~ 2007)

Profit surge of 158% and cashflow from operations increase by

Alcoa Production System(Started Late 1990s)

30% CAGR in profitability afterthe program despite Al price

plunge

Operational Initiatives Overall business impact

ALCOA


8.2%

13

Improving PerformanceTogether Program (Started

~ 2005)

For e.g. in RT Coal Australia, theprogram contributed $975 Mn in

3 years

Source: Company Websites, KPMG Analysis

RIO TINTO


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Automation in mining and other processes is central to the operationalexcellence initiatives taken by various companies

Mining Innovationdriven by the need to find and access newresources to meet rapidly growing demand, oftenin complex and difficult to mine environments

Incrementalinnovation

Step upInnovation

gradualimprovements in themining processes,but imply onlylimited changes tobusiness-as-usualoperations

significant change inthe extant technologies/ process ; requiresmaterial time andinvestment

Automation

the intelligentmanagement of as stem usin


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Asset healthSystem

Miner AssistTechnical

Equipment

Water andenvironmental

processimprovements

System tomonitor the

equipmentperformance onreal time

System toassist miners

interact (videolink etc) withspecialists toaddressequipmentbreakdown

Multipletechnologies

aimed at entiremining valuechain

Airborneexploration

technologies

Mineralprocessing

appropriate technology

so that its operationcan occur without directhuman involvement

Source: BAE


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Various facets of automation/ mechanization for a mine

CONTROLS


TOOLS

Mine


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Higher mechanization is the way forwardExample:IPCC system in place of Truck dispatch system in OC mines

The Installation of IPCC is a profitable working whichsignificantly reduces cost of transportation by Truck

The big difference in the total handling/ operating costsmainly result from the low costs for the conveyor

transport Payback period of approx. 2 years

It also has Environmental Advantages


16

MTPA)

8.3

16.5

26.1

0%

20%

40%

60%

80%

100%

Cost Break-up for Truck only system(INR/ton)

Estimated total

trucking costPrimary rehandlingcost

Primary crushingcost

Total Cost:50.9 INR/

ton

No InitialInvestment

9.6

1.3

4.2

3.2

0%

20%

40%

60%

80%

100%

Cost Break up for In-pit crushing-cum-conveying system (INR/ton)

Spares costEnergy cost

Labour cost

Capital cost

InitialInvestment: 190

INR crore

Total

Cost: 18.4INR/ton

Crusher Capacity: 333 tph

Source: Coal Trans Asia 2003


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Indian mining industry needs to start its journey towards highermechanization & automation, as others are progressing very fast


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Source: Rio Tinto presentation on Innovation: the key to sustainable development March 1, 2010


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Sustainable EBITDAImprovement Levels

Sample Initiatives Examples

5 8%

OEE Improvement

Energy Efficiency

Consumable Optimization

Crusher uptime

improvement Electrical wiring overhaul

Tire life improvement

E-Procurement Reverse auctions

Aggressive targets can be set for operational improvement in mining throughcontinuous improvement (CI), higher degree of mechanization and use ofautomation technologies


8 15% Recovery Improvement Haulage efficiency

Flotation cell circuitimprovement

Conveyor layoutoptimization

20 25%

Process centralization

Integrated value chaininitiatives

Capex operating model

Shared services

Supplier collaboration &strategic LCCS

Innovative assetownership models

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For additional details:

Harmeet KatariAssociate Director

KPMG Advisory Services Private Limited

KPMG, Floor 8, Building 10,

DLF Cyber City, DLF Phase II

Gurgaon 122021

India

Mob: +91 9811762700

Email: [email protected]

Restriction on disclosure and use of data:The data in this document contains confidential and proprietary information of

KPMG, the disclosure of which would provide a competitive advantage to others.

As a result, this document shall not be disclosed, used or duplicated, in whole or

in part, for any purpose other than to evaluate KPMG. The data subject to this

restriction are contained in the entire document.

01harmeetkatari_28sept2012

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