dale schilling

Value Creation in Mining:

The Productivity ImperativeDale Schilling

30 April 2015

20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 1Draft—for discussion only

Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Our flagship report: Value Creation in Mining

"More Than

Commodity Prices"

"Taking the

Long-Term View in

Turbulent Times"

"The Productivity

Imperative"

"Beyond basic

productivity"

Today's focus


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

TSR drivers Management’s levers

TSR

Profit growth

Multiple change

Free cash flow

contribution

Operating performance

Financial, investor and

portfolio strategy

Cash returns/ efficiency

ƒ

ƒ

BCG’s disaggregation methodology translates TSR into

levers managers can influence


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

23% total share holder returns during 2003-2010 Total Shareholder Return

1. S&P 500. 2. Weighted averageSource: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; Annual reports; BCG analysis

2003 - 2010

40%-20% 0% 80%20% 60%

TSR (%/year)

Market TSR = +8%

Mining TSR = +23%


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

.... shareholder value destroyed during 2010–2013 ...Total Shareholder Return


2003 - 2010 2010–2013

0% 80%60%40%20%-20%

TSR (%/year)

-60% -30% 0% 30% 60%

TSR (%/year)

Market TSR = +8%

Mining TSR = +23%Mining TSR2 = -13%


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

2003 - 2010 2010–2013 2014

... a trend that continued last yearTotal Shareholder Return

80%60%40%20%0%-20%

TSR (%/year)

-60% -30% 0% 30% 60%

TSR (%/year)

Market TSR = +8%

Mining TSR = +23%Mining TSR2 = -13% Mining TSR2 = -14%


-60% -30% 0% 30% 60%

TSR (%/year)


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Today the 'big squeeze' is here

75

168 168192 209 228

0

100

200

300

400

$/unit production

Indexed to 2002 price

Cost (Indexed)

EBITDA %

2013

288

20%

2012

313

33%

2011

329

45%

2010

273

39%

2009

230

27%

2002

100

25%

Price (indexed)

Source: BCG


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

In 2014, Australia coal prices fell 17% and 23% for thermal

coal and met coal respectively

0

50

100

150

USD$/ton

2011

-17 %

2012 2013 2014

Newcastle thermal coal Hard coking coal

1. Insufficient data point for 2010. Source: World Bank, Bloomberg, BCG Analysis

0

100

200

300

2014201320122011

USD$/ton

-23 %


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Average annual TSR1

1. TSR derived from calendar year data in local currency2. Background curve based on listed coal companies worldwide by Capital IQ industry segmentSource: Capital IQ; BCG analysis

So, how have Australian coal companies fared vs their peers?

-75% -50% -25% 0% 25% 50%

10-year TSR 1-year TSR

Rank (n=49)

Median= 3.1%

-100% -50% 0% 50% 100%

Average annual TSR1

Rank (n=123)

Median= -22.3%

3-year TSR

-100% -50% 0% 50%

Average annual TSR1

Rank (n=111)

Median= -24.1%


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Productivity improvements link directly to value creation

Example value-driver tree for surface operations

Factors directly affected by a MOST productivity program

Valuation multiple

change

Fundamental value

Cash flow contributions

Total shareholder

returnƒ

Saleableproduction

ROM production

Unit Price

Unit Cost

Yield (%)

ƒ

COGS per unit

SG&A cost per unit

CapEx($millions)

+

+

ƒ

ƒ

+

Source: BCG analysis.Note: BCM=bank cubic meters; CapEx=capital expenditure; COGS=cost of goods sold; DOH=direct operating hours; EV=enterprise value; ROM=run of mine; SG&A=selling, general, and administrative.

Dividends


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

BCG projects typically yield ~ 10–20% improvements

of key operational metrics …

1. Unit cost reductions from increased throughput are in addition to thisSource: BCG experience

Productivity

t/FTE

Identify the bottleneck production

step and cause for

underperformance in availability,

utilization, rates

Throughput

Mtpa

Unit cost

$/t

Generate transparency on high cost

buckets along production steps and

functional splits

Identify required workforce and full

potential throughput through detailed

benchmarking to validate targets

Low direct

operating

hours of key

equipment

Mismatch of

cost and

performance

Throughput

not in line with

headcount on

the operation

KPI

… and typical

impact… key challenges …Issues …

Unit cost at constant volumes1

10–15%

5–10%

10–20%

NPV improvements of over 30% achieved


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

0

1

2

3

4

7210 6

Year one relative

TSR growth1

Successful operations transformation is hardOnly a quarter of programs outperform in the long term

Pitfalls …

… mean only 25% of transformation

programs succeed in the long term

1. Sample of 40 companies publicly undergoing transformation programs. TSR adjusted by S&P500 growth; 1 = same growth rate as index. Long term = 5 years period or ongoing for transformations started since July 2008Source: BCG case experience; BCG operations practice

Time

Status

quo

Performance

turnaround

Sustainable

change

Change journey does not even start

No step change in performance

Change was not sustainable

Performance

Change not even started,

no step change achieved

Long-term relative TSR growth1

Successful transformation,

sustainable change

Short-term success,

but not sustained


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Case example: Underperforming underground coal mines

Million tonnes

A B C

0

D E F G I J K L M N O P Q R S T U V W X Y Z AABBCC

2

4

6

8

10

Australian Longwall Coal Production

Client performance:

Operating at 40-60 hours per week

Australian industry benchmark:

Operating at ~100 cutting hours per week

Gap worth ~$600m in annual EBIT

Source: International Longwall News, BCG analysis


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Reliability (%)

100

80

60

40

20

0

Availability (hours / week)

1681441207248240 96

Transformation program to address longwall cutting hours

Source: BCG experience

People-based initiatives

delivered majority of benefits

Unplanned

delays

Planned

down time

Cutting time

(55 100

hours / week)

Diagnostic: Why are we cutting at

half the rate of our competitor?

Comprehensive program to

transform Longwall Operations

ReliabilityDevelop-

mentEngineering

People &

processes

Site Leadership

Program Leadership

Rigorous Program Management

Comms, Culture and Engagement


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Significant, positive impact on performance and people

Improvement in

longwall cutting hours Selected quotes from Pulse Check

Source: Investment Bank Analyst Report, November 2011; BCG pulse check survey

BCG engagement

Cutting hours / week

120

100

80

60

40

20

0

JunMayAprMarFebJan

Monthly average cutting hours

Best weekly performance

"This program has

brought focus to our

organisation to what

we should be

delivering and that

the targets are

achievable."

"It took a while

to get site

support and

enthusiasm, but

now the guys

believe they can

do it"

"There is a sense of

urgency and

accountability ...

we've got the 100

hours once, now we

just need to keep

doing this"

"GM very visible,

very hands on"

Historical

performance


Copyr

ight

© 2

015 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.

Critical lessons for miners

Value creation in mining has proven very challenging since 2011

Margin pressures are at the core of these challenges

It is imperative that mining companies improve productivity to address this

pressure

• Counteracts "the squeeze" caused by falling pricing and rising costs

• Links directly to value creation

There remain ways to create value in mining

• Use the right performance measures

• Identify and pursue profitable opportunities

• Enhance productivity

• Give back to shareholders

Thank you

bcg.com | bcgperspectives.com

dale schilling

Business

yearmarket tsr

boston consulting group

coal respectively050100150usd

mining tsr2

australia coal prices

shareholder value

weighted averagesource

total shareholder return1