How to address the mining productivity imperative?
20 October, 2016
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
World Mining Conference
McKinsey & Company | 1
Key messages
▪ Super cycle over and unlikely to return
– Speed of demand growth is unlikely to return (75% driven by China)
– Lack of exploration success: “World class deposits” are becoming a
myth
– 50% drop in mining productivity has put significant pressure in costs
▪ The productivity imperative is here to stay
– Even when we net out grade erosion, mining productivity has
dropped 33%
– Mining needs to close the gap to other capital intensive industries
▪ There are 3 distinct formulas mining companies can follow to address to increase their productivity by 50-60%
– Recovery & Transformation: instilling an owner’s mindset and relentless execution discipline
– Lean management: implement a manufacturing philosophy to drive stability and eliminate variability
– Digital transformation: Deliver leaner and safer operations by using
data, analytics and automation to create better insights
McKinsey & Company | 2
The mining sector has been fundamentally reshaped, but has also become more volatile, and more vulnerable
0
200
400
600
800
1,000
1,200
1,400
1,6007% p.a.
0% p.a.
21% p.a.
16141210080604022000989694921990
SOURCE: McKinsey Mining Model
USD billion (nominal)
Volumes: +4% p.a.
Prices: +15% p.a.
Revenue
EBITDA
Volumes: +10%
Prices: -35%
Steady state“Supercycle
up”“Supercycle
down?”
Supercycle
▪ 50% volume growth (75% of this from China demand)
▪ Lack of exploration success
▪ 50% drop in mining productivity
Revenues and EBITDA of the global mining industry
+
+
McKinsey & Company | 3
Even when netting out grade erosion, mining companies are under pressure after a decade of poor productivity performance
SOURCE: McKinsey analysis (based on company reports and websites)
MineLens Productivity Index - MPI
100
95
90
85
80
75
70
0
09
0% p.a.
-7.6% p.a.
2014131211100706052004
-3.9% p.a.
08
Index, 2004 = 100 ▪ Between 2004 and 2013, global mining productivity has fallen ~33%, or 3.9% p.a., even after accounting for geological degradation
▪ Over the last ~2 years, there has been some improvement in productivity performance, but more work is required to reverse the trend
McKinsey & Company | 4
Mining has a large opportunity to improve productivity by closing the gap to global best practice
SOURCE: MineLens, McKinsey Analysis
Paper mill Oil refiningOpen pit
mining
Underground
mining
Oil and GasCrushing and
grinding
85 88 92
69
3927
Percent
Average Overall Equipment Efficiency
McKinsey & Company | 5
Mining companies can improve productivity by 50-60% over 3-6 years using 3 distinct and complementary formulas
RECOVERY & TRANSFORMATION
Rapidly drive cost and capital productivity by instilling an owner’s mindset and a relentless execution discipline in the organization
+25-30%productivity
18-24months
DIGITAL TRANSFORMATION
Enable leaner and safer operations by using data, analytics and automation to create better insightsand translating them into actions
+10-15%productivity
18-24months
LEAN MANAGEMENT
Embed a manufacturing system to drive stability, eliminate variability, and instill a culture of continuous improvement
+15-20%productivity
18-36months
+50-60%productivity
36-72months
Full scale transformation
McKinsey & Company | 6
How organizations need to run to deliver a successful transformation…
Execution
Relentless focus on how to get it done, quickly
....most effort goes into “how,” not “what”
Owner’s mindset
Your team owns the business, and acts like
it
….this is the key to reach and sustain full
potential
Accountability
Owned by line with RTS as “personal
trainers”
....this is not a traditional consulting “project”
Aspiration
RTS never settles for less than your full
potential
....it is not a comfortable, consensus-led
approach
Motivation
Health and performance are not mutually
exclusive
....you will have to address underlying
mindsets
RESTRUCTURING & TRANSFORMATION
McKinsey & Company | 7
A full fledge transformation requires a “proven recipe”… focused on how to get things done
Establishing the
trajectory and full potential of the business
using an investor due diligence
Developing atransformation plan (initiatives and financial
projections) which is
fully owned by the line leaders
Launching a full-scale effort to drive value to
the bottom-line
Bottom-up planning
Independent diligence
Transformation Implementation1 2 3
Change management
Taking tactical action to change the mindsets and behaviors necessary to sustain the transformation4
Performance infrastructure
Using a relentless cadence to ensure superior execution and value delivery to the bottom line5
Support
Sequence
Execution
Rapid execution of immediate opportunities
RESTRUCTURING & TRANSFORMATION
McKinsey & Company | 8
A full fledge transformation will deliver significant outcomes
150
300
200
260
400
350
100
50
150
300
60
Met Coal
Base metal
Petroleum
Energy Coal
Chemicals
Energy
Paper & packaging
Precious metal
Building products
Base metal
Chemicals
250
600
400
540
950
300
150
500
300
1.000
1.100
5
3,7
3,3
3
3
2,9
2,4
2,1
2
2
1,7
“Surprise” factor
FCF p.yr. in USD millions
Initial management aspirationWhat a fulltransformation has delivered
2,7
RESTRUCTURING & TRANSFORMATION
McKinsey & Company | 9
Across sectors, the leading companies in productivity have four common characteristics…
Work according to operational standards that minimize waste1
The levels of adherence to the standards are very high (>90%) at all levels of the organization2
Each employee is involved in the continuous improvement of the standards (more value to the customer, less waste)
3
The development of capabilities of each employee is a fundamental part of the role of each leader4
SOURCE: McKinsey
LEAN MANAGEMENT
McKinsey & Company | 10
1 TIP: Tactical Implementation Plan
SOURCE: McKinsey
… that they achieve by consistently applying management systems
Coaching 1 on 1
Role Confirmation
Skill Matrix
Process Confirmation
SOPsResource planning
Aspiration Barometer
KPIs and Targets
Problem Solving
TIP Management
Optimum value
delivery
HuddlesWeekly meeting
WILO
Common objective
Continuous improvement
People development
LEAN MANAGEMENT
McKinsey & Company | 11
SOP example: haul trucks fueling SOP Non-fueled LHD Fueled LHD
Location of the LHD at the end of the shift
Process of filling up the tanks and later location
▪ Use time between shift thus reducing later interruptions
▪ Organize LHD’s location at the end of the shift▪ Free up operators with the responsibility to fill up the tanks
of the LHDs
Goals
8:00 16:00 12:00
25 minutes
Shift A Shift B Shift C
Clear outcome defined
Visual and simple
� It is not exhaustive, it contains the most important best practices that some operators tend to miss
� Created by the operators, then they can be challenged and convinced to improve it
T – 20
▪ Operators park the non-fueledLHDs at certain locations
T – 0
▪ Operators’ team arrive at the mine and two of them are sent to fill up the equipment tanks
T – 0
▪ Advanced team (2 operators) fill up the tanks of 6 LHDs located according to end of the shift plan
T + 20
▪ Advanced team ends the process of filling up the tanks
SOURCE: McKinsey
LEAN MANAGEMENT
McKinsey & Company | 12
Lean creates impact in all the stages of project development and operations, while improving the health of the organization
SOURCE: McKinsey past projects experience
▪ Improve safety records
▪ Improve motivation, belonging and pride
▪ Improve customer-centricity
▪ Engage, empower, and develop talent
▪ Develop new ways to improve efficiency and effectiveness
▪ Reinforce a “one company” culture and improve coordination across areas
▪ Build a culture of continuous improvement
Open pit operation
Underground extraction
Plant
Smelting and refining
Construction
Capital Project design
15-30% increase on shovel and truck productivity
20-40% productivity increase in trucks, shovels and crusher system,
15-20% increase of production, while reducing 10% of the energy consumption and up to 30% of maintenance costs
15% production increase and 15% reduction of energy consumption
20-30% of cost reduction y high planning adherence
Minimization of potential delays, overinvesting and costs overruns
Application area Typical impactAdditional impact for the organization
LEAN MANAGEMENT
McKinsey & Company | 13
However, four major developments will accelerate change in the mining industry
SOURCE: McKinsey & Company; HBR, The Age of Smart, Safe, Cheap Robots Is Already Here; IBM
1015Analytics and intelligence
More computer operations per second than since the 1960s
250k xProcess digitization
More RAM in iPhone 5 than in the Apollo 11 computer which took it to the moon and back
50%Robotic and Automation
Reduction in cost of robots since 1990 vs. 80% increase in US labour costs
90%Data, computational power, and connectivity
Data in the world today has been created in the last two years
DIGITAL TRANSFORMATION
McKinsey & Company | 14
The future mine will be designed around a fully integrated digital platform
The future mine is safer, more predictable and sustainable, built on automated and integrated analytical platforms
Optimization of material and equipment flow
Deeper understanding of resource base and progress vs. plan; Planning & budgeting support
Increased mechanization, automation & remote control
Scheduling and maintenance;Processing
Continuous learning
Real timeplanning
Predictiveoptimization
Automatedequipment
Digital & Mobile
Operations
Real-time, remote & optimized operational control; Paperless maintenance & operations
IntegratedData
Platform
DIGITAL TRANSFORMATION
McKinsey & Company | 15
Digital B2B marketing and sales
This overall vision consists of several specific opportunities
Automated equipment
Automation and remote operation strategies, business cases, design and implementation
8 Pit-to-port supply chain2
Dynamic modelling of supply chain from mine pit to port to diagnose bottlenecks and system dynamics
Optimised scheduling and control3
Increase throughput through optimisedmine and logistics scheduling
Digital performance management11
Insights on deviations from automated systems initiate follow-up actions and escalation
Predictive maintenance strategies
Targeted maintenance strategies to improve reliability at lower cost
5
SOURCE: McKinsey
Digitally enabled maintenance execution
Work plans generated and distributed digitally to maintenance operators
7
Integrated operations center
Integrated central control center with real-time dashboards fed by remote sensors
9
Optimise 2nd and 3rd-level parameters to maximise yield through processing plant
Yield optimization4
Integrated IT architecture12
Common data inventory across all levels of the organization to establish common frames of reference for various tasks within the value chain
Improved ore body insight, driving more targeted blast strategies and mine plans
Stochastic geological modelling1 Digitised maintenance planning
Inputs generated by advanced analytics lead to automatic trigger scheduling of required maintenance crews and ordering of replacement parts
6
Efficiently defined processes with single point accountabilities which allow for rapid innovation
End-to-end process design10
Analytics center of excellence
Collaborative environment of experts engaged in advanced analytical development to support decision making
13
Targeted digital channels for marketing and digital purchase mechanisms for sales
14
Back office processes
Use digital solutions to handle majority of all administrative work
15
DIGITAL TRANSFORMATION
McKinsey & Company | 16
RESERVE VALUE Lifetime value of resource
VOLUME Tones through constraint
COSTPit-to-port operating cost
SAFETYTotal injury frequency rate
Stochastic geological modelling
Pit-to-port supply chain
Optimized scheduling and control
Yield optimization
Digitized mtce planning
Predictive maintenance strategies
Digitally-enabled maintenance execution
Automated equipment
1
2
3
4
6
5
7
8
Overall we see transformative impact from digital technology in mining…
5-20% 12-32%
19-33%
25-75%
DIGITAL TRANSFORMATION
McKinsey & Company | 17
These three formulas are complementary and based on a set of common principles…
Bold vision
▪ Clear aspiration to deliver significant impact by achieving best in class performance
▪ Focus on long-term sustainable impact, even when short-term gains are also needed
Deep commitment
▪ Executive and Transformation team highly committed to impact and finding full potential for business improvement
Aligned incentives
▪ Financial and non-financial incentives to all parties involved aligned with impact aspiration and targets
Tested recipes
▪ Methodologies that have been successfully applied in a variety of geographies / industries
▪ Significant focus on change management and performance infrastructure
Distinctive skill▪ Leading industry and functional expertise required to generate
improvement initiatives
McKinsey & Company | 18
Key messages
▪ Super cycle over and unlikely to return
– Speed of demand growth is unlikely to return (75% driven by China)
– Lack of exploration success: “World class deposits” are becoming a
myth
– 50% drop in mining productivity has put significant pressure in costs
▪ The productivity imperative is here to stay
– Even when we net out grade erosion, mining productivity has
dropped 33%
– Mining needs to close the gap to other capital intensive industries
▪ There are 3 distinct formulas mining companies can follow to address to increase their productivity by 50-60%
– Recovery & Transformation: instilling an owner’s mindset and relentless execution discipline
– Lean management: implement a manufacturing philosophy to drive stability and eliminate variability
– Digital transformation: Deliver leaner and safer operations by using
data, analytics and automation to create better insights
