Shareholder Value Maximization through Mining Operational Excellence - My article in Mining India magazine

Fundamentally it is easy to discern that three levers to shareholders’ value are the capital employed, market realization (revenues) and operating costs for any mining ventures. Prudent application of capital involves optimal utilization of equipment and machinery and investments in expansion of reserves. Market realization depends largely on market intelligence and management of market risks appropriately. In the recent years when the commodities markets have performed well, there are chances that market realizations have been good for mining companies with little efforts. However, while prices have been rising, so have been the costs. In such circumstances, and more so when market environment turns around, it is realized that while prices tend to fall sharply, costs tend to be sticky. That’s when the significance of the third lever can be assessed. Lever of operating costs for shareholders’ value maximization can be best employed with an objective of continuously and relentlessly reducing costs through performance improvement and hence, achieving operational excellence.


The six keys of operational excellence

The typical keys for performance improvement in a mining venture are – technology, performance management parameters, organization, processes, strategy and leadership.

Technology essentially involves collection, usage, analysis and communication of data from various business processes of an organization. Several of the mining processes are now controlled through implementation of enterprise resource planning technologies, supported by arrays of specialized technologies for unique processes such as mine planning, geological modeling, blast design, GPS based haulage plan and truck dispatch systems. Operational excellence may aim at seamlessly aligning several of these technology platforms and hence, having better operational control over the entire mining processes chain. Performance management parameters such as Key Performance Indicators (KPIs) are tools that help the process of operational excellence through identifying areas that need to be measured, controlled and evaluated periodically for improvements. KPIs on an organization wide human resources can be applied in the form of a balanced score card, which can help track improvements in human capital effectiveness and efficiencies. Organization concerns the availability of right talent for right positions in a structure that supports the business processes. Processes are those which range from activities such as drilling, blasting and haulage to procurement, talent acquisition and all others. Strategy for mine development, operations and supply chains has significant bearing on the operating costs and hence, they figure prominently in the scheme for operational performance improvement. Leadership team that is aligned to innovation, continuous performance improvement and cost reduction pursuits alone can see the efforts being made on a sustainable basis yielding fruits of operational excellence.

One of the key characteristics of these six keys is that while the impact of these on operational excellence is in the increasing order of magnitude; the quantum of investment in time, effort and resources, and ease of improvements follow in decreasing order in the sequence of technology, performance management parameters, organization, processes, strategy and leadership. This characteristics need to be considered when the trade-off between investments and likely impact is being made.

Value optimized operations

The value driver model for the performance excellence therefore targets value-optimized operations which in turn have three components:

1) Development of value focused culture – this concerns the human resources and organizational structure for enhancing value

2) Process controls for effectiveness and efficiency – this concerns primarily the organizational and production processes for cost reduction

3) Systems to support processes and development of value driven culture – this concerns the technology that support the above two.

Development of value focused culture can be different for leaders and for staff. The focus of leaders may be on education, establishment of managerial accountability for costs, effectiveness of compliance to targets, and establishment of model behavior in line with value-driven culture. These can each be translated into KPIs, such as variances on budgeted costs versus actual costs for a cost center under a particular manager for accountability on costs. The measurement, monitoring and rewarding of performance based on the KPIs can help create a value focused leadership team. Similar framework may be designed for staff for their cost conscious behavior and each of the components of the framework can then be translated to appropriate KPIs which are then linked to rewards and recognition for the staff.

Process controls for effectiveness and efficiency depend on all processes in the life cycle of a mine, right from planning to execution. Planning should involve prudent and effective budgeting process for operations. These budgeting processes can be activity based budgeting and zero based budgeting and the performance of the operations vis-à-vis the budgeted levels of expenses must be monitored, analyzed for variances and assessed for lack of compliances by the process owner. The other process control components typically are design of prudent requisitioning, inventory management, material consumption, wastage management and such others. Material requisitioning, for example, can then be studied for classification of materials and some of these costs can be optimized through just-in-time application or vendor-owned-and-managed stocks. The site-mix-emulsion explosives, for example, may be a vendor-owned-and-managed stock till the blast holes are charged for blasting in surface mines. These effectively reduce the carrying cost of inventory and may also reduce the maintenance of explosives magazine.

The processes must be supported by systems and technologies to result in performance improvement and process excellence. The technology must provide for accurate and on the run reporting of costs and its comparison with budgeted costs, so that variances can be effectively mitigated in short response time. The technology should also support evaluation of cost-benefit analyses of all performance improvement initiatives as well, and help in the assessment of variances along with establishment of accountabilities and indication of mitigation measures. The reports of costs controls and cost-benefit assessments may be disseminated at various levels of the organization depending upon the established communication policy and the process ownerships. Technology can facilitate that as well. Technology and systems can also help capture appropriate data that help keeping a tab on lead indicators, which indicate a business need for mitigation measures in anticipation of likely variances.

Performance Enhancement Cycle

The process of shareholders’ value maximization through process excellence is a continuous process and initiatives can be cyclical, each running parallel and sometimes even independent of each other. The components of the cycle can quite intuitively be –

• Planning the performance improvement initiatives,

• Setting targets,

• Measurement and monitoring of the progress, and

• Addressing and mitigating variances.

These cycles of performance improvement however get more and more complex with succeeding ones. The initial cycles tend to address the basic improvement opportunities, such as development of roadmap for value-driven leadership, establishment of governance structures, definition of organizational roles, responsibilities and process accountabilities, identification of common and frequent failures and methods to affectively mitigate and manage them, re-considering procurements and sourcing, and such others. In the more matured mining operations after the basic cycle has been completed and most initiatives in the cycle have yielded, the complexity of performance improvement initiatives rises. These initiatives then tend to look at broader resource planning, implementation of process inspections, precision in developmental needs for leaders and staff for value-conscious culture development, development of standard operating procedures for several key processes, risk management, asset utilization, equipment maintenance and such others. Further evolved mining projects and organizations then get into more complex cycle of continuous improvement, focusing on implementation of performance management processes, processes to incubate innovation, implementation of reliability methods for production and maintenance, real time monitoring of asset utilization, process timeframes, costs and variances, and implementation of complex enterprise wide resources planning and management systems.

Target Setting and Prioritizing

The performance improvement initiatives that essentially target shareholders’ value enhancement must begin with a target. This process usually tends to be challenging since there is always haziness on where to begin from. At the same time, during brainstorming for identifying opportunities, several realistic and unrealistic ideas may prop up adding to this intriguing question. Systematic approach to target setting and prioritizing, therefore, becomes significant and once such a roadmap of implementation has been accepted, the battle seems easier.

The estimated costs of production of an ore or mineral is first prepared according to ‘as-is’ assessment. These are then subject to all proposed initiatives for performance improvement through cost reduction and each of these initiatives need to be assessed from the costs and benefits perspective. Only the initiatives that are likely to yield net benefits are considered with an estimate of likely benefits being made in monetary terms. An aggregate of all the net benefits from these initiatives then measured against the ‘as-is’ costs will indicate the final estimated ‘to-be’ costs.

From the identified initiatives, with their respective costs and benefits, some tend to be high impact while others tend to be low and on the other hand there may be varying degrees of ease in their implementation. A prudent approach to develop a road map is, therefore, then to plot these initiatives on a three-dimensional matrix – impact of the initiative in monetary terms, ease of implementation and payback time. After the initiatives are plotted, the organization can choose to focus on low hanging fruits first before plunging deep into the initiatives which may have higher impact but take longer to implement.

A Short Case in the Point

During my stint in Zambia where the challenge was to re-operationalize a coal mine, one of the significant performance enhancement opportunity was to shorten the length of coal and overburden haulage distance through – a) creating a new haul road through the middle the leasehold, b) investing in extension of the conveyor belt to shorten haulage through dump trucks and c) relocation of in-pit service station so that it moved closer to the working faces of the mine. These initiatives could be all done simultaneously or taken after the other. Typically, for overburden removal, the key considerations are:

• Overburden removal by equipment is constrained by the preceding equipment along the removal chain

• A capacity constraint on a type of equipment means that total overburden removal cannot be increased without increasing the amount of overburden moved by that piece of equipment

• Trucks can either deliver overburden to the dump or the transit point from where the conveying system can be employed

For each of the scenarios then, a cost-benefit estimate is done that takes into account life-of-the-mine costs. A realistic estimate is also done for the ease of implementing the initiatives, which leads to prioritizing them. The analyses includes – Value driver tree that establishes the impact of the initiative on the final shareholders’ value; Control worksheet that presents the base case scenario for each othe initiatives and their cost benefit analysis; Capacity analysis that indicates the possibilities of splits in the overbudern flow through different routes and inidates optimal capacity; and Sensitivity analysis that gives the range on impact on shareholders’ value with each change in parameters considered for cost-benefit analyses. Based on these, the management approval for implementation is given and implementation is undertaken.

Conclusion

From Deloitte’s recent report on tracking global trends in mining for 2012, it is well accepted now that costs of mining have been going up across the board. New taxes and royalties are pushing up compliance costs; energy input costs are on the rise; capital expenditures are reaching a new peak; in some regions, investments in water, transportation and energy are expected to account for 82% of project spend; and global political uncertainty and currency volatility have exacerbated the situation. Under these circumstances, it can easily be stated that cost management will remain a critical priority. This is the time to institute long-term optimization and efficiency measures, which are targeted at shareholders’ value maximization through operational cost reductions and process excellence. Enhancing performance management through continuous improvement and sustained focus on cost reductions can help with the analysis of expenses on a per item basis, to enhance shareholders’ value.

Metal, Mining Cos Eye Global Scale - Quoted in the Economic Times

Two recent developments — the merger of Sesa Goa & Sterlite and Tata Steel’s plans to get into merchant mining — signify that Indian metals & mining companies are aiming to acquire a global scale. The Indian firms, however, have a long way to go before they could rival the likes of BHP Billiton of Australia or Vale of Brazil.

Tata Steel said recently it may look at merchant mining at New Millennium Iron’s Taconite Project in Canada coming up at a $4.4-billion capital cost. With over 100 years of experience in mining iron ore, coal and chromite, Tata Steel produces 14 million tonnes of ore from its captive collieries, iron ore mines and quarries spread over Jharkhand and Orissa. Similarly, post announcement of Sesa-Sterlite merger, chairman of Vedanta Resources Anil Agarwal has said the decision stems from a vision to create a mining major to compete with the likes of Vale and BHP.

In the public sector too NMDC, SAIL and NALCO have been eyeing mining and metals operations across the world. The move stems as much from a need to secure global mining assets as to achieve economies of scale in mining operations to serve their captive needs. However, these moves have failed to impress metals sector watchers and analysts who feel, in scale and size Indian companies have a long way to go before they can even dare to rival the likes of global mining biggies.

Dipesh Dipu, director, Deloitte India, who is a mining consultant, said: “The move is linked to raw material security. Thus domestic metal companies with downstream interests are now acquiring mines. The mining value chain captures a larger value as commodity process go up. It has more to do with profitability rather than scalability.”

“Also, mining is more global now than ever before. Due to problems in mining in India, companies are being forced out to resource-rich areas like Canada, Australia or Africa which have welcomed Indian investment in mines,” Dipu added. “Also, mineral assets give companies better control on input costs, and hence, certainty in pricing,” he added. Jagannadham Thunuguntla, strategist & head of research at SMC Global Securities, feels Indian companies are nowhere near global majors like BHP Billiton or Rio Tinto in terms of scale and size, despite recent attempts to acquire mines abroad.

Why it isn't enough to just raise coal output - Quoted in the Business Standard

The recent prescription issued by the Prime Minister’s Office (PMO) to rid mining major Coal India (CIL) of its many ailments has missed diagnosing a crucial affliction -- logistics.
Under pressure from power producers, who were severely hit last year by non-availability of the fuel, the PMO last month had asked CIL to supply to power plants at a higher, 80 per cent commitment level, creating sudden and huge delivery pressure on the miner. CIL will require 123 million tonnes (mt) of additional coal for the next financial year, ending March 2013, to successfully sail through the changed demand scenario. Production in 2010-11 was flat, at 431 mt, and pithead stockpiles at the end of the last calender year about 50 mt.

While production and import targets can be met, the challenge is in transporting the coal from pitheads and ports to the power plants. As late last year, when a combination of production woes and logistic issues brought a third of India’s 81 power plants, with a total capacity of 87,000 Mw, to the brink of closure. With the majority of coal being transported through rail, the coal ministry had identified two chief reasons for the recent crunch at power stations -- lack of adequate rail connectivity to major coalfields and unavailability of rakes. Given that production is expected to rise, alongside an increase in imports, there is likely to be additional pressure on the rail network to deliver.
TRADING BLOWS

Railways and CIL need to coordinate to create vital infrastructure to transport coal, but a blame game is on

* Coal India requires an average of 200 rakes daily for offtake but availability is less than 180

* Coal ministry says lack of adequate rail connectivity to major coalfields is also an issue

* The shortage causes daily loss of 50,000 tonnes, creating fuel crunch for power stations and pushing up stockpiles

* The railways blames CIL for not transporting coal to rail sidings; also criticises the miner's road transportation network

* 180 rakes were available daily between August and October but CIL loaded only 130 rakes, says the rail ministry
“Not much has happened in coal transport infrastructure recently. The connectivity points to bring coal to the main railway network are missing, and there is not enough scope on the main line itself. Also, port-to-plant linkages haven’t sufficiently expanded. There is a major bottleneck in terms of this infrastructure,” said Prakash Sharma, a coal analyst with Wood Mackenzie.
CIL officials are also concerned about the congestion on main railway routes, but their larger worry is that vital transport links into new mining areas are yet to be established. “We practically depend on the railways for transporting coal, and we are willing to give them money to build links. Money is not a constraint. But we cannot go forward without them,” an official said.
Barclays Capital analyst Shiyang Wang said: "India's coal transport infrastructure will not improve any time soon. India is experiencing the same issue as China, where the coal production regions in the east are far away from the consuming regions in the south and the southwest. Railway and rail wagon additions are likely to develop but will lag the production of coal, even though coal production is already so far behind due to delays in environmental and forest clearance approvals. Port additions are also lagging the target; therefore, imports are not expected to bridge the gap between supply and demand."
In particular, CIL officials have identified three projects — the Tori-Shivpur rail link in North Karanpura (Jharkhand), Gopalpur-Jharsuguda in the Ib Valley (Orissa) and Baroud-Bijuri in Mand-Raigad (Chhattisgarh) — that could enable the movement of up to 140 mt to end-users. The current domestic shortage is 86 mt.
Railways officials in charge of freight transportation say clearances are delaying these lines. “For the Tori-Shivpur rail link, the (Union) ministry of environment and forests (MoEF) gave us permission to set-up a 50-km line,with no stations en route and no night trains, which doesn’t make sense. We have decided to approach them again. As for the other two projects, CIL is yet to complete their own studies and finalise funding,” an official said.
The mid-to-long term risk from the lack of infrastructure is significant, agree both CIL and the railways, are undertaking third line works to help evacuate extra traffic, and some other sanctioned works, such as loops and signalling, are being completed, which will help the network. We are also running long-haul trains, basically two trains joined, that will allow us to carry more freight,” a rail official said.
It is also pushing to provide more rakes to CIL, which has often complained that the lack of rake capacity dampens its offtake. Compared to the average of 180 rakes per day that the railways offered to CIL last year, it was able to supply 198 rakes this January and hopes to take it beyond 200 during February.
At the same time, Indian Railways holds CIL responsible for not being able to manage loading with available rakes. According to IR, a key factor retarding transportation of coal from CIL sources by rail has been the inability of coal companies to transport from pithead to rail sidings, due to lack of transportation infrastructure insikde the mine areas.
But with the prospect of increased coal imports (73 mt of this increased demand will be brought in from abroad), the dismal coal handling capacity of all major ports in India, currently at 54 mt, will be troublesome for the sector. Analysts predict the utilisation rates of coal handling terminals at Indian ports will continue to remain high, at over 90 per cent, while the ideal average is around 75 per cent.
“Import infrastructure in India is certainly not to the tune of projected demand for imported coal,” said Dipesh Dipu, director at accounting and consultancy firm Deloitte Touche Tohmatsu. “The lack of a coordinated approach in India is likely to have an impact on coal imports, which are also likely on the exporting countries’ side. However, acquisitions in these countries are being planned with simultaneous investments in inland transport and port facilities.”
To add to the problem, cargo growth at Indian ports over the next five years through 2017 is likely to outpace growth of port handling capacity. While growth of cargo will grow at a compounded annual rate of eight per cent, from 570 mt this year to 899 mt by 2017, capacity is likely to grow at six per cent to 947 mt over the same period.
The PMO’s current strategy may prevent CIL from sliding into further illness, but unless it addresses the problem of logistics, the world’s largest coal miner may never be fully cured.

5% import duty on coal may go - Quoted in the Mint

The coming Union budget could scrap the 5% import duty on coal meant for power projects—a move that will help meet demand for the fuel in a country that is perennially short of it and where 70% of power is still generated from it.
“The announcement will be made in the (Union) budget. Given the coal shortage in the country, this step had to be taken,” said a senior government official who spoke on condition of anonymity.
Indian energy producers consume 78% of the total domestic output of coal.
“We have asked for it (the cut in duty) given the shortage of coal in the country. We may get it,” added a senior power ministry official who also did not want to be identified.
The finance ministry’s views on the duty cut could not be confirmed because it is in quarantine during the last phase of preparations for the Union budget, which will be presented on 16 March.
The size of the market for imported coal that goes into power generation in India is around 80 million tonnes (mt) a year. The demand-supply gap is expected to touch 450 mt by 2017, which is largely expected to be met through imported coal. It takes around 5,000 tonnes of coal to generate 1 megawatt of power.
“The import duty waiver is likely to bring relief to power projects, particularly those... where the bid clauses restrict pass-through of high imported coal costs to the power procurers. The cost of procurement of imported coal has been high and is rising, and the import duty on a higher base has led to a compounding effect,” said Dipesh Dipu, director (consulting, energy and resources, and mining) at audit and consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd.
Doing away with the import duty on coal will also help state-owned Coal India Ltd (CIL), which was recently asked by the Prime Minister’s Office (PMO) to sign fuel supply agreements (FSAs) to solve the ongoing fuel crisis. An FSA guarantees coal supply and is a legally binding document that will, in this case, require CIL to supply the quantum agreed upon. As a part of the relief package, the PMO stated, “In case of any shortfall in fulfilling its commitment under FSAs from its own production, CIL will arrange for supply of coal through imports.”
Dipu added that while it is clear that CIL will not supply imported coal at the same price at which it sells domestic coal, the duty cut could see the cost of imported coal fall and, consequently, help the state-owned company find willing buyers.
CIL committed to supply 347 mt of coal to power generators in 2011-12 and by 31 March, the end of this fiscal, it will have supplied 320 mt. It has committed to supplying 452 mt in 2012-13. India has 75 thermal power projects that depend on CIL for supplies.
Other incentives
The budget may also withdraw the 5% import duty on liquefied natural gas that is used as fuel in power generation projects to offset sharp spikes in the price of imported natural gas. This is a long-pending demand of the power ministry, although the finance ministry has chosen to ignore it in earlier budgets.
The power ministry has also asked for the removal of withholding tax on overseas investments in power in an attempt to attract investments. Withholding tax is charged on the repatriation of income from equity or debt. India’s power sector is already struggling with a shortage of capital, with the power ministry estimating that $400 billion (Rs. 19.6 trillion today) of investment will be required during the 12th Five-Year Plan (2012-17).
The power ministry has made 47 demands of the finance ministry, of which 17 are related to taxes.
The power ministry also wants finance minister Pranab Mukherjee to extend the tax holiday on power projects. The tax break under section 80-IA of the Income-tax Act ends on 31 March 2012, making any power project that starts operating after that date ineligible for the benefit. The law allows a developer to claim tax exemption of up to 10 years within the first 15 years of a project’s commissioning.
The budget may also announce incentives for promoting the use of energy-efficient appliances and light-emitting diodes for lighting.