Ross Middleton on boosting productivity, returns

“Productivity is the prime imperative for the mining industry of the decade or decades to come,” Ross Middleton, a partner with the Boston Consulting Group (BCG), told attendees at Mining Magazine’s “Optimizing Mine Operations” conference, which ran from Sept. 30 to Oct. 3 in Toronto.

Middleton — who started as a geologist before joining the global management-consulting firm, where he focuses on optimizing large capital project strategy, improving operations and integrating technology — says miners should rethink productivity in order to create more value.

Before 2002, returns were barely above the cost of capital, he says, arguing the operations that were making money were doing so, mainly because they had great orebodies.

From 2002 to 2008, productivity and returns in the industry increased on the back of higher commodity prices, driven by China’s rapid growth and metals consumption, which offset higher unit costs.

“The China miracle, as we might perhaps want to call it, was a price-driven event. And in this price-driven event we’ve adopted a ‘growth at all costs’ mindset,” Middleton said.

But the industry is no longer reaping the benefits of higher commodity prices, leaving companies with shrinking margins, high costs and weary investors.

“The honeymoon period is over … and many of us don’t have the luxury of a beautiful orebody to enjoy. So we are in a tight spot,” Middleton said.

He noted that the industry’s weighted average annual total shareholder return (TSR) was 16% from 2002 to 2012, which was good for long-term investors as it exceeded the S&P 500, but not for short-term investors, who saw an average TSR of zero from 2009 to 2012 and negative 20% in 2013.   

But adapting to the environment and improving operations has been tricky for companies, Middleton admits. “It’s difficult to pivot on a dime, when you got a whole infrastructure set up around this growth agenda and ‘growth-at-all-costs’ mindset.”

But understanding productivity will help with the change. According to BCG, the best practice productivity programs in highly productive mines have three components: effective management, efficient physical assets and excellent people.

Simply put, effective management plans, controls and monitors company resources. Management relies on integrated planning, governance and risk management, and tracks performances and uses real-time data to help resolve any major operational issues.

To have an efficient asset, a company must fully understand the orebody so that it can pick the best mining method, mine and plant equipment to boost throughput. It also means looking for ways to improve the operation by eliminating non-value added activities and revising the mine plan according to market conditions.

Lastly, employing, training and motivating the right people to run assets and management teams — where there is accountability and transparency — will help improve productivity, Middleton said. 

If companies launch a productivity program, they should consider all the factors that drive the net present value (NPV), including throughput, price realization, mine life, operating expenses and capital. And they should aim for an NPV improvement, Middleton said. 

“As leaders, if you set this type of ambition, the teams that follow will understand that they need to be bold and they can’t be incremental to achieve 20–30% changes.”

While conceding that most mines might fall short of that goal, Middleton argued it will shift the mindset from eking out 2–3% annual gains to achieving a step change.