Digging for the root of our miners' woes

Australia has some of the best mineral deposits in the world but they are being horribly mismanaged.

That leads us to an obvious question: are the chief executives of our two biggest miners, Andrew Mackenzie at BHP and Sam Walsh at Rio Tinto, merely scratching the surface in their attempts to change their companies?'

Certainly, WA Premier Colin Barnett thinks BHP is wrong on iron ore.

And now after surveying some 60 top mining executives, Ernst and Young and the University of Queensland say a different management approach is required by most of our big miners -- not just BHP and Rio Tinto.

The Ernst and Young report comes after the Boston Consulting Group found that our mines, on a cost basis, are among the worst managed in the world. Australia would need to slash a third from its cost base to match its next nearest competitor (Miners need to dig themselves out of a cost sinkhole, May 30).

Cost reduction is exactly what Mackenzie, Walsh and the other big mining CEOs are doing. They are also lifting their volumes at a time of low prices to help in the process. 

Without naming the companies, Ernst and Young and the University of Queensland, after talking with executives of the big miners, are saying that BHP, Rio Tinto, Anglo American, Xstrata and the other big miners have a much deeper problem to solve.

 “We believe more still needs to be done. Many of the executives we interviewed believe that they are soon to reach a ceiling on cost reduction … and the productivity gap has not yet closed”.

“Most participants acknowledged that the easy work has been done and that what needs to be done now is more complex.

“There is an overriding need to ensure that each element of the business, from the resource in the ground, to the product being delivered to the customer, is optimised -- not just on its own but as part of a business system.”

In my words, we are therefore looking at a complete change in culture being required in our big miners. That's no easy task for a CEO, although Andrew Mackenzie has taken the first step by telling his employees and shareholders that iron ore prices are not going to recover in the medium term so the market will not solve the problems.

Let me extract a few observations from the mining executives quoted (but, with one exception, not named) in the report:

• “Labor productivity may have declined just because we've made team sizes too big, and we haven't given the supervisors or superintendents the right leadership to deal with this.”
•  “High employee turnover levels and an inexperienced workforce have had an adverse impact on equipment utilisation levels. Competitive advantage has been lost due to lack of knowledge of how to best optimise resources.”
• “When you start to talk about fleet utilisation in the developed world, if we're getting about 85 per cent, we're doing well. If you go back 10 or 15 years ago, people were pushing the 90s, the low 90s. We've lost 5 per cent or 6 per cent on fleet utilisation.”
•  “Our industry is damned by the fact that our spending on innovation is one-tenth of the petroleum industry. ... If we don't start to bring innovation back ... the major diversified will be subsidiaries of General Electric or some other conglomerate that has still got innovation in their vocabulary.”
• Mark Cutifani, chief executive of Anglo American, was quoted as saying: “Although mines were scaled up to meet greater demand, inexperienced mine managers were not provided with the tools to manage this increased complexity. The scale of the mega mine and the related complexity resulted in an increased pressure on functional departments to manage these burgeoning workforces”.

The executives who were interviewed had many anecdotes about the lack of communication between the functional departments and how a silo mentality has crept into management of mining companies.

• “How wonderful would it be if the drilling operator knew that by drilling the right hole size and the blaster knew that by blasting it right so it's not oversized, that there will be no downstream impacts. That by not doing it right it can impact the shovel operator and the truck driver. The challenge is trying to get them to understand how they all fit in.”

It seems that the big miners have to address the management complexity and silos they have created by increasing production; engage their work force (that may require different executives); and develop innovation. These are much more complex tasks than traditional cost cutting and volume increases.