IBP and Mining

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IBP and Mining

Some common ways Integrated Business Planning (IBP) is or could be used by the North American mining industry to increase operational efficiency include conducting extensive what-if analysis, maximizing performance and minimizing cost through process integration, and process optimization.

How IBP Increases Operational Efficiency

What-if Analysis

  • Integrated Business Planning (IBP) requires extensive what-if scenario planning across various planning horizons and across the entire organization.
  • This extensive what-if scenario analysis and planning helps improve operational efficiency as new questions lead to new answers, leading to unmatched value in every aspect of the value chain.
  • A mining company that applied IBP in its operation was able to identify and answer several what-if questions such as: "What if we need to move from one raw material to another, over the next several years? What if we want to expand into new opportunities. Where should we be investing? What if we make changes in design, materials, and production. How will it affect short- and long-term planning? What if new capital expenditures are required today and in the future? What if we made acquisitions instead of more capital expenditure projects?"
  • These what-if scenarios enable mining companies to find optimal solutions as well as to optimize existing business processes.
  • In many cases, "what-if scenario analysis is what allows companies to integrate their supply chain plans with finance, manufacturing, procurement, sales, marketing, etc."
  • This, in turn, helps maximize operational efficiency in many ways such as reduction of working capital; optimization of logistics, procurement, and capacity; improved collaboration, risk mitigation, forecast accuracy, and planning agility; and reduced planning time frame.

Minimizing Cost and Maximizing Performance

  • Another way IBP could help the North America mining industry to increase operational efficiency is by simplifying "the costing of each production line by pulling together data from multiple sources automatically without the need to rely on spreadsheets from each department."
  • Also, IBP makes budget standardization across various departments easy and seamless through improved workflow processes and organization, creating transparency and control.
  • IBP also provides "clear visibility into variables such as labor and machinery in order to accurately match capacity with resources required for production."
  • IBP also provides visibility into the supply chain process, making it easier to understand decisions that negatively impact KPI adherence.
  • Mining operations are generally complex. IBP creates a single planning and optimization solution that "helps to increase the ability to understand decisions, and how they lead to KPI overall adherence."

Process Optimization

  • Integrated Business Planning can enable coal producers in North America to optimize the entire operation, starting from mine production through optimizing demand, supply, and financial planning.
  • IBP takes into consideration every customer nuances such as considering each customer's preferred product mix as well as which customer(s) to supply at any given time to maximize operational efficiency.
  • A mining company that changed from normal S&OP approach to IBP noted that it started incorporating specific steps into its decision-making process and "no decision is taken until all participants have agreed — this includes sales, marketing, production, logistics and finance." This led to about 80% decrease in planning effort compared to previously.
  • IBP helps decreases the chances of duplicate processes that sometimes arise from siloed operations, minimizing costly inefficiencies and keeping projects on budget.

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Mining Industry Challenges

Some industry challenges in the North American mining industry include commodity price volatility, environmental challenges, aging labor force, and pressure and challenges adopting new technologies.

Challenges North America Industry

Commodity Price Volatility

  • Although the price of gold has been on the rise recently, prices of other commodities such as copper are lower than five years ago.
  • Companies in the industry cannot consistently predict demand or price movement which makes it difficult for companies in North America "to plan income and therefore expenditure. Recent disruptions in commodity prices have led to many companies having to close down operations or make serious cuts in the size of their workforce."
  • To mitigate the challenges posed by price volatility, companies are perpetually looking for ways to improve efficiency and get more out of their production processes.

Environmental Concerns

  • Concerns about the environmental and climate consequences of mining are a big challenge in the North American market.
  • In the past four years, deregulations by President Trump in the US has led to growth in the mining sectors. However, political uncertainties about the country's future, especially with a Presidential election in November, may hamper the development of the US coal mining sector if President Trump is defeated.
  • The mining industry in North America is also trying to reduce its carbon footprint and improve water usage efficiency.
  • In Canada, "Mount Polley and other dam failures have sharpened mining-sector focus on improving tailings management through safety reviews and emergency management plans."
  • The public is more sensitive about environment and climate change issues and is more resistant to the idea of granting companies mining license. Hence, companies are having to pay more attention to sustainability, including employing a sustainability manager and publishing sustainability reports to obtain the social license to operate.

Aging Labor Demographics

  • A key challenge in the North American mining industry is that the workforce is mainly compromised of baby boomers who are aging and retiring. The industry is struggling to attract young people into the workforce.
  • To attract young people, the industry is emphasizing how mining is becoming technology-focused. The industry is also exploring and incorporating new technologies such as blockchain, artificial intelligence, and robotic process automation.
  • According to industry analysts, adoption of these new technologies will "likely translate into concerted efforts to retrain people to use technology or redesign jobs to take better advantage of people’s existing skills."

Exploring New Technologies

  • The mining industry in North America is bracing up for technologies that may disrupt the industry and are under pressure to innovate.
  • According to Deloitte, "in a world of deeper mines, more complex ore bodies, rising energy costs, social and geopolitical risks, infrastructure shortages and resource nationalism, mining companies remain under exceptional pressure to control costs, heighten efficiency and improve safety performance."
  • As noted above, mining companies are already exploring technologies such as blockchain, artificial intelligence, and robotic process automation in order to find ways to improve efficiency.
  • Companies are also using data analytics to "improve the efficiency of systems, from pit to customer. The aim is to create an information layer, or digital nerve center, which brings together data across the mining value chain in multiple time horizons to improve planning, control, and decision-making."
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SSR Mining Challenges

Some challenges facing SSR Mining include market price volatility, transportation challenges, and employee/labor issues.

SSR Mining Challenges

Market Prices Volatility

  • A key challenge for SRS Mining as with most of the companies in the mining industry is the volatility of commodity prices. SRS mining is mainly impacted by gold and silver prices and to a lesser extent by zinc and lead prices.
  • For instance, SRS Mining "revenue in the fourth quarter of 2018 decreased by 4% relative to the comparative quarter in 2017, due principally to lower gold and silver prices."
  • The volatility in prices makes it difficult for SRS Mining to plan income, expenditure, and future investment. SRS Mining generally weighs investment based on current prices but this can be risky as commodity prices may decline, but it can also result in the opportunity cost of missing out on an investment that may be valuable if prices increase in the future.
  • For instance, SRS Mining evaluated the potential for an underground mine at the Pitarrilla project and although their evaluation confirmed it was a technically feasible and economic project, they didn't proceed with the project in 2018 because the potential return is below its investment thresholds at current metal prices.

Transportation Risks and Challenges

  • SSR Mining is subject to a number of transportation challenges and there can be no guarantee that transportation risk won't affect profitability.
  • According to the company, its "facilities at the Seabee Gold Operation depend on supplies of consumables (including diesel, tires, sodium cyanide and reagents) and capital items to operate efficiently, many of which are delivered to site across a seasonal ice road. If we experience prolonged disruption to the delivery of such consumables, our production efficiency and ability to effectively complete capital projects requiring such deliveries may be reduced."
  • Also, SSR Mining "ore mined at the Chinchillas property is loaded onto road trucks and transported approximately 45 kilometers to the Pirquitas processing facilities. Transportation of such ore is subject to numerous risks including, but not limited to, roadblocks, terrorism, interruption by domesticated and non-domesticated herding animals, theft, weather conditions, environmental liabilities in the event of an accident or spill, inability to transport ore in oversized loads, personal injury and loss of life."
  • In the fourth quarter of 2018, transportation challenges and timing of shipments contributed to lower gold sales, approximately 3,000 ounces lower, than the comparative quarter despite the fact gold production was similar in both quarters.

Employee/Labor Challenges

  • SSR Mining's efficiency and productivity are dependent on its employees and this can be adversely affected by a deterioration in the company and employee relationship. This is significant because the company's relationship with its employees is sometimes subject to "changes in the scheme of labor relations that may be introduced by the relevant governmental authorities in the region it operates.
  • SRS Mining non-management employees at Puna Operations are unionized and subject to a collective salary agreement. In early 2019, the company and the workers were in salary negotiations and the company faced an illegal strike that disrupted activities in January 2019 and may be subject to additional strikes in the future.
  • According to SSR Mining, "there can be no assurance that negotiations in accordance with our collective bargaining agreement will not prove difficult or that we will be able to renegotiate the salary agreement on satisfactory terms, or at all. The renewal of the salary agreement could result in higher ongoing labor costs, which could have a negative impact on our future cash flows, earnings, results of operations and financial condition."

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Mining KPIs

Some common KPIs used in the North American mining industry include MineLens Productivity Index, Mining Equipment Performance Index, Labor Productivity Index, and Capital Productivity Index.

North America Mining Industry KPIs

MineLens Productivity Index

  • The MineLens Productivity Index (MPI) measures aspects of productivity that can be controlled by the operational manager. The aspects under the control of the management are labor invested, capital invested, spending on goods and services, the production processes it operates, and the way it organizes mining operations.
  • Factors that affect productivity by that are not under the control of management such as the depth of the ore body and the ore grade that typically worsens as the ore is continuously exploited are not measured. Factors such as regulatory requirements that can directly or indirectly affect productivity but that are outside the control of the management are also excluded.
  • MPI was developed by McKinsey and is based on "the well-established Cobb-Douglas production function, used to measure productivity in national economies."
  • According to McKinsey, "the MPI comprises four elements: physical mining output, employment at the mine site, the value of assets at the site, and nonlabor costs. Physical mining output is measured as total material moved, so changes in ore grades, stripping ratios, or commodity prices don’t affect the MPI."
  • The MPI is a good metric because it measures the efficiency of production and the ability to do more with less.

Mining Equipment Performance Index

  • Mining Equipment Performance Index (MEPI) measures "the efficiency of open cut mining operations by comparing how much material mining equipment is moving from one period to the next."
  • The MEPI is based on performance data from various equipment such as hydraulic excavator, rope shovel, front end loader, dragline, and truck performance.
  • This is a good metric for measuring operational efficiency because the "productivity and efficiency of mining equipment are among the most important factors contributing to unit mining cost, and measuring and benchmarking them is one of the best ways of identifying the possibilities of improvement."
  • PwC provides case studies showing that "benchmarking of equipment performance has generated significant gains in some quarters and served to highlight diminished performance for others."
  • According to PwC, "companies serious about both cost control and productivity need to have a greater focus on the efficiency of their equipment. This means stepping beyond short term cost reduction initiatives and a preoccupation with extra tonnes leaving the mines. It’s about what’s happening inside the gates that is the key to arresting the industry’s productivity decline."
Labor Productivity Index
  • Labour Productivity Index (LPI) measures how efficiently labor input is used for generating real output. It is a direct measurement of the rate of change in output per employee engaged in the mining activity
  • The productivity index can be found by "dividing the value added by the total number of staff on the payroll."
  • This index is a good metric for measuring operational efficiency because it can identify trends in labor productivity and show how efficiently labor is being used in the company.
  • In the mining industry, Ernst & Young notes that labor productivity declined by about 50% between 2000 and 2013.

Capital Productivity Index

  • Capital Productivity Index (CPI) in the mining industry measures "how efficiently capital is used to generate output. It reflects the joint influence of labor input per unit of capital used and multifactor productivity (MFP); the latter reflecting the overall efficiency of production."
  • Analysts from PwC and Ernst & Young state that capital productivity declined sharply in the mining industry between 2000 and 2013. The decline reached the bottom in 2016 but has since rebounded, rising by nearly 60% from its 2016 low.
  • This index is a good metric for measuring operational efficiency because it can identify trends in capital productivity and show how efficiently capital is being used in the company.