JOHANNESBURG (miningweekly.com) – Hugely lagging productivity in Anglo American’s South African thermal coal operations is coming under intense scrutiny and head office roles at the company's Kumba Iron Ore may be cut by 40%.

In response to a Mining Weekly Online query on the accuracy of the claim that productivity on Anglo’s coal mines in South Africa is 50% below productivity in Anglo’s coal mines in Australia, Anglo American CEO Mark Cutifani said the 50% figure actually understated the situation.

“Unfortunately, it’s a bit worse than that,” he said.

And on the Kumba head office reduction, he said a meeting with employees had taken place recently to discuss the prospect.

On badly lagging coal productivity, Cutifani said the use of different technologies was significant and in Australia, longwall mining was an astounding success.

Coal seams were also more complex in South Africa.

“So we’ve got to be more innovative,” Cutifani added.

In the last quarter, productivity on Anglo’s South African coal mines had improved 5% to 7% on a like-for-like basis but a lot more had to be done.

“We’re certainly focusing on doing much better than that in 2015 and we’ll start to see benefits come through.

“We can close the gap. The one thing I have always said about South Africa and South Africans is that it’s a ‘can do’ country with a ‘can do’ population who say ‘we’re making a plan’.”

The Anglo head has a huge productivity ambition of an 80% improvement by 2017, especially important in the light of the current commodity price headwinds, which are knocking the company off its return on capital employed (ROCE) target of 16%.

While on 2013 prices the company would be heading for a 16% ROCE, it is heading for a 12% ROCE as a consequence of the lower prices.

Capital has been cut by $500-million to $1-billion across 2014 and peak net debt is falling as a consequence of the company’s better operating performance.

“Our diversified portfolio is turning out to be a real strength. Suddenly, everyone across the industry wants to be a diversified miner,” he commented.

The restructuring of existing operations, changes to the portfolio and the efficiency improvements being driven gives him confidence of an 80% or better improvement in productivity in the next two years.

The assets being disposed of by the company tend to be the more labour-intensive and high-cost assets within the portfolio.

Cutifani says that while the company is not putting people out of work, it is reducing the numbers of people employed through a 15% cut in its portfolio size. By 2017, it is estimated that Anglo American will employ 60 000 fewer people and have a total global employee and contractor portfolio of 102 000.

Simultaneously, because of the focus on increased production at the major assets, a growth rate of 7% a year in the next three years will materialise.

Not factored into the calculation of the 80% improvement in productivity is the company’s work on innovation under Anglo group director technical and sustainability Tony O’Neill, who launched the company’s ‘future smart’ initiative in Las Vegas last month.

“We’re adding strings to our bow as we go and the improvements in productivity will be driven by the things you can touch and feel today.

“Very simply put, we’re replacing high-cost production across the portfolio with low-capital, low-cost, highly competitive production from our bigger assets. That’s the nature of change we’re driving across the portfolio,” Cutifani said in response to Mining Weekly Online.

On dealing with the iron-ore and thermal coal over supplies, he added that there was a targeted overhead reduction for the iron-ore company following Kumba CEO Norman Mbazima’s recent meeting to inform staff of the company’s intention to reduce the employee complement at the company’s head office in Pretoria.

“We are talking about material change in our head office structure and continuing to improve our efficiencies at Kumba,” he said.

Encouraging from Kumba were the nigh-30% efficiency improvements that had emanated from the introduction of the new operating model.

What had to be done in South Africa was a turning around of the trend of prices increasing at the rate of inflation and the challenge in iron-ore, thermal coal and platinum was to come in under inflation and show more than 6% real cost reductions across the South African portfolio.

“That’s a critical task for us as a team in 2015,” he said.

Beyond that, what had been learnt in reducing costs by 21% in Australia’s metallurgical coal operations had to be applied to improve the productivity of mining thermal coal in South Africa.

Four-million tons of production had been dropped out of the metallurgical coal market through the closure of a mine, the placing of another on care and maintenance and the restructuring of a third.

“In our view it is very important to be disciplined in the market. Some are not so disciplined in our market, I’m afraid.

“We take production off if we think we’re going to destroy value or margins. Consistent with that, we are improving productivity and two out of the top three operations in Australia are ours.

“We have indicated that a couple of the coal assets in Australia will be considered for sale. We have also indicated that we’re open to talk about some of the coal assets in South Africa. It’s early days. We’re just starting to talk to stakeholders about domestic supply on the thermal coal side,” Cutifani added.

Kumba told the investor day that the Sishen mine remained on track to increase production to 35-million tons in 2014, 36-million tons in 2015 and 37-million tons from 2016.

The JSE-listed company said it was assessing Thabazimbi iron-ore mine as part of the portfolio and planning to reduce stay-in-business capital expenditure by 20% and a further 10% in 2015 and 2016.

It would cut exploration, technical and project studies expenditure by 50% and reduce head office roles by 40%.