By: Steve Burks
South Africa’s minerals sector could be falling short of achieving its full potential owing to a failure first to correctly identify opportunities to increase stakeholder value and then to effectively bridge the gap between strategic business plans and implementation of the potential improvements identified.
In this article, the first of a four-part series, I focus on operational efficiency in line with the typical approach of mining companies to business planning. In the second, third and fourth articles, I will discuss the latest strategic optimisation techniques, the nonmining steps of an optimisation, and alternative approaches for operators that aim to combine the implementation of long-term plans with short-term gains.
The yearly planning cycle for many mining operations and projects is a lengthy process. It typically starts with the mine’s senior executive team reaching consensus on the objectives. Next, quantitative targets are set using metrics such as the notional cash expenditure for operations or the internal rate of return for projects. Finally, this strategic evaluation is followed by an analysis of the recent historical operating results of each major department of the operation, for example, geology, mining, processing and marketing.
Once complete, these evaluations are then used to develop quantitative targets for the following year. Each department then sets its own objectives in line with the strategic targets and metrics set by the executive team. These individual plans are combined into an overall business plan aimed at ensuring that the departmental plans are ‘consistent’ and the overall financial outcome is acceptable to stakeholders.
This all sounds thorough and well thought out and, in an environment characterised by limited change, either in the orebody or in most external macroeconomic factors, this process works well. However, in an environment that has a higher rate of change, the process presents some fundamental weaknesses that ultimately limit optimisation abilities.
Most importantly, the objectives and financial metrics set out by the executive team can often be in conflict with the views and priorities of other stakeholders and external observers. This is because these objectives are often not understood in the same way, and there is often no benchmark process for matching corporate and departmental objectives. This often results in a failure to recognise that departmental objectives must be aligned carefully, as each department is usually highly dependent on the others.
While yearly planning usually incorporates some formal optimisation discussions and agreements, financial optimisation is usually limited to a few of the mining steps in the process. Openpit shells and phases and cutoff grade optimisation, for which there are established mathematical techniques, are the most frequent.
In other sections of the value chain, such as metallurgical processing, the process normally focuses on maximising technical parameters like metal recovery. However, this will not always yield the optimum financial result.
Following the development of yearly plans, mines often spend much time and effort to increase operational efficiencies to match or exceed this plan. Usually, these initiatives focus on maximising labour productivity and equipment availability and minimising costs.
The complexity of models and a lack of suitable software to process the data mean an overall synchronised optimal solution for the entire value chain can never be achieved. Coupled with the fact that efficiency studies do not always take sufficient note of either the strategic optimisation conclusions or the executive committee’s objectives, they sometimes do not yield the expected improvements when they are implemented.
There are, however, significant opportunities for improvement. Specifically, I suggest an amended approach with the following steps:
•Optimise the whole value chain simultaneously, based on recent operational results or business plans.
•Use the opportunities identified to inform the conventional yearly planning process.
•Develop strategic objectives but also departmental targets that are aligned with the initial optimisation exercise.
•Develop and implement operational plans for each department that maximise efficiency, while also achieving the strategic improvement targets. Implementation is likely to include an iteration of the optimisation step after the efficiency improvement plans have been developed.
Operational efficiency starts with optimal and efficient planning. By streamlining the process and including the whole value chain from the start, many of the limitations of the current process will be overcome. The result is a far more integrated and aligned plan that can only result in improvements in the short term and sustainability in the long term.
Steve Burks, an Associate Director of Johannesburg-based MAC Consulting, a management consulting group specialising in mining, oil and gas, financial services and telecommunications suggests that this could be the case, and offers some suggestions about how the situation might be improved. Prior to joining MAC Consulting, Burks had completed 30 successful optimisation studies over the past four years in Africa on behalf of Australia’s Whittle Consulting. This in turn followed nearly 20 years spent working for Bateman Engineering where Burks was involved in feasibility studies, project delivery, technology commercialisation, change management and business acquisitions and start-ups for mining related operations and projects in many countries.