TORONTO (miningweekly.com) – With short-term objectives taking precedence over long-term planning and strategy, the shortcomings of senior management and poor CEO performances often exacerbate and sometimes introduce many of the difficulties dealt with by mining companies.

That was what mining industry veteran Larry Smith recently told an audience at the Canadian Institute of Mining’s management and economic society in Toronto, saying that poor management continued to haunt prospects for mining companies.

Working as a mineral project evaluations and strategic analysis consultant and educator with more than 40 years’ experience in the industry, having most recently worked with Barrick Gold, as well as with Vale, Inco, BHP Billiton, Rio Algom and SNC-Lavalin, Smith stressed that a critical, but perennial problem for the industry had been its failure to control capital expenditure at remoter sites, particularly those located in mountainous or inhospitable regions within the developing world.

TIME IS MONEY
Scheduling at these sites, particularly during construction phases, was often overshadowed or overlooked as capital savings became the primary focus. Unfortunately, scheduling lapses led to disruption and work delays, causing more disruption and increasing costs still further.

Flawed scheduling also left contractors waiting on sites for longer, adding yet more costs. “So if you’re not focused on the schedule, then fire whoever is running the project and bring in someone who cares,” Smith advised.

Bidding processes continued to favour the lowest offers even if other, more expensive bids would be better for the project over the long term. Corners were cut in the worst cases, embedding problems that to correct needed expensive reverse engineering or retrofitting.

Bidding issues were also becoming increasingly common within companies as project teams competed against each other to reduce their costs profiles in the hope of winning management's attention and the release of precious funds.

In addition, many management teams continued to ignore negative results within feasibility studies. “If the answer of a feasibility study is no, then don’t go back and ‘value engineer’ so the answer becomes yes,” Smith said. “You can get an answer that says ‘yes’ on paper, but it will quickly become apparent that it’s still a ‘no’ when you get out there and construct.”

The mantra “bigger is better” had been a hindrance for many projects, with management teams falling into the trap of thinking that a larger project would simply be a smaller project scaled up. But large operations had specific problems with tendencies to take on a life of their own.

“As the project grows bigger, the number of interfaces grows exponentially and more management and skilled people are required. But what are we short of? Skilled people, of course,” Smith pointed out. “So we end up with a monster trying to do its own thing, with unqualified personnel and not enough of them.”

MANAGEMENT MATTERS
High turnover rates in management had also damaged the prospects of many companies. This was often compounded by CEOs focusing on short-term objectives, spurred on by the knowledge that their ‘life expectancy’ with a mining company could sometimes be measured in months rather than years.

Smith cited research that noted new CEOs had an average of just 16 months to prove themselves.

With quarterly performance often seen by the market as the litmus test for a company's outlook, management had become geared towards bolstering short-term results, sometimes at the expense of long-term strategy.

CEOs also knew that the risk of being fired increased around the time of quarterly results, especially if the company was deemed by the market to have underperformed.

“[With underperformance], I think the CEO becomes a lamb for the chairperson or board to sacrifice – it’s the CEO who gets shot, not them. However, it’s sometime a case whereby a CEO will exclaim: ‘Shoot me! Shoot me!’," Smith explained, quipping that some of their redundancy packages were "literally to die for”.

Too many CEOs lacked core management skills, including those who refused to heed advice or suggestions that, while sensible, conflicted with their vision for a project or operation. Others remained oblivious to risk until disaster had engulfed them.

Some CEOs placed too much faith in a new technology or methodology, creating a raft of problems that were amplified if their proposals had never been field-tested. “We often see hundreds of millions of dollars spent to defend a CEO’s chosen cause, whereas the simpler, more effective solution would have been off-the-shelf purchases,” Smith noted.

To help mitigate the risk of ‘short termism’, a CEO’s remuneration should be tied to long-term results, which Smith noted had already started to happen. In addition, a CEO’s options should only vest after four to five years, again to make them think more carefully about the longer term.

THE COST OF CLOSURE
The industry had faced another issue that management had sometimes failed to address; mine closure and the increasingly complex expectations surrounding it.

Successful teams engaged this issue early on, with an eye for projected future costs. This often involved ensuring that closure funds were available before development started and Smith noted the example of Alaska, whereby cash upfront for closure had become a requirement.

Post-closure care-and-maintenance costs had become increasingly expensive. For some companies the ability to carry these expenditures could prove too much to bear in the future. “Closure obligations are getting bigger and will eventually reach a point whereby a company is left with only one option – bankruptcy,” Smith warned.

He also questioned whether a closure liability would really be removed when selling on a property or operation. “Unless you’ve got some incredible deal that’s absolutely ironclad, or the buyer is the State, you’ll never, ever get rid of that liability – especially if you’ve got deep pockets.”

One measure to remove this risk might come from the insurance industry, which could cover the closure risk for premiums. “But I don’t know if we, as an industry, have started to talk to insurers on this. Certainly, it will need someone bigger than the mining industry to assist us.”