Modern Management in The Global Mining Industry
Modern Management in The Global Mining Industry
Modern Management in The Global Mining Industry
MANAGEMENT
IN THE GLOBAL
MINING INDUSTRY
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MODERN
MANAGEMENT
IN THE GLOBAL
MINING INDUSTRY
ROBIN G. ADAMS
assisted by Christopher L. Gilbert and Christopher G. Stobart
1. Introduction 1
2. Commodity Price Forecasting 17
3. Recycling 55
4. The Marketing of Commodities 63
5. The Role of Commodity Exchanges in Pricing 83
6. Price Risk Management 115
7. Shareholder Value 133
8. Measuring Mine Production Costs 151
9. Performance Improvement and Capital Productivity 181
10. Risk and the Cost of Capital 199
11. The Mining Cycle 215
12. The Myths and Realities of Resource Depletion 231
13. The Environment: Cost or Constraint? 243
14. Unfinished Business 271
vii
Fig. 6.2. Basic Hedging Programme Design. 126
Fig. 7.1. Three Key Elements in Value-based
Management. 137
Fig. 7.2. The Efficient Frontier. 141
Fig. 7.3. Strategic Characterisation of Processes –
The Steel Example. 142
Fig. 8.1. The Four Basic Value-based Costing Concepts
Are Designed to Be Compatible with the Typical
Corporate Structure. 155
Fig. 9.1. There Are Two Halves to the Operating Excellence
Part of Shareholder Value. 185
Fig. 9.2. The Three Elements in Capital Productivity
Can Be Quantified Using a Small Number of
Simple Concepts. 186
Fig. 9.3. Milling Is the Most Intensively Utilised of All
the Elements in the Production Chain, and So
the Bottleneck in the Whole System. 187
Fig. 9.4. Machine Productivity Is a Concept That Can Be
Readily Communicated at the Operator Level. 190
Fig. 9.5. Analysis of Drills Showed Scope for Better
Utilisation and Operating Efficiency:
Thus Fewer Drills were Required. 195
Fig. 10.1. Real Equity and Bond Returns, 1956–2015. 205
Fig. 10.2. Weighted Average Cost of Capital in Mining,
1991–2015. 209
Fig. 11.1. General Evolution of Value in the Mine
Development Process. 217
Fig. 11.2. International Standards for Quantifying
Resources and Reserves. 222
Fig. 11.3. The Gateway System for Mine Development. 225
Fig. 12.1. Real Metals Prices, 1950–2015. 237
ix
Table 7.1. Different Sources of Comparative Advantage
Exist in Each Sector. 143
Table 8.1. The VBC Nomenclature. 157
Table 8.2. Hypothetical Cu-Au Mine Production and Market
Assumptions. 169
Table 8.3. Hypothetical Cu-Au Mine Cost Assumptions
(Typical Year). 170
Table 8.4. Cost Estimate Reconciliation. 172
Table 11.1. Key Criteria for Determining Project Progress
in Relation to the Gateways. 227
Table 11.2. Work Required by Discipline for Passing
Each Gateway. 228
Table 12.1. Major Metals: Annual Average Price and
Volume Changes. 236
Table 12.2. Major Metals: Production and Reserves
(Million Tonnes), 2015 Versus 2000. 238
Table 13.1. Components of the Policy Potential Index. 255
x List of Tables
About the Authors
xi
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Foreword
Robin Adams was an exceptional man and an inspiring force. Our paths
first crossed in the 1970s when Robin came to join CRU back in its fledg-
ling days. One could not help being struck by this tall impressive fellow.
He had a top first from Oxford in PPE, was self-taught in advanced statis-
tics and maths, and widely read in history, politics and sociology. One of
his great gifts was his ability to bring insight and enrichment from many
other subjects to his application of economics.
This interdisciplinary approach is in evidence throughout the book
you hold in your hand. It forms an introduction to the approach Robin
and CRU adopted in different types of assignments; how we applied our
methodologies to gain understanding and use the results to help clients
manage risks more effectively and better assess likely developments and
future trends. Robin was also keenly interested in the forces that engen-
der change in society, industries and markets, both national and local.
CRU was established in 1969 and was the first research company to
specialise in metals, minerals and mining, advising governments and
corporates active in these sectors. Much of that advice came from apply-
ing principles of economic analysis to deal with business challenges that
are typical to natural resource industries. In the extractive industries, for
example, issues can arise from the immovability of assets such as mines
or reserves, or the occurrence of rent and consequently the generation of
super-normal profits. Other issues include the susceptibility of primary
commodities to market cycles, severe short-term price volatility and, not
least, to the impact of innovation and substitution in changing demand
for raw materials offering similar properties.
Robin spent some 25 years with CRU. After an initial period, he left to
work for Chase Manhattan Bank (now part of JP Morgan) before estab-
lishing his own company in Pennsylvania, Resource Strategies, which
CRU acquired in 1995 as part of its expansion in North America.
Robin made his distinctive presence felt across the spectrum of CRU’s
activities. Initially the focus was on non-ferrous industries such as copper
xiii
and aluminium but, by the time Robin re-joined, CRU had expanded its
coverage to the steel complex, energy industries and agricultural sectors.
As our client base grew so our challenges became more diverse. Robin
played a leading role in that expansion process and helped to develop new
methodologies that had the breadth of scope and sophistication needed
for our new markets. Robin for instance pioneered applying systematic
econometric modelling to competition between materials in electricity,
transport, construction and packaging markets. He was also instrumental
in developing what we called CRU’s Compass methodology and apply-
ing it to long-term forecasting. Similarly, he was involved in improving
the company’s risk-adjustment methodologies and its value-based cost-
ing system for competitive analysis as between mining operations. Robin
also led CRU in developing its value-in-use models for negotiating iron-
ore and metallurgical coal off-take agreements between western produc-
ers and Chinese counterparties.
He particularly enjoyed applying analytical economics to resolve dis-
putes between parties active in natural resources industries. He would
facilitate negotiations by identifying what he called Bargaining Zones to
achieve win–win outcomes. Robin would frequently be retained to help
resolve fiscal differences between host governments and foreign inves-
tors in connection with existing or planned mining and infrastructure
developments, the merits of more downstream processing, and on mat-
ters relating to transfer pricing.
The book draws on all this work, focussing particularly on the char-
acteristics of primary commodity markets and the political economy of
extractive industries. Robin puts great emphasis on the range of talents
that a mining company executive needs to be able to deploy if he or she is
to deal with the complex issues that mining throws up. These can be geo-
logical, metallurgical, management, economic, political, social, environ-
mental, regulatory and financial. He states that mining companies need
to be led by Renaissance men and women. There is no doubt that Robin
Adams was such a person.
Robin was greatly respected and admired by his colleagues. All who
worked with him gained from the experience and benefitted from the
thoughtful and considerate way he interacted with others. He is remem-
bered as a person who was generous with his time and enjoyed sharing
with others what he knew. He was a great mentor both in the office and
when it came to outdoor activities, especially deep-snow skiing which
he did frequently and expertly in the mountains near CRU’s offices just
south of Seattle. CRU’s US West Coast offices were located on Whidbey
Island next to where Robin and his wife Judith, a writer and poet, chose to
xiv Foreword
build their home. Theirs was a deep and fulfilled marriage that thrived on
the complementary combination of their talents and strengths.
Robin often took it upon himself to act as advisor to parties who had
been disadvantaged by contamination or pollution resulting from min-
ing and processing operations. In one such case his clients, mainly bond-
holders and environmental agencies, had been defrauded into bearing
heavy costs which should rightfully have been borne by the shareholders.
Only two weeks before he died, in spite of his deteriorating health, Robin
made an extraordinary effort to give a deposition which was crucial to the
cause he felt so strongly about. (This book concludes with one of Judith’s
poems, reprinted with her permission, that memorialises Robin’s deposi-
tion.) As a result of the deposition the shareholders were found guilty and
required to pay out over $215 million. They were refused appeal to the US
Supreme Court.
To me personally, Robin was a close colleague and greatly valued
friend. He was a source of sound and impartial advice and a person I
valued for his warmth and integrity as much as for his brilliance. Even
today at CRU one of our key steps in resolving analytical problems is to
ask: “How would Robin have approached this?”
Well, this book provides some answers.
Robert A. Perlman
Chairman, CRU Group
Foreword xv
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Acknowledgements
xvii
true friend. They had an exceptional bond for they both felt deeply about
ethics both in the work place and in their lives. They shared a special
relationship both at work and as friends. I also know that Robin would
like to thank Taylor Shively who came to work for Robin out of graduate
school. Robin would bounce his ideas off Taylor and get reliable feedback.
He would also have thanked the young people he mentored from time to
time. The promise they showed gave him hope for the future of the min-
ing industry. Robin would also thank the liberal community on Whidbey
Island who surrounded him with encouragement, accepted his eccentrici-
ties and challenged his ideas.
Lastly, I know deeply that he would have thanked me for putting up
with his sometimes very late arrival home, his booming voice waking
me from sleep when he enthusiastically announced his latest idea and
for loving him in the way that I did; his elder daughter, Laura, who chal-
lenged every idea he had, and was like him in her debating acuity; his son
William who, unlike his father, was less of a student but much more of a
party guy, who inherited his father’s free spirit and occupies himself in
saving lives jumping out of a helicopter on a rescue team; and lastly his
younger daughter, Rachel, who taught him about so many things includ-
ing flamenco dancing, how to handle his emotional Portuguese herit-
age, and who for a while worked for him. One day Rachel reported to
me “Mum, dad is an absolute power house at work. I don’t how anyone
keeps up with him.” Robin was proud of his children especially because
they, as Carl Jung once said, “lived their parents’ un-lived lives”!
I know I have missed out many people in the industry who influenced
him, taught him and who touched him over the years. I know he would
have wanted to thank the publishers for taking on his book so that his
thoughts did not go unheard into his grave on the hill on Whidbey.
Judith Adams
xviii Acknowledgements
Praise for Modern Management in the
Global Mining Industry:
‘This book is a must read if you are planning a career in the miner-
als industry. Its author, Robin G Adams, with more than 20 years’
experience at CRU, one of the world’s most prominent consulting
firms in the field, exhibits mastery in disentangling the intricacies
of this important industry to the lay reader. Complex issues like
metal price formation, measurement of production costs, or the
myths of resource depletion are straightened out so as to be acces-
sible even to my grandkids, yet with no loss of realism. I am full of
admiration’.
Acknowledgements xix
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1
Introduction
1
which are dependent on the discretionary spending decisions of
businesses and consumers.
Introduction 3
the core requirement for successful management in the industry. CRU’s
mission is to help mining industry stakeholders make higher quality and
more robust business decisions by deeply understanding and managing
the risks involved. Industry expertise is our core asset.
Mining in Perspective
My goal in writing this book is to summarise some of the industry know-
how and related analytical techniques that, with the help of colleagues
at CRU and other companies, I have managed to acquire and use in 40
years of consulting. I have chosen to do this by providing examples taken
largely from a small subset of the 200-odd minerals used by the twenty-
first century global economy – coal, iron and steel, aluminium, copper and
the fertiliser minerals. These are high-volume mined commodities with
the largest environmental, social and political consequences for society.
The affairs of the companies that mine them are reasonably transparent.
A huge volume of academic studies, technical conference proceedings
and business reports about these commodities is also available. Readers
who are interested in digging deeper into information that I am necessarily
presenting in a highly summarised form can, therefore, readily do so.
Any sampling bias found in this book has to be seen in context. When
I became Research Director of CRU International in 1973, my first task
was to advise management on the potential diversification of the com-
pany’s interests. At that time CRU’s business was primarily related to
market research and price forecasting in the copper industry. However,
the company was fielding inquiries about many other commodities and
was looking to expand the scope of its business significantly. Unencum-
bered by any prior knowledge of metals and minerals, I therefore began
my analysis with a clean sheet.
My approach at that time was simple and I will follow the same
approach in writing this book. I listed as many minerals as I could iden-
tify and looked up world mine production and the prevailing market
price in order to calculate the global revenues associated with the pro-
duction of each commodity. This analysis revealed that 75% of the value
of the world’s non-fuel mineral production was accounted for by just
four commodities – gold, iron, copper and aluminium. As an economist,
I understood that gold was a currency rather than an industrial commod-
ity. As a transportation expert, I could see that the importance of logistics
cost in the overall price made nonsense of the London Metal Exchange
1
I consider that the value of mine production is a reasonable proxy for mining effort, because
in the final analysis costs strongly influence price and are a function of effort.
Introduction 5
6
Table 1.1: Value of Global Mine Production, $bn, 2015.
Introduction
7
power transmission towers, and almost all other forms of infrastructure.
Another major use of steel is in the production of machinery and other
capital goods that are required for the operation of manufacturing indus-
try. Without steel, there is no urban industrial economy.
A further quarter of the value of production reflects the production of
gold, aluminium and copper. Eight other commodities – phosphate rock,
titanium, zinc, nickel, potash, silver, lead and platinum – take the cumula-
tive share to 97.5% of total value. For all practical purposes, everything
else extracted from the earth’s crust can be considered as a niche business.
Individually, none of them account for more than 0.5% of world mine
production.
Minerals produced and used in small quantities can, of course, be cru-
cial to some manufacturing processes, but at the same time the volume
and value of world production may be insignificant compared to the
major minerals from which I draw my examples in the body of this book.
As an example, it may be helpful to reflect upon the concern expressed
in recent years over the potential dominance of China in the supply of
rare earth oxides (REOs). In 2014, China is estimated to have produced
95,000 tonnes per year of REOs out of a world total of 111,000 tonnes.
These minerals (there are 17 of them) are critically important in automo-
tive pollution control catalysts, permanent magnets and rechargeable bat-
teries. Demand is expected to grow strongly as future global demand for
conventional and hybrid automobiles, computers, electronics and port-
able equipment increases. Expanded rare earths usage is also expected in
fibre optics and a wide range of medical equipment applications. In other
words, REOs play a crucial role in modern, high-technology growth sec-
tors of the economy.
However, the value of global production of all 17 REOs was just $1.65 bn
in total, using 2012 prices. Thus, all REOs collectively represent only 0.1%
of the value of world mine production. It is worth adding that REOs are
not all that ‘rare’ either. According to the US Geological Service, world
reserves are 1,000 times greater than current production, and only half
of them are in China. In other words, a hypothetical Chinese attempt to
squeeze international consumers by restricting exports would have only
a short-term impact. The resulting price increases would be very likely to
stimulate additional supply from other countries, and the absolute size of
the investments required for this transformation would be modest when
judged in terms of the industry’s global financial capacity. To put this in
perspective, a single new iron ore mine, the Roy Hill project in Western
Australia, which came into production in 2016, is expected to have an
ultimate capital cost of $14 bn and will have an output worth over $6 bn
per year at current prices.
Another perspective can be obtained by comparing the value of non-
fuel mineral production with the value of the production of various fuels.
From an overall economic perspective, the energy industry is far more
important than the mining industry. Non-fuel minerals account for less
than 20% of the total value of all extracted minerals whether mined or
pumped. Oil accounts for more than 50% as set out in Table 1.2.2
Steel-related Minerals
Within the universe of non-fuel minerals, iron ore is clearly the most
important mineral because it is the raw material base for the steel indus-
try. A number of other minerals are also tied to the steel industry. These
include the bulk ferroalloys such as ferromanganese, ferrosilicon and fer-
rochrome as well as more specialised alloys such as nickel and molybde-
num. The use of alloying materials imparts special properties to carbon,
alloy and stainless steels, including resistance to rust, improvements in
ductility and strength, resistance to chemical and environmental corro-
sion and so forth. When these additional materials are taken into account,
as much as 40% of the value of the global metals and mining industry’s
output must be considered as steel-related.
2
Calculated using average crude oil price and average of United States and Russian natural
gas prices.
Introduction 9
From a business perspective, a key economic issue is that iron ore has
a low value to weight ratio and is required in enormous quantities. The
management challenge is therefore as much about logistics as it is about
mining and beneficiation. Similar challenges arise with other so-called
bulk commodities such as the bulk ferroalloys, bauxite and phosphate
rock. Another feature of these bulk commodities is that quality varies
from one producer to the next, which introduces significant complica-
tions in any analysis of markets, prices and competition.
Power-intensive Industries
The next most important commodity in the industrial economy is alu-
minium. Its main uses are in the construction, transportation and
packaging sectors. A key driver of aluminium demand is its very light
weight, which makes it an ideal material for transportation equipment,
as reduction in the weight of vehicles is a key to improving fuel econ-
omy. Aluminium is now making significant inroads into the previously
dominant position of steel in the automobile industry as vehicle manu-
facturers strive to meet government-imposed fuel economy standards
without sacrificing the interior size of their vehicles or the amenities they
offer. Another strategic advantage enjoyed by aluminium is the plenti-
ful nature of bauxite, the main source of raw material. Aluminium is
the third most common element in the earth’s crust after oxygen and
silicon. While it is very energy-intensive to smelt aluminium in the first
place, once in service the material can be recycled far more easily than
any other metal with a small fraction of the energy required for its initial
production.
From a business perspective, aluminium really involves two com-
modities, one a mineral and the other energy. The extraction of baux-
ite, aluminium’s raw material, is an example of (usually quite simple)
bulk commodity mining. However, bauxite mining represents only
5–7% of the total value of primary aluminium. Bauxite must first be
converted into alumina in a chemical process plant, at which point
the alumina represents 25–30% of the value of aluminium metal. The
alumina must then be reduced to pure aluminium in an electrolytic
smelter, which requires huge quantities of electricity. Thus, aluminium
smelters tend to be located in places where relatively cheap power is
available. The insights obtained from a study of aluminium can readily
be transferrable to other power-intensive industries such as silicon and
magnesium.
Introduction 11
and potash (K) fertilisers has been one of several factors that have made
this possible.
The world obtains most of its nitrogen from the essentially limitless
supply in the earth’s atmosphere. The key input is not the raw material
itself but the energy (usually in the form of natural gas) required to convert
atmospheric nitrogen into ammonia, the basic building block of nitrogen
fertilisers. The P and K components of fertiliser come from mined prod-
ucts. In the absence of these fertilisers, agricultural yields would almost
certainly decline, even if natural fertilisers were a partial replacement.
Although we might be able to mitigate part of this in various ways, one
result would almost certainly be higher food prices and probably wide-
spread hunger in some countries. Another outcome might be to require
that even more land be converted for agricultural use.3
This sector raises business issues similar to those found in other
parts of the mining industry, but it also has to contend with a far more
complex set of marketing issues in an economic sector that is becom-
ing increasingly exposed to critical review from an environmental and
health perspective, while still being expected to supply cities with
extremely cheap food. Fluctuating crop prices and a bewildering array
of governmental support, taxes and regulation leave farmers exposed
to potentially unstable incomes, which obviously affect their capacity to
invest in the subsequent growing season. On top of this, the optimal fer-
tilisation is a complex function of the kind of crop planted, the soil type
and the equipment available. Effectively, the fertiliser sector presents
affordability and substitution issues in a manner that is far more intense
than for metals.
I have not drawn many examples or anecdotes from the other group
of economically significant minerals, the precious metals. By far the most
important is gold, the vast majority of which is used as an investment
product. As a result, at least 90% of all the gold ever mined is still avail-
able in above-ground stocks. There are some industrial uses of gold in the
electronics and dentistry sectors, but these require small quantities com-
pared with annual mined production. The main consumer use of gold
and other precious metals is in jewellery and other decorative objects.
Substitutes are readily available for gold’s industrial and consumer uses.
While the mining of commodities such as iron, bauxite, copper,
phosphates and potash is clearly fundamental to the living standards
3
Agriculture has a far greater impact on the environment than any other industrial activity.
For example, the conversion of native forest into arable land has been identified as a key
factor in the increase of carbon emissions and the reduction of biodiversity.
4
Keynes, J.M. (2003). A Tract on Monetary Reform. London: Macmillan.
Introduction 13
prices and to some extent forecast them, we can at least plan in a mean-
ingful way. Mining companies can also earn marketing and trading
premiums, and in many instances at least partially manage price risk.
Improving a company’s comfort level on price will reduce the feeling of
helplessness and open the door to other initiatives for taking control of
its destiny.
The second section of this book directly addresses what I think is the
single greatest cultural obstacle to more effective management in mining,
namely that the only viable business strategy in a commodity sector is to
build or acquire low-cost operations in the first or maybe second quar-
tiles of the supply curve. This thinking stems from the cultural impact of
price uncertainty. Managers know they cannot do anything about price
but think they can do something about costs. They think getting costs
down means not only earning a higher profit margin over the cycle but,
more to the point, improving job security in a high-paying, but also high
risk, occupation. I try to correct this bias by showing how it is at odds
with modern concepts of business strategy. I discuss the basics of value-
based management that many mining companies say they have adopted.
I introduce a number of techniques developed by CRU to allow com-
panies to reorient themselves from a narrow technical focus on cost of
production to a broader focus of delivering value. I also discuss more
specific techniques such as benchmarking and out-sourcing, and the
pitfalls involved.
The third section of this book addresses mine development, the life
blood of the industry. This is where the demands on the ‘Renaissance
Man’ combine in their most intense form and where there is still major
unfinished business in the relationship between the industry and the soci-
eties and environments in which companies operate. I cover the rewards
and pitfalls of the mine development process, because we need new
mines, not simply to meet growth in demand for commodities but also to
replace mines that have depleted their resource base. The capital invest-
ments involved are very large, the decision-making process is complex
and extended over long periods of time, and exposure to risk is typically
at its most acute at this point. Moreover, this is where the industry has its
most immediate impact on the environmental, social, and political health
of the societies that provide these resources for the benefit of the rest of
the world.
This book is not intended to supply answers. It is intended to improve
the reader’s comfort level with the three most important topics in mining –
dealing with commodity price risk, maintaining a competitive position
and effectively managing the mine development process. If readers come
Introduction 15