Value Driver Modelling for Extended Mining Operations … · Value Driver Modelling for Extended Mining Operations Executive mining breakfast 23 June 2011 Fabio Buckeridge Advisory

Value DriverModelling forExtended MiningOperations

Executive mining breakfast23 June 2011

Fabio BuckeridgeAdvisory ServicesPwC Australia

www.pwc.com

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Return to cost efficiency

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Mining costs

Operating and capital costs increased dramatically in the five years prior tothe Global Financial Crisis

The mining industry spent severalyears compromising operationalefficiency, in order to increaseproduction volume to take advantageof booming prices

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Following the collapse of commodityprices and demand 2008, miningcompanies scrambled to quicklyreduce both production and unitcosts

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Operating costs increased from$85bn in 2003 to $176bn in 2007and investing cash outflows increasedfrom $20bn in 2003 to $126bn in2007

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Worlds 40 Largest Mining Companies

Operating Exp. Investing Cashflows

Net Profit

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The mining industry has shown a reactiveapproach to cost reduction

Opex saving

6%From 2008 to 2009 across the global miningindustry

Revenue decline

15%From 2008 to 2009 across the global miningindustry

Capital investment

$200 biBetween 2007 and 2009

Source of cost reductions have largely been cuts to discretionary spend onitems such as exploration, contractors and head office costs

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Commodity price vs cost index

Copper Price US$/t (left) US Mining Cost Index (right)

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Global mining companies have adjusted theirstrategy to deal with commodity price volatility

More than ever, miners must ‘run hard to stand still’and continue to deliver long life, low cost projects

Favourable cost curve positioning with the majorityof production in the lower half of the cost curves

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Operational cost efficiency requires focus over thelonger term

Long term focus is key to maximise lifetime asset efficiency and embed aculture of cost awareness that will survive throughout boom commoditycycles

• Mine plans and budgets are setannually

• Budgeting process is inherentlybroken. Budgets are based onprevious years + 10-15% with a limitedunderstanding of value drivers

• Poor linkages between mine plan,budget and real cost/ value drivers

• Difficult to determine impact ofsignificant changes in productionshould they occur outside annualplanning process

• Active management andunderstanding of the drivers of value

• Quick response to increasedmargins in fluid market

• Key operational leavers drive highlevel financial outputs

• Ability to efficiently estimate theimpact of changes in productionvolumes and costs

Downfall of traditional costmonitoring

Value driver approach to costefficiency

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What are value driver models?

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Value driver models connect low level operationalmetrics with financial outcomes

Value driver models are used for predictive analysis and/or performance reporting. Theyprovide a connection between the fundamental gears driving performance and theresulting financial impact

Value driver models:

• precisely model the economics of a business

• empower managers by helping them understand the value creation levers of theirbusiness

• add creativity and rigour to the strategic planning process

• identify and financially quantify opportunities for improvement

• focus the mindset of management on “where the money is”

• identify key operational metrics to be defined as KPIs to create accountability.

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Value driver models are excellent tools foridentifying the drivers of cost and performancevariancesValue driver models can be used to report a combination of operational andfinancial performance data assisting with budgeting, forecasting and mineplanning

Variances betweenbaseline data and themodelled scenario are

detailed in real andpercentage terms.

Unfavourable variances are denotedwith red shading, favourable with

green.A greater level of detail can beaccessed beyond these costtotals by double clicking on

each tree node

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Building a value driver model of a mine operation

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Step 1: Mine operational model

• We build an operational model of the mine

• We do this quickly, using libraries of mining assets and operational processes

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Step 2: We model capacities and constraints

• The model includes the capacities of all major assets

• This considers the impact of constraints on production

Truck fleet

Operating 19,414 hours

Maintenance 5,557 hours

Speed 400 bcm / hourDragline

Operating 6,711 hours

Maintenance 1,579 hours

Speed 3,750 bcm / hour

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Step 3 : Link operations to finance

• We map the accounting trial balance to the mining activity based trial balance

• We allocate operational costs into fixed and variable buckets

• We link variable costs to activity based cost drivers

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Step 4: The value driver model build

• We can now build a value driver model of the mine with baseline information

• The build is done quickly using a purpose-designed build tool

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What can a Value Driver Model be used for?

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Identify cost improvement opportunities

• Understand the key operational drivers of production

• Rank the operational drivers with greatest cost reduction potential

• Identify the metrics that matter

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Prioritise improvement opportunities

Decreasing $ / ROM t

Increasingproduction

ImprovementOpportunity

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Drive to EBIT level if required

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Scenario analysis

• Perform “what-if” analysis and track the impact

• Drill down on variances to find the root cause of the change on cost andproduction

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Comparative Analysis

• Benchmark performance against other mining operations

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Modelling extended operations

Value driver modelling andArchimedes FACX

Fabio Buckeridge

This presentation has been prepared for general guidance on matters of interest only, anddoes not constitute professional advice. You should not act upon the information contained inthis publication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PwC Australia, its members, employeesand agents do not accept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this publication or for any decision based on it.

© 2011 PwC Australia. All rights reserved. In this document, “PwC” refers to PwC Australiawhich is a member firm of PricewaterhouseCoopers International Limited, each member firm ofwhich is a separate legal entity.

Thank you for your attention

This presentation has been prepared for general guidance on matters of interest only, anddoes not constitute professional advice. You should not act upon the information contained inthis publication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PwC Australia, its members, employeesand agents do not accept or assume any liability, responsibility or duty of care for anyconsequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this publication or for any decision based on it.

© 2011 PwC Australia. All rights reserved. In this document, “PwC” refers to PwC Australiawhich is a member firm of PricewaterhouseCoopers International Limited, each member firm ofwhich is a separate legal entity.