August 2014

Eye on Business

Plan the work, plan for change

By Thomas Struttmann

An effective operational plan ensures companies can set important goals and make short- and long-term planning decisions about how to efficiently extract their commodities, and process and sell them. Designing a sound operational plan is no small feat, though. Industry-wide, roughly 40 per cent of mining operations regularly miss their market guidance. The level of complexity involved in effectively managing one site is often compounded when companies must duplicate these processes across as many as 20 sites worldwide. Moreover, the technical nature of the mining business necessitates that engineers and planners produce the operating plan. When corporate managers receive it, they fail to understand the technical components, and as a result they produce financial metrics that do not fully align with reality on the ground.

This situation means that when the economic environment shifts, corporate and operations managers are unable to effectively adjust the operating plan, deploy resources, or modify the operating strategy to mitigate risk. In an era of declining commodity prices, optimizing the operating plan is essential to all mining companies that want to meet their earnings guidance. Without this key component, it is extremely difficult for management to adequately quantify operational risk, let alone assess an existing plan’s quality or revise it when the markets fluctuate.

Rigorous analysis

An operational plan requires expert analysis to ensure it presents an accurate picture of a company’s most significant variables: grade, geological model, commodity prices and production schedule. Such analysis ultimately determines the amount of investment necessary to achieve production goals, as well as the total ore that will be produced, while also outlining revenue and operating margins. A top-tier global gold miner reported on a recent project that more than one-third of the ounces produced in the company’s portfolio were unprofitable. In this case, both the corporate and operating teams were too focused on growth and revenue and subsequently failed to pay attention to margins, thereby wasting precious capital.

Before a plan is implemented, there is usually a healthy debate about the revenues, margins, resource recovery and assumptions that go into it. There are various methods of review to validate the quality of a plan. While some companies use peer reviews, others request outside technical assistance. In general, it is good business practice to engage outside support. These reviewers have read thousands of operational plans and can provide insights and opportunities for improvement including geological estimates and production strategies.

Executing the plan

Mining companies comprise a complex portfolio of variables that are constantly in flux. Their operational plans cover wide-ranging business elements from corporate (e.g. sales contracts, financing, supply chain variation) to operations (e.g. productivity, recovery, reliability, variation in grade). Unfortunately, when an operational plan is rolled out, both corporate and operations generally assume that the plan is a fixed document. As a result, neither team implements strategies to avoid setbacks and optimize financial performance when changes occur. If one side does respond to changing conditions, due to a lack of transparency between operations and corporate, it does so in a vacuum, without regard for its impact elsewhere. For instance, operations might reach production targets but spend more than anticipated on labour and energy, thereby decreasing profit margins.

Successful mining companies deploy systems that offer dynamic transparency to both the operational and financial sides, providing metrics that help managers control costs and accurately forecast production, revenue and margin. With these systems and protocols in place, operations management teams can understand future conditions and make adjustments to the operating plan accordingly. When managers understand what the future events might look like, they are able to mitigate risk and consistently meet guidance.

Managing live events

Most companies take daily measurements of physical data and monthly measurements of financials. As a result, today’s operations teams are flooded with a continuous stream of data, including daily production results, new geological information, production system health, sales information and the supply chain. In short, there is a storm of data about the past but little information about what is on the horizon. The easiest thing to measure is what happened yesterday, but it is also the least valuable because little can be done about past performance.

Companies that can model live events with key operations, finance and marketing leaders can effect changes to the operating model in order to get ahead of the curve to mitigate risk. Mining optimization software solutions such as AlightMining’s Enterprise are indispensible tools for achieving this goal. Managers can use this software to model entire mines, making changes to numerous variables (e.g. utilization, productivity, recovery, grade, supply chain, ore body) to see their impact on the income statement and balance sheet across the portfolio and inform any changes to their operational plan.

The most successful mining companies understand that an operational plan is not a stagnant document. It is a constantly evolving roadmap that enables them to deftly navigate the business environment and keep their margins high.

Thomas_Struttmann Thomas Struttmann is CEO of Struttmann Consulting.
He brings more than 30 years of industry experience
leading projects, supporting M&A due diligence, and
providing expertise on asset management and capital
planning for top Fortune 500 companies.
Tom@Struttmann.com, www.struttmann.com

It is possible to significantly reduce energy expenditures at milling facilities, especially those with low utilization, considering the current billing structure in Ontario. Energy conservation measures can provide savings, but it is equally important that whenever energy is used at a facility, it is done as efficiently as possible. Confronting the elephant in the room may be intimidating, but the rewards are worthwhile and sustainable in terms of both efficiency and overall savings.

Next: Engagement
Getting beyond duty to consult myths


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