Value Driver Modelling for Extended Mining Operations

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Ashlyn Parks
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1 Value Driver Modelling for Extended Mining Operations Executive mining breakfast 23 June 2011 Fabio Buckeridge Advisory Services Australia

2 Return to cost efficiency

3 Mining costs Operating and capital costs increased dramatically in the five years prior to the Global Financial Crisis 1 The mining industry spent several years compromising operational efficiency, in order to increase production volume to take advantage of booming prices Worlds 40 Largest Mining Companies 2 Operating costs increased from $85bn in 2003 to $176bn in 2007 and investing cash outflows increased from $20bn in 2003 to $126bn in 2007 $bn Following the collapse of commodity prices and demand 2008, mining companies scrambled to quickly reduce both production and unit costs Operating Exp Investing Cashflows Net Profit

4 The mining industry has shown a reactive approach to cost reduction Source of cost reductions have largely been cuts to discretionary spend on items such as exploration, contractors and head office costs Opex saving 6% From 2008 to 2009 across the global mining industry Revenue decline 15% From 2008 to 2009 across the global mining industry Capital investment $200 bi 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Commodity price vs cost index Between 2007 and 2009 Copper Price US$/t (left) US Mining Cost Index (right)

Global mining companies have adjusted their strategy to deal with commodity price volatility More than ever, miners must run hard to stand still and

5 Global mining companies have adjusted their strategy 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 majority of production in the lower half of the cost curves

6 Operational cost efficiency requires focus over the longer term Long term focus is key to maximise lifetime asset efficiency and embed a culture of cost awareness that will survive throughout boom commodity cycles Downfall of traditional cost monitoring Mine plans and budgets are set annually Budgeting process is inherently broken. Budgets are based on previous years % with a limited understanding of value drivers Poor linkages between mine plan, budget and real cost/ value drivers Difficult to determine impact of significant changes in production should they occur outside annual planning process Value driver approach to cost efficiency Active management and understanding of the drivers of value Quick response to increased margins in fluid market Key operational leavers drive high level financial outputs Ability to efficiently estimate the impact of changes in production volumes and costs

7 What are value driver models?

8 Value driver models connect low level operational metrics with financial outcomes Value driver models are used for predictive analysis and/or performance reporting. They provide a connection between the fundamental gears driving performance and the resulting financial impact Value driver models: precisely model the economics of a business empower managers by helping them understand the value creation levers of their business 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.

Variances between baseline data and the modelled scenario are detailed in real and percentage terms.

9 Value driver models are excellent tools for identifying the drivers of cost and performance variances Value driver models can be used to report a combination of operational and financial performance data assisting with budgeting, forecasting and mine planning Variances between baseline data and the modelled scenario are detailed in real and percentage terms. Unfavourable variances are denoted with red shading, favourable with green. A greater level of detail can be accessed beyond these cost totals by double clicking on each tree node

10 Building a value driver model of a mine operation

11 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

Step 2: We model capacities and constraints The model includes the capacities of all major assets This considers the impact of constraints on production

12 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 / hour Dragline Operating 6,711 hours Maintenance 1,579 hours Speed 3,750 bcm / hour

13 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

14 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

15 What can a Value Driver Model be used for?

16 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

17 Prioritise improvement opportunities Improvement Opportunity Decreasing $ / ROM t Increasing production

18 Drive to EBIT level if required

19 Scenario analysis Perform what-if analysis and track the impact Drill down on variances to find the root cause of the change on cost and production

20 Comparative Analysis Benchmark performance against other mining operations 140 $ / Development metre Benchmark 40 Mine 20 Company Million 4tonnes per6 annum 8 10

21 Modelling extended operations

22 Value driver modelling and Archimedes FACX Fabio Buckeridge This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Australia, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it Australia. All rights reserved. In this document, refers to Australia which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

23 Thank you for your attention This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Australia, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it Australia. All rights reserved. In this document, refers to Australia which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

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