How to beat a downturn in commodity prices

Once upon a time...

…there were two mining CEOs. They were both very intelligent, experienced and both ran a tight ship.
Then, one day, the economy got the speed wobbles and the commodity prices went south. Even though both CEOs were equally smart, only one of them had used the good times to prepare for this inevitable event.
The first company, whose CEO had not asked his leaders to prepare for winter (after all, it wasn’t snowing yet), found themselves in all kinds of trouble because they had allowed costs to escalate while they were making hay.
That left them with only one option, and that was to cut their costs wherever they could.
They hired bright young people (with good intentions but limited knowledge of mining) to analyse their costs. Poring over massive spreadsheets, they found some good opportunities and advised the decision-makers to act on them.
But, since they were pretty much parachuted in at the last minute, they didn’t really understand all of the processes and ended up confusing causality with mutuality. Some of the client’s more seasoned operators were wondering why some of these consultants’ suggestions were indeed actioned but they did not feel like it was their place to speak up. Others knew that speaking up was a waste of time as nothing ever came from it, or worse, it put a target on your back for when the inevitable layoffs started. After all, no one had bothered to ask them in the first place. As expected, costs dropped but so did everything else. Production and morale dropped to all-time lows because everyone was now expected to do more with less, but the underlying problems had never been addressed. However, in times like these, everyone who had a job did their best and made sure they kept it as long as possible.
Winters can be unseasonally long and the first CEO had seen other companies be the target of hostile takeovers. He wondered, how much longer this could go on before his job was at risk. But, eventually, summer returned and commodity prices started to recover. Fortunately, this was only a short winter and they had made it (well, at least those who had not been laid off). However, when the snow receded they found the winter storms had done damage they couldn’t see in the thick of it. Some of their business processes had been so badly messed up that it would take quite some time before they could safely ramp up production. Jobs in the industry were becoming abundant again as other sites were able to scale operations up so people left the sh!t show in droves, taking the knowledge of how things were done with them. Having had such a poor experience during the winter months it would take (cost) A LOT for them to hang around a minute longer than they had to and pass this knowledge on and the company wasn’t financially in any position to compete on wages or bonuses.
Then there was the other CEO, who realised that some things (like serious business transformation) cannot be delegated and decided to embark on a quest to make the company more resilient. The executive leadership team had come to the realisation that not being resilient left them exposed to all kinds of threats, including having to scale right down or worse, shut the gates when the bad times hit.
So, how had the CEO prepared his company? This CEO had realised that it’s during the good times, when the cash flows more freely, one needs to reinvest some of it. Being an engineer, they were tempted to buy more technology. Who doesn’t love big yellow trucks, shovels and excavators?
Initially, their quest took them on a journey to understand what really constrained their Production Value Chain. Engineers calculated the theoretical capacity in each one of the key production steps and found that this knowledge actually made raising capital to buy those lovely yellow bits of kit (and other hardware) far easier because it would allow output to be raised as a result of the entire production system being improved. Before they addressed this, they found that from time to time, they had nowhere to work because their production drills couldn’t keep up with demand and this held up all the subsequent processes. They also figured out that trucks were holding up the show because the mine had gone deeper and deeper over time, yet haul times hadn’t been updated… all the while the crusher had too much downtime, which choked up ore supply to the SAG mills.
Buoyed by their success, the CEO asked his leaders to review and improve other critical aspects of the company.
They invested in training their people in a myriad of competencies, which not only started to pay back handsomely very quickly but this was one of the intangible things that made life on site better. Now everyone was speaking the same language, pulling in the same direction and there was less friction. Additionally, the people felt invested in and seen, rather than just another cog that could be easily replaced.
At the same time, they reviewed their systems and processes, starting with planning processes. As it turned out, they had been using some planning parameters that were bordering on fantasy, which explained why they kept missing their targets.
Soon after planning was sorted, they realised they had been making many of the same mistakes over and over (pretty insane, right?), so they learned about closing the continual improvement cycle using the proven plan-do-check-act method.
They also discovered that many of the metrics and KPIs they had been tracking for eons weren’t overly useful, so they found better ones (that consistently predicted the future outcomes and allowed them to take action before problems arose). As well, they improved their reporting system and implemented real-time digital dashboards (ok, so perhaps this story didn’t actually happen a long, long time ago…).
At times, these new insights could create some conflict between teams or team members, because there had been little trust between them. This led to poor accountability and the story went on and on. So, they then hired someone to analyse the causes of all that. This resulted in some very effective leadership and management coaching of both teams and individuals and ultimately much more productive and effective teams.
At some point in time, people realised that now they knew what was expected of them, by when and how much of it. They felt safe in raising issues and concerns, so they could review and resolve them together. They were enjoying their new workplace so much that they never wanted to leave.
And all along the way, the company was making more money and shareholders were happy. And so was the Board.
Of course, this didn’t all happen overnight, but, because their CEO had displayed great foresight during the good times, they were ready when winter did eventually arrive. And when it did, the team had a myriad of options and knew which levers to pull to adapt to the new reality very quickly.
The CEO knew they were well placed to not only survive the winter but started identifying sites that weren’t as well prepared and identified a few that could significantly expand the company’s earnings sheet they could potentially acquire for cents on the dollar.
Ultimately, the second CEO and their team realised that there are only two ways to impact their business’ bottom line:
  • During the good times, because their production capacity was high and cost per unit was very low, they could sell more of whatever they chose to produce, be that gold, silver, copper, lithium, coal or anything else.
  • When times started to get tough, the team now had far more knowledge of their mining and processing operations, so they knew how to reduce their costs without sending their business back to the stone age in the process, from which it might never have recovered in time to cash in on the good times again, because — sure as sh!t — summer did inevitably return. Now they were on the front foot to cash in.

The end

It turns out they might not have been equally smart. So, which CEO are you?

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