Dale Schilling

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  • Value Creation in Mining:

    The Productivity ImperativeDale Schilling

    30 April 2015

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 1Draftfor discussion only

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    Our flagship report: Value Creation in Mining

    "More Than

    Commodity Prices"

    "Taking the

    Long-Term View in

    Turbulent Times"

    "The Productivity

    Imperative"

    "Beyond basic

    productivity"

    Today's focus

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 2Draftfor discussion only

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    TSR drivers Managements levers

    TSR

    Profit growth

    Multiple change

    Free cash flow

    contribution

    Operating performance

    Financial, investor and

    portfolio strategy

    Cash returns/ efficiency

    BCGs disaggregation methodology translates TSR into levers managers can influence

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 3Draftfor discussion only

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    23% total share holder returns during 2003-2010 Total Shareholder Return

    1. S&P 500. 2. Weighted averageSource: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; Annual reports; BCG analysis

    2003 - 2010

    40%-20% 0% 80%20% 60%

    TSR (%/year)

    Market TSR = +8%

    Mining TSR = +23%

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 4Draftfor discussion only

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    .... shareholder value destroyed during 20102013 ...Total Shareholder Return

    1. S&P 500. 2. Weighted averageSource: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; Annual reports; BCG analysis

    2003 - 2010 20102013

    0% 80%60%40%20%-20%

    TSR (%/year)

    -60% -30% 0% 30% 60%

    TSR (%/year)

    Market TSR = +8%

    Mining TSR = +23%Mining TSR2 = -13%

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 5Draftfor discussion only

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    2003 - 2010 20102013 2014

    ... a trend that continued last yearTotal Shareholder Return

    80%60%40%20%0%-20%

    TSR (%/year)

    -60% -30% 0% 30% 60%

    TSR (%/year)

    Market TSR = +8%

    Mining TSR = +23%Mining TSR2 = -13% Mining TSR2 = -14%

    1. S&P 500. 2. Weighted averageSource: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; Annual reports; BCG analysis

    -60% -30% 0% 30% 60%

    TSR (%/year)

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 6Draftfor discussion only

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    Today the 'big squeeze' is here

    75

    168 168192 209

    228

    0

    100

    200

    300

    400

    $/unit production

    Indexed to 2002 price

    Cost (Indexed)

    EBITDA %

    2013

    288

    20%

    2012

    313

    33%

    2011

    329

    45%

    2010

    273

    39%

    2009

    230

    27%

    2002

    100

    25%

    Price (indexed)

    Source: BCG

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 7Draftfor discussion only

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    In 2014, Australia coal prices fell 17% and 23% for thermal

    coal and met coal respectively

    0

    50

    100

    150

    USD$/ton

    2011

    -17 %

    2012 2013 2014

    Newcastle thermal coal Hard coking coal

    1. Insufficient data point for 2010. Source: World Bank, Bloomberg, BCG Analysis

    0

    100

    200

    300

    2014201320122011

    USD$/ton

    -23 %

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 8Draftfor discussion only

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    Average annual TSR1

    1. TSR derived from calendar year data in local currency2. Background curve based on listed coal companies worldwide by Capital IQ industry segmentSource: Capital IQ; BCG analysis

    So, how have Australian coal companies fared vs their peers?

    -75% -50% -25% 0% 25% 50%

    10-year TSR 1-year TSR

    Rank (n=49)

    Median= 3.1%

    -100% -50% 0% 50% 100%

    Average annual TSR1

    Rank (n=123)

    Median= -22.3%

    3-year TSR

    -100% -50% 0% 50%

    Average annual TSR1

    Rank (n=111)

    Median= -24.1%

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 9Draftfor discussion only

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    Productivity improvements link directly to value creation

    Example value-driver tree for surface operations

    Factors directly affected by a MOST productivity program

    Valuation multiple

    change

    Fundamental value

    Cash flow contributions

    Total shareholder

    return

    Saleableproduction

    ROM production

    Unit Price

    Unit Cost

    Yield (%)

    COGS per unit

    SG&A cost per unit

    CapEx($millions)

    +

    +

    +

    Source: BCG analysis.Note: BCM=bank cubic meters; CapEx=capital expenditure; COGS=cost of goods sold; DOH=direct operating hours; EV=enterprise value; ROM=run of mine; SG&A=selling, general, and administrative.

    Dividends

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 10Draftfor discussion only

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    BCG projects typically yield ~ 1020% improvements of key operational metrics

    1. Unit cost reductions from increased throughput are in addition to thisSource: BCG experience

    Productivity

    t/FTE

    Identify the bottleneck production

    step and cause for

    underperformance in availability,

    utilization, rates

    Throughput

    Mtpa

    Unit cost

    $/t

    Generate transparency on high cost

    buckets along production steps and

    functional splits

    Identify required workforce and full

    potential throughput through detailed

    benchmarking to validate targets

    Low direct

    operating

    hours of key

    equipment

    Mismatch of

    cost and

    performance

    Throughput

    not in line with

    headcount on

    the operation

    KPI

    and typicalimpact key challenges Issues

    Unit cost at constant volumes1

    1015%

    510%

    1020%

    NPV improvements of over 30% achieved

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 11Draftfor discussion only

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    0

    1

    2

    3

    4

    7210 6

    Year one relative

    TSR growth1

    Successful operations transformation is hardOnly a quarter of programs outperform in the long term

    Pitfalls mean only 25% of transformationprograms succeed in the long term

    1. Sample of 40 companies publicly undergoing transformation programs. TSR adjusted by S&P500 growth; 1 = same growth rate as index. Long term = 5 years period or ongoing for transformations started since July 2008Source: BCG case experience; BCG operations practice

    Time

    Status

    quo

    Performance

    turnaround

    Sustainable

    change

    Change journey does not even start

    No step change in performance

    Change was not sustainable

    Performance

    Change not even started,

    no step change achieved

    Long-term relative TSR growth1

    Successful transformation,

    sustainable change

    Short-term success,

    but not sustained

  • 20150430-Australian Coal Conference-BCG-Dale Schilling.pptx 12Draftfor discussion only

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    Case example: Underperforming underground coal mines

    Million tonnes

    A B C

    0

    D E F G I J K L M N O P Q R S T U V W X Y Z AABBCC

    2

    4

    6

    8

    10

    Australian Longwall Coal Production

    Client performance:

    Operating at 40-60 hours per week

    Australian industry benchmark:

    Operating at ~100 cutting hours per week

    Gap worth ~$600m in annual EBIT

    Source: In