Dale Schilling

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

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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

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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