For some of us, who have argued for many years that such developments were vital to the future survival of the industry, these changes are long overdue. They have not been revolutionary innovations that have led the business world; rather, the industry has just been playing catch-up for an abysmal managerial performance in the previous decade. Our concern now, which will probably be dismissed as scare-mongering by the industry, is that the mining firms will repeat history and allow the gains to be dissipated in an expansionary binge where production is chased at any cost.
What is needed in Canadian mining during the next five years is a continuing thrust to bring down costs further, rebuild the mineral inventory base, regain the lead in key areas of technology, and demonstrate to employees that corporations want to involve them as partners in the business. Instead, there is accumulating evidence that executives are racing to bring marginal capacity into production, and that costs are starting to rise significantly. Consolidate the Gains
Outstanding though the profits performance of many mining companies has been, one good year in 10 does not produce a healthy industry. In fact, was the past year all that great? Absolute profits look good, but even the record profits mentioned earlier only translate into returns on investment that are equal to the average returns over the past decade for many large, well-managed U.S. corporations.
General Electric and 3-M are two outstanding U.S. corporations that have performed well. Return on capital employed in both these firms has averaged more than 20% for the past 10 years. Why mention these firms? Even without the stimulus of losses, both have made dramatic strides in cost management and productivity. In the past eight years, General Electric has reduced employment by a quarter (100,000 jobs eliminated), reduced the corporation’s white-collar bureaucracy, and re-established its world leadership in most of the businesses in which it competes. At 3-M, known mainly for outstanding product innovation, 10% fewer employees than at the start of the decade now produce 50% more in revenues, and the corporation is in the middle of 5-year programs to cut 35% from each of the following categories: unit direct labor costs, transaction (administration) costs, and the cost of quality. In addition, it has boosted spending on innovations and research and development (R&D). Now that the Canadian mining industry has regained acceptable levels of profitability, it must accelerate, not slow, the pace of renewal.
There’s a clear need to rebuild mineral inventories. The industry’s performa nce in this area during the past two decades has been outstandingly dismal. It’s now more than 20 years since the last “elephant,” Kidd Creek, was discovered. Many of Canada’s larger base metal mines, including Kidd Creek, are within one or two decades of the end of their lives. These discoveries are the equivalent of a major product breakthrough for either 3-M or General Electric, both of which would probably be looking for new senior executives if they had gone this long without results. Moreover, spending on base metal exploration in Canada has declined in the present decade, both as a proportion of total exploration expenditures and in absolute terms.
Much more has to be done in the development and adoption of new technology. In spite of much executive rhetoric about the need for an increased effort in this area, spending on mining R&D has actually decreased in Canada during the present decade.2 By way of contrast, industrial spending on R&D in the U.S. has almost doubled during the same period.3 Moreover, the mining R&D that is being done in Canada is fragmented, being carried out by a variety of small, subeconomic- scale research laboratories and industry-funded associations.
For mining, this deficiency need not be too acute, since much of the enabling technology the industry needs already exists elsewhere, and all that is required is for it to be adapted to use in the industry. Unfortunately, for many suppliers, mining is such a small segment of their business and the traditional image of mining is so conservative that they are not willing to invest the effort. Most mining companies lack the advanced engineering skills to do so themselves and cannot easily acquire them since Canada is particularly short of graduates in these areas of technology.
Employee relations have undoubtedly improved during the past few years. Combined with the introduction of new technology, this has led to sharp increases in productivity. However, wages and salaries as a proportion of total costs have not diminished dramatically. Workforce reductions have virtually ended and if, as expected, employees push for larger wage settlements as their share of renewed profitability, reversals of these unit labor cost gains can be anticipated.
Moreover, in spite of having one of the most highly educated and skilled workforces of any industry in the world, most Canadian mining companies still get very little out of employees other than basic effort. Programs to involve employees directly in the task of cost reduction are still in their infancy in the industry, and performances such as those of some Japanese firms where, on average, each employee submits up to 20 cost-reducing, process/product- improving ideas a year are the stuff of academic fantasy.
What is needed in the industry is a continued commitment to reducing the labor content in the cost structure and gaining more involvement from the workforce. In this respect, cynicism abounds. Many employees and observers believe communication and participation are only for the tough times, and that as soon as the industry returns to profitability, these initiatives will fall by the wayside. As we have seen earlier, what is needed is for mining companies to establish long-run targets and commitments for unit costs and employee programs, develop the strategies to implement them, and stick to the task, no matter what the price of metal. The Keys to Future Competitiveness
There are a few characteristics shared by most truly outstanding corporations, such as 3-M and General Electric, which Canadian mining companies could seek to emulate in the next decade.
The first is never to be completely happy, but always question the status quo and look for better ways of managing and operating. The Canadian mining industry has undoubtedly made great advances in the past five years, but now t he drive has to be sustained and even accelerated. With increased profitability, additional resources are becoming available to invest in the drive for lowered costs and productivity and so the rate of progress could be increased.
The second is to make long-run commitments to achieve key strategic objectives in terms of ore reserve positions, costs, quality and employees and not lose sight of them even when prices escalate dramatically. By remaining lean and productive in highly profitable periods, the industry will then be in a position to sustain investment in exploration and R&D during t
he inevitable lean periods.
The third characteristic is to avoid marginalism at all costs. The key to a high average return on investment is ensuring that businesses operate with high gross profit margins. Investment in marginal operations during good periods lessens the duration of high- price periods. Canadian executives often point fingers in this respect at producers in developing countries, but their own record is far from perfect. These investments also divert resources from improving core business units and lead to dramatic cutbacks when prices fall, which demoralizes the entire business team.
In summary, the current period of high prices could prove to be a mixed blessing in the long run if it leads to a lessening of the drive to modernize the thinking, the processes and the management of mining in Canada. The industry has a history of boom and bust and of forgetting the basics when prices sky-rocket. Let’s not repeat history. Notes 1. Company annual reports, quarterly reports and The Globe and Mail. 2. Statistics Canada, Cat. No. 88-202. 3. Business Week, Report on Research and Development, annual reports 1980-1988. Dr Richardson teaches at The School of Business, Queen’s University, Kingston, Ont. This article first appeared in the April, 1989, issue of CRS Perspectives published by the Centre for Resource Studies, Queen’s University. Flowsheet
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