5. Summary of case organisations
5.3. Mining
Chapter 5: Summary of case organisations
out and the outlook was upbeat from the beginning of 2017 (Research and Development Company SOC Limited, 2017).
The following top business and strategic risks facing the organisation in 2017 were noted (Research and Development Company SOC Limited, 2017):
1. “Loss of commercial revenue”.
2. “Operational incident causes injuries, destruction of building and equipment or loss of licence to operate scheduled processes”.
3. “Failure to attract and retain skilled personnel”.
4. “Changing Government policies and priorities”.
5. “Surge in operational costs”.
The review of Research and Development Company’s annual reports revealed that the organisation survived difficult external and market conditions over the period of review.
It is commendable that Research and Development Company was able to remain afloat while contributing to the mining industry and its clients during this time.
The journey of the Research and Development Company between 2010 and 2017 reflects that the organisation was focused and intentional in establishing its approach to execute the corporate strategy through project portfolios although in the absence of striving to achieve its strategic intent (reason for existence or mandate of the organisation). This largely illustrates how the Research and Development Company applied the conceptual model developed for the research although the link between business value and the strategic intent was inadequate.
It was emphasised by representatives during interviews that the CEO was extremely focused on developing systems, measuring success and reporting on the performance that was achieved across the organisation. The CEO started, in his early years, by streamlining how things are done. It was also shared that the CEO applied a leadership style that focused on compliance thus providing the necessary resources to achieve compliance and this resulted in the organisation achieving clean audits.
It was noted from the case study results that the Research and Development Company has a defined corporate strategy which it executes through the use of projects, the organisation does evaluate its performance against the strategic objectives and targets as well as link the achieved performance to its mandate as defined in the Compact.
Chapter 5: Summary of case organisations
that from 2007 to 2010 the company focused on increasing its production throughput from 45Mtap to 70Mtpa by 2019. The strategy shifted to increase the target to 80- 90Mtpa by 2020 through exploration of life of mine (LOM) expansion projects. The environment in which Mining Company operated become more stringent resulting in the change in strategy to operate a lean operation with a resilient operating mode. The evolution of Mining Company’s operating strategy over the period of review is depicted in Figure 5.4.
Figure 5:4: Corporate’s strategy evolution between 2007 and 2017
Organisation’s approach to executing strategy
Strategy formulation for Mining Company is triggered through the Resource Development Plan (RDP) by exploring an area where the organisation seeks to develop its mining asset and be in the first quartile of the margin curve. The company assesses the full potential of the area they are in including assets which the business does not own, opportunities for growth and expansion i.e. mining rights that they could gain to extend the life of mine (LOM), Mergers and Acquisitions (M&A), Joint Ventures (JV), New Technology, New Business Development, etc. The consideration is broadened to look at things that the organisation knows, opportunities for mergers, how technology could unlock opportunities and other aspects which the company has not identified.
The organisation would devise strategies around LOM execution, M&A JV, technology, and exploration. Mining Company normally develops the RDP within the context of where the company would like to be as a business. Mining Company currently has Primary Business Unity at 10 – 15 years LOM and the ambition is to extend it to 20 years plus. When the company evaluates opportunities it would then assess whether the region could achieve a 20 year plus LOM and what could be done to achieve this ambition as guided by the CEO. The company would then explore options that would enable it to achieve the ambition.
Chapter 5: Summary of case organisations
Mining Company has a LOM plan which the company runs and monitors annually. The organisation has developed targets on the RDP and LOM, on which it applies options (Mergers and Acquisitions (M&A), Joint Ventures (JV), New Technology, New Business Development, Exploration, others) to assess their contribution to the realisation of the aspiration. Each one of these options has a long term effect (generally in the next two years) on the strategy and as such the company has a Project Support Office (PSO) to guide the process of developing these strategies over time. The RDP sets the strategic direction of the business and once the company has secured mining rights it would bring the asset into the LOM process.
Mining Company can only schedule and mine assets which are owned by the company. The acquired asset would then be assessed based on the level of confidence. If it is at a high level of confidence then it goes straight to feasibility after which it is added to the LOM then it proceeds to the next cycle which is the LOM process, alternatively it goes through the studies which are either an exploration process or a study process which entails concept, pre-feasibility and feasibility. Once the project has successfully passed the feasibility stage then it becomes part of the LOM process.
The strategic planning process starts with the review of where the steel market it is going since the iron ore that Mining Company mines goes into steel. The company would look at where the steel market is going across the world and then decide what strategy to follow given what the steel market does. Mining Company would then decide what strategy the company is going to follow. The strategy planning process would look at what the steel market does which is then tied with the resource which the company has in the ground (resource). The objective is to match what the company has in the ground and what could be produced (production throughput) which would then be tie to iron ore supply and steel demand.
In the strategy planning process Mining Company looks at the type of product that the company is going to supply, when and to which customer, and marry that to what is coming out of the ground to assess what the projection means in terms of supply.
Furthermore, consideration is given to the long term iron ore prices because the price dictates on how deep the pit should be. Mining Company subscribe to a number of forecasters and price analysts who will have a view of the benchmarked indexed price for iron ore is. The company would adopt the forecasted price for the business plan as well as the Life of Mine (LOM).
The iron ore price dictates the strategic thrusts on the mining approach the company would follow not only for operations but for new capital the company will deploy since ROI that could be achieved given the prevailing market conditions is one of the key considerations in the investment decision. The ROI needs to consider the exchange
Chapter 5: Summary of case organisations
rate and its volatility. The company would also consider the political and regulatory climate since these have a bearing on the strategy.
The corporate strategy is structured around the life of mine and linked to the five year plan. The corporate strategy is derived from the LOM, brought into a five year view and then brought into an annual view. The corporate strategy originates from the CEO’s office and delegated to the different BUs. It is required that the objectives and targets are communicated and must filter through to the business units across the organisation. The BUs must then develop their own plans in line with the strategy issued from the CEO’s office. This message will then be reflected in the different business unit’s or department’s plans in terms of numbers for the next five years (horizon) and the following year (annual plan). The financial strategy will dictate the financial ambitions which translates into operations ambitions for the BUs.
The BUs and different divisions would then compile their plans which will articulate the daily targets which should be achieved in order to realise the targets in the corporate strategy. The process would include conducting a scenario planning process to assess the effect of the different actions on the set targets to estimate the outcome and their effect on the bottom line, capital profile, balance sheet, stock levels, mining costs, etc.
The process involves an interaction between technical and finance. The outcome will then be reviewed against the prevailing performance so that they could refine the corporate strategy if necessary. The scenario planning would consider different options from which the best scenario would be selected which will then be tested or compared to the projected performance.
Once the scenario planning process is complete, the outcome would be assessed against the strategy to test whether the projected numbers are supported or not, and whether the strategy is sound or not. This process would consider the planned capital investment and how much could be spend by the business in the different portfolios i.e. stay in business, growth and/or studies. The outcome would also reconcile the projected spend (capex and opex) to the performance which the company may achieve once the funds are invested. This process will then inform the prioritisation and portfolio optimisation given the projected performance and affordability.
Mining Company has a formalised risk management process that sits under the CEO which is reviewed on a monthly basis to assess business and strategic risks, to identify which risks are affecting the strategy and which ones the company introduces by making certain decisions. At a board level Mining Company has an Audit and Risk committee that looks at the strategic and business risks. The board of directors monitors a list of top five risks and the Exco Level will manage the top 15 risks. On a monthly basis, the risk profile is tracked to monitor how they are changing so that decisions would be made to manage and mitigate them.
Chapter 5: Summary of case organisations Project Portfolio
The Mining Company’s commercial activities are informed by the Corporate Strategy Guiding Document which directs when things needs to be done and thus this specify the business priorities at the time. The Corporate Strategy Guiding Document reflects objectives and details such as when the company needs to be working on, financial target, level of complexity, ease of hitting the target, etc. which then feeds into the planning process. The Mining Company uses ranges and sensitivities to assess the most likely performance in order to manage uncertainty on the performance that could be achieved. The Monthly Operations Plan (MOP) process is also an insightful process beyond being mechanistic because other things could be analysed based on intuition given what has happened or is happening in the business (insightful experience).
The MOP is the formal process which is used to manage the execution of the strategy.
The MOP draws from demonstrated performance that was achieved by the business.
The company has different MOPs for its targets that tracks how the business is doing against budget. In instances where the business is running, corrective action is carried out to achieve or get closer to budget. The business would source the services of the Business Improvement (BI) unit which has the capability to support the business in this but where specialist skills are required they could be procured.
The Mining Company has adopted a portfolio approach which is used to select and execute projects that are key to the delivery of the corporate strategy. The following projects, noted from The Mining Company’s annual reports, were executed between 2010 and 2017 in order to realise the set corporate strategy and its thrusts (Figure 5.4).
Table 5:4: Strategic project portfolios between 2010 and 2017
Strategic project ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 Mine expansion project 1 mine
construction
Mining Company expansion projects Business Unit 1 Jig plant
Business Unit 1 concentration brownfields project
Business Unit 1 lower grade project Business Unit 2 expansion project Phoenix project
Mine expansion project 2 Mine expansion project 3
The experience in projects vary at The Mining Company and thus there is recognition that portfolios are dynamic with projects performing at different levels with others failing while others succeeding. The organisation holds the view that there needs to be a large enough portfolio which will enable the organisation to manage the value realised from the portfolio. There is a need to have a good stream of ideas (potential projects) to
Chapter 5: Summary of case organisations
enable one to effectively manage the value expected from a portfolio. This is an area where The Mining Company needs to improve. There are a lot of great ideas but these have not been translated into projects in pre-feasibility and feasibility stages. There is a need for a good pipeline of projects and these need to be advanced through the project lifecycle beyond concept stage and get through to pre-feasibility to feasibility.
This will enable the company to identify projects which could be advanced given their capital budgets and capabilities (projects, rail, equipment, etc.). The overall approach is to explore brownfields projects and then greenfields projects in order to manage the demand on the capital expenditure.
It was noted during interviews that The Mining Company has a formal project portfolio structure that is used to select projects to execute the corporate strategy. There is a defined evaluation criteria that is used to select optimum projects given the corporate strategy. The project are then executed in a structured way, however it was highlighted that the approach is not consistent as there are pockets of excellence throughout the organisation (head office and business units) given the experience and competency of the project manager that is responsible for the delivery of the project.
Key challenges and market factors experienced by Mining Company
The following market changes and internal factors were noted during the review of the organisation’s integrated reports in the quest to appreciate the dynamics that affected the performance and turn of events within Mining Company:
The company operated in a buoyant market during 2007 which was expect to persist into 2008 with spot prices into China, with a consumption of 45% of global seaborne iron ore, still much higher than contract prices as well as market fundamentals that support a significant price increase in excess of 65% for the 2008/9 iron ore year (Mining Company, 2007). Locally there was an acute shortage of skills and infrastructural constraints, from electricity supply to transport facilities, where there were risks of curtailing the country’s economic growth potential and this was expected to be exacerbated by any negative developments internationally, such as a recession in the United States (Mining Company, 2007).
In order to achieve its target of doubling export production capacity by 2013, the focus for Mining Company in the coming five years was going to be on developing the iron ore export channel further in partnership with Freight Company and other stakeholders, securing regulatory approval for the South African expansion projects such as Primary Business Unity South, and a first-stage development outside South Africa such as the exploration under way in Guinea (Mining Company, 2007). It was reported in Mining Company (2007) that the company’s project pipeline was healthy and balanced, with projects in the Northern Cape, elsewhere in South Africa and in Africa offering the
Chapter 5: Summary of case organisations
potential to grow towards 70Mtpa and beyond, with continual review of the project pipeline to consider operating and market conditions.
The year 2008 saw the drop in the commodity price and what appeared to be an end to a commodity price boom due to the dropped demand for iron ore, amidst a prevailing global economic meltdown with 30% drop in production cuts at major steel mills and slowing demand in steel from the South African environment (Mining Company, 2008).
It was further reported that low demand in iron ore was expected to decrease until the economy recovers. Mining Company managed to secure a new order mining right for the Primary Business Unity South project which bode well for improving throughput to achieve the target of 70Mtpa, as the company was poised to weather the market volatility by keeping a watchful eye on costs and improving asset optimisation, and also finalised an agreement on expanding iron ore export channel with Freight Company (Mining Company, 2008).
Sound long-term fundamentals of iron ore industry with positive demand from China were noted in 2009 (Mining Company, 2009). While in 2010 an additional value was captured across the value chain by achieving exceptional prices for niche products and once again making additional profits on the shipping business (Mining Company, 2010). Despite the economic environment, Mining Company managed to deliver record earnings due to the climate for iron ore, a substantial increase in export prices and increased sales volumes and finalised an agreement on expanding iron ore export channel with Freight Company (Mining Company, 2010).
Mining Company noted that 2011 was a year of two halves, a strong start in the first six months with a weaker finish, in which China accounted for 68% of Mining Company’s export sales and global crude steel production rose by 6%, up by 7% in China and up by around 4% in Mining Company’s traditional markets (Europe, Japan and Korea) (Mining Company, 2011). It was reported that the Eurozone contagion presented a threat that could affect demand in a manner similar to that following the market crisis of 2008, with the prevailing view at the time being that the situation would be temporary, although there was the potential for a negative effect on steel prices, giving rise to production cutbacks, with a consequent impact on iron ore demand and pricing (Mining Company, 2011). Furthermore, it was reported that Mining Company had noted European production reduced by up to 20% towards the end of 2011, however was noted that mills appeared to hold less iron ore stock than was the case in 2008 thereby potentially muting the overall impact on demand (Mining Company, 2011).
The outlook on the trading environment in 2011 was that fundamentals of the global iron ore industry had been excellent for the previous three years and Mining Company believe that this environment would persist for the foreseeable future, albeit at somewhat subdued levels (Mining Company, 2011). However, it was reported that the
Chapter 5: Summary of case organisations
market supply/demand relationship had been tight especially on the price of iron ore, with supply of iron ore constrained amid rising demand from the global steel industry (Mining Company, 2011). Furthermore, the company experienced solid demand growth from China, with a positive outlook on growing demand for iron ore due to envisaged demand for steel to support continued urbanisation and infrastructure development (Mining Company, 2011).
Mining Company’s strategy evolved during 2011 as the company moved from being a South African company focused on growth, to becoming an African growth company, with the potential for much more ambitious growth from a second, African footprint (Mining Company, 2011). It was reported that the company had set its sights on the mineral-endowed west and central African region (Mining Company, 2011).
The year 2012 was a difficult on with 23% decrease in realised average export iron ore prices of US$122/tonne, however the declining iron ore prices in the first three quarters of 2012 gave way to a pleasing recovery in iron ore prices in the latter part of the year including global crude steel production rising to 1.6 billion tonnes which was primarily driven by China (Mining Company, 2012). The volatility of the global markets, particularly the slowing economic growth in China which affected the demand for and prices of iron ore, as well as the protracted impact of the global financial crisis, combined with the Eurozone sovereign debt crisis, played a role in the company’s mixed fortunes during the year (Mining Company, 2012). Mining Company remained resilient with the outlook anticipating firm prices, a stable demand counter-balanced by growth in seaborne iron ore supply, with the likelihood of softening iron ore prices in the second half of 2013 (Mining Company, 2012).
Unfortunately, labour unrest that was experienced in the fourth quarter of 2012 at Primary Business Unity mine was unexpected given the historical state of employee relations within the group, and was viewed as disappointing by Mining Company given that employees had benefitted significantly from the Envision programme (Mining Company, 2012).
The year 2013 for Mining Company was one of transition in which the company revised its strategy given the significant change in the landscape and strengthened its purpose amidst business challenges and successes, and believed that an essential part of strategy implementation was to ensure that every member of the company understood the strategy and their role in it (Mining Company, 2013). It was reported that external influences included the volatility in the market demand and the general sentiment in South African mining, and internal factors encompassed the redesign of Primary Business Unity, the continued ramp-up of Secondary Business Unity, the final judgment from the Constitutional Court, and the new supply agreement signed with a Steel Producing Company (Mining Company, 2013). The goal was to effectively optimise current operations and grow the South African pipeline, with the development