Will mining learn from experience?

High prices for base metals, coming just after these improvements, have meant large profits in 1988 for most Canadian producers. For executives in the industry, the current high levels of profitability are perceived to be their reward for withstanding the tough times and fighting to implement change.

For some of us, who have argued for many years that these 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, 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 costs down 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.

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 last decade for many well- managed U.S. corporations.

There’s a clear need to rebuild minerals inventories. The industry’s performance in this area during the last two decades has been outstandingly dismal. It’s now over 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 life.

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 went 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 research and development (R&D) has actually decreased in Canada during the present decade.

By way of contrast, industrial spending on R&D in the U.S. has almost doubled during the same period. 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.

Employee relations have undoubtedly improved during the last few years. Combined with the introduced 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 labour cost gains can be anticipated.

What is needed in the industry is a continued commitment to reducing the labour content in the cost structure and gaining more involvement from the workforce. In this respect, cynicism abounds. Many employees and observers believe that 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.

There are a few characteristics shared by most truly outstanding corporations, which Canadian mining companies could seek to emulate in the next decade in their quest to regain a position of world leadership and competitiveness.

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 last five years, but now the 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 the 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.

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.

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