CEO.CA Chairman's Briefing

Following the landmark special report by Ailbhe Goodbody titled "Whittling away the waste" http://cdn.ceo.ca/1ctqcgn-Whittling-away-the-waste-MM-June-2014.pdf for the Mining Magazine in 2014 about Day 1 of the Money Mining seminar with Gerald Whittle, this new article describes part of the sprawling brilliance that is Day 2. The Money Mining seminar with Gerald Whittle is all about integrated strategic planning: "A concept of long-term planning which considers all parts of the value chain, all period and all stakeholders."

See my transcripts of excerpts here http://cdn.ceo.ca/1dm1hk9-2017-10-31-PeterBell-MoneyMiningReport.pdf from the October 2017 session in Vancouver with Gerald for more.

You may also enjoy my 2017 article titled, "M&A Strategy Based on #MoneyMining Whittle Consulting" here https://ceo.ca/@newton/ma-strategy-based-on-moneymining-whittle-consulting. I continue to watch out for groups who pay attention to the Whittle-delta. So far, I've met one public company that has attended the 2-day seminar and implemented the techniques: Averso Resources (TSX:ASO). See some of my tweets on their economic study from July 2018 https://twitter.com/PeterNBell/status/1027985288671330309, which shows an example of what I call a "mine plan from the future".

See also my posts on a recent economic study from Kerr Mines on CEO.CA here https://ceo.ca/whittle?filters[terms]=%24KER. I suspect there is room to increase NPV with Kerr at the Copperstone Project in Arizona, USA as their annual gold production numbers are fairly constant around 40,000 ounces per year. In contrast, annual gold in the Averso study varies wildly from 50- to 100-thousand ounces. Study these two images below closely to get a sense for what I’m talking about. 

Follow me with #MoneyMining on Twitter as I search for public companies who work with Whittle Consulting.

For example, I am looking for the next Condor Gold. This was a big win where the market responded to a +50% delta for revised economics for their flagship project. See the study published by Whittle on the case and a screenshot below http://cdn.ceo.ca/1dmuq6d-WhittleConsulting-CaseStudy-CondorGold_Nicaragua_LowResNoTrims.pdf. Whittle Consulting made fairly slight changes to the mine plan, in terms of projected cash flows, and it translated into a large delta for NPV.

Capturing these gains starts with a change in mindset.

Ask Gerald about Dangerously High Living with DHL, the logistics company. He had an impact on that massive company as an executive for change management, which influences his current integrated strategic planning work. Gerald is trained as an accountant but he’s a global leader in theory and practice of economic optimization of mines. Apparently his father, the distinguished Jeff Whittle, has recently produced many exciting new technical ideas. The technical aspects of all this are great, but implementation is everything. A key step to successful implementation is calling things by their true name. More on that in a second.

Whittle Consulting don't waste their time optimizing economic studies where the delta on NPV is small. Check out the increases in NPV for all the projects they've worked on in this image. I’m surprised how many times the delta was below 25% and I wonder if they’re representative of results going forward? Regardless, I love that positive skew with +100% delta for NPV!

The mine plan in an economic study is important, but it’s just a plan. The mine is not guaranteed to meet the projections for many, many reasons. A big one is mindset.

Someone asked a good question at the recent seminar in Vancouver about how many companies enjoy lasting benefits from working with Whittle. I believe Gerald replied that roughly half the companies who hire Whittle Consulting fully capture the delta they identify. A quarter capture some of the delta, and the final quarter don't. There are many reasons a mine doesn’t meet expectations set in an economic study, but a big one that we can control is mindset. The ideas Gerald Whittle puts out there challenge deeply-held concepts of mining professionals.

Did the change management teams at DHL ever have Sheriffs roaming the company to see if people were following the plan on a day-day basis?

Gerald’s point about mindset goes all the way down to the words we use in the business. Gerald says, "Call it what it is. Don't use the word 'tonnes'. It's loose cubic meters or wet tonne kilometers or mill power units. Not mill tonnes." Implementing that dramatic approach from corporate through the mine site and beyond is essential for shaping the culture to successfully optimize and implement the plan, which is all about bottlenecks.

I’ve heard Gerald Whittle say some amazing things, but the most impactful language is probably "Blue Line Mining" versus "Red Line Mining". Not just because it reminds me of the meme of Morpheus in the Matrix, but because it gives us a way to distinguish what is conventional versus what is new in the Whittle Consulting approach.

The new Whittle handbook describes them as follows.

Blue Line Mining: Technical view. To operate a mine conventionally with a focus on maximising reserves, recoveries, efficiencies and LOM, whilst also minimising costs. Units are tonnes, grades, recoveries. (i.e. physical measures.)

Red Line Mining: Shareholder view. To economically optimise a mine by simultaneous, integrated, cross-functional processes, thereby accelerating cash through bottlenecks. Units are "Net Value per Bottleneck Unit" NPV and IRR. (i.e. economic measures.)

Green Line Mining: Stakeholder view. To operate a mine maximising the economics within the social/political/environmental context within which it operates. (i.e. multi-stakeholder measures.)

Sorry that I threw in "Green Line Mining". I couldn’t help myself, as it's the real cherry of Day 2. It’s simple enough, but let’s start with Blue Line Mining. Blue Line Mining is what they teach in school. It's how mining businesses have been run for generations. Red Line Mining is what they teach in Day 1 at Money Mining. "Whittling Away the Waste" goes through the classic example called Marvin, where a series of 10 steps take boosts NPV by a stupendous amount.

See my video for a basic run through things for an underground mining scenario. Take the red pill and start to see how deep the rabbit hole goes!

The Marvin example Ailbhe Goodbody describes in "Whittling away the waste" is Red Line Mining, but the methods Gerald introduces in Day 2 go far beyond the Marvin case. As Gerald likes to say, the methods in Day 2 take a sledgehammer to the mine plan.

To understand what he means about the sledgehammer, see how the cost curves change for Blue Line and Red Line Mining in these images below.

The Marvin example uses Blue Line costs, which are just labeled as "Costs" in the bar charts above. I made these charts from a numerical in the Whittle handbook that gives specific numbers and units for key costs. I normalized them to 100 to show how costs change with the Whittle method, which entails two optimizations problems with industry-standard software for scheduling and spatial planning. Hence, the two diagrams.

Notice how the Red Lines are completely different from the Blue Line in the two diagrams? The difference shows how much Whittle changes the cost curve in this realistic example. They make these changes for good reason, even if they lead you to do silly things like change the mathematical optimization problem in ways that are blatant errors to people trained in Blue Line Mining. 

"The mining manager finally took some interest in what we were doing. He rang me up and said, “Mate, you made a mistake. The pits are not right – they shouldn’t be that deep.” Why was I even wasting my breath? I was on the phone with a guy in Papua New Guinea trying to explain what has taken me a day and three-quarters to explain to you in person. Anyway, I tried to explain it all. He said, “No, I’ve found it. It’s cell number D87 in your business model.” Or whatever it was. He went on, “I fixed it for you. You were dividing by sulfur grade, but that’s obviously wrong. You should divide by tonnes. I fixed it for you and I’ve sent it back to you.” What could I say? How much difference do you think it made? 25% more NPV under our plan, which was $485 million in this case. A half-billion dollars in NPV by changing one cell in a spreadsheet." Gerald Whittle, 5 October 2017, Vancouver B.C. Canada.

Not only do the costs for key parts of the mine plan change drastically, Red Line Mining leaves you with 2 cost curves rather than 1. It takes you from one cost curve that matched the management accounting system and Generally Accepted Accounting Principles to something way out there. Hold on, we’re going even further!

People who understand the technical aspects of mathematical modelling and this kind of computer-based optimization have good reason to be wary of this stuff. New approaches to classic models are always controversial. As the Central Bankers say, "It takes a model to beat a model." Does Whittle have a model, or are they using ad hoc methods with no theoretical basis?

Good news for the technocrats: Red Line Mining has a firm theoretical basis. Say hello to the "Theory of Constraints" and "Activity-Based Costing".

A quick conceptual explanation of this theory hinges on language, specifically the words "fixed costs" and "variable costs". These are basic building blocks of economic theory, but appropriate definitions shift underfoot in practice. What is fixed on a single day is variable over the life of mine. How do we move forward? Carefully.

The Whittle method starts with interviews of key people in the business to identify idiosyncrasies in the operation that are important for the economic models. The models pin down the key choice variables and feasible ranges. As you determine what it costs for the mine to operate with a particular setup, you specify a linear cost equation for the choice variables. We call the fixed costs the period costs, as they refer to the cost of having the mine available for that time period. We call the variable costs attributable costs, as they refer to the cost of doing something within that time period.

Attributable costs are like unit costs, which are basic building blocks for Blue Line Mining, but are calculated differently. One problem with unit costs is that they lead you to calculate average cost including both fixed and variable costs. It’s important to strip-out the fixed part of the unit costs before calculating the averages because the fixed or period cost doesn’t change. If you include it then, you’re over-estimating how much you can change costs. 

When I first studied accounting, I thought it was a neat how conventions reflected human knowledge. Activity-Based Costing is a school of thought in accounting that is very powerful and has impacted how I consider my own business activities. Let me go through these charts again to explain in greater detail. These charts show how Red Line Mining changes the costs used in mine planning relative to Blue Line Mining.

Imagine these charts describe a mine that’s currently in production. Management brings in Whittle Consulting and they identify 8 items as the key cost-drivers for mine planning. How much can they do with 8 cost items, you wonder?

Whittle Consulting builds a mine plan to reflect operating conditions of the business and produces this chart. It show the current costs as $100 per unit and a new set of costs in red. Every cost item has changed, with one going from $100 to $0. That can’t be right? And all the new costs are lower, so the total costs don’t even match!

Whittle Consulting tells you that they are going to use this cost curve to estimate the optimal mine production schedule using the same software that you’ve been using. Then, they show you another chart.

Apparently, Whittle are also going to use two different cost curves to optimize the mine plan, spatially! They say that the bottleneck at the mine is going to change 3 years from now from a mining bottleneck to a milling bottleneck as the mine gets into part of the mine plan with less waste rock. The two cost curves are wildly different. Gerald explains that we’re taking a sledgehammer to the existing mine plan by loading the period costs on the bottleneck.

Note that putting all the fixed costs onto the bottleneck has such a big effects on the cost curve that I used a logarithmic chart to show the effect. Consider the costs when "mill tones" is the bottleneck. In this example from the Whittle handbook, the unitised cost from the current Blue Line plan is $3.00 per mill tonne. The attributable costs are only $1.50, and the total costs, attributable plus period costs, are $13.50. Imagine having someone come into your mining business and tell you a key cost is $13.50 rather than $3.00, except for the times when it’s really just $1.50. That’s a hit from the sledgehammer Gerald speaks of!

"What we did yesterday, most people find interesting. But that was just the warm-up. That was just to create the description of the mechanisms. Activity-Based Costing and Theory of Constraints completely change how these mechanisms will play out. It takes me a day-and-a-half before I can explain it. It will make sense, I believe. This is where these differences of hundreds of millions of dollars come from..." -- Gerald Whittle, 27 July 2018, Vancouver B.C. Canada.

Attributable costs are always lower than unitised cost because unitised cost include some period costs. See how much each item decreases in this example. Head Office costs decrease by 100%. There are no attributable costs to Head Office, so all the costs get included in the period cost. And that period cost either gets loaded onto the bottleneck for the spatial optimization or applied to all items equally for the scheduling problem.

The cost of the mine fleet decreases by 30% as you move from unit costs to attributable. That means 70% of mine fleet costs are period costs. Sounds about right with maintenance, financing, and everything else that makes a mining fleet costs money before you even start driving the trucks around! 

The essence of Activity-Based Costing is separating out the period and attributable costs. The Theory of constraints comes in when we load the period costs back onto the bottleneck. Period costs are typically 40-60% of total costs, which is a huge amount of cost to be fiddling around with.

It’s wholly unfair to put half the total costs onto the slowest part of system, but it’s done to reflect how important the bottleneck is for economic performance. You want to induce the rest of the system to go at a speed that keeps the bottleneck running flat-out. The bottleneck is the only part of the business that should be working at maximum capacity. Planned redundancy within the rest of mine is essential, which is another part of the Whittle Consulting approach that challenges deeply-held beliefs of mining professionals.

The technical aspects of Day 2 start with this change in accounting approach. This 2-hour crash course in Activity-Based Costing is powerful. Developing linear cost models from interviewing key people in the business strikes a chord with me for my activities because of my hashtag #NewtonInterviews, but the way these linear cost curves develop into a complex system is profound. In passing, I will note that it’s almost surely possible to use Fractal Geometry to describe the distinction between fixed/variable costs in some insightful way.

See this story I wrote based on one of Gerald’s stories from the world of manufacturing. Just imagine a flashing red light over the station that is the bottleneck on a factory floor. Every worker keep an eye on crew under flashing light and constantly think if they can do anything to help, which might entail taking break to play ping pong.

>> http://cdn.ceo.ca/1dm1hjp-2017-10-31-PeterBell-WhittleStory.pdf

Theory of Constraints is a "concept that views any manageable system as being limited in achieving its goals by a very small number of constraints." If you like the 80:20 Rule of Pareto's Law, then you'll love this. Read the management-oriented novel called "The Goal" by Eli Goldratt for more. Narrative helps convey how much all this entails a change in perspective. 

Red Line Mining combines Activity-Based Costing and Theory of Constraints. You identify bottlenecks in the system under various states, calculate attributable costs for each state, and then put the period costs onto the bottleneck for some planning problems but not for others.

You can do this using industry-standard software like Prober-E, but please don't try this at home. If you’re seeing fuzzy cut-off reports, then call Gerald. He inspires a lot of confidence in his two-day seminar about the potential to do better, but successful implementation may require global change within your business.

If you're still with me after that essential foray in Theory of Constraints and Activity-Based Costing, then you deserve an explanation of Green Line Mining.

At this point of the 2-day seminar, Gerald has covered a lot of ground. Yet, the final hours have some of the most important stuff that everyone in the mining industry globally needs to hear. To wit, Green Line Mining entails a "forum by which all stakeholders can discuss & understand, through the life of the project, the impact of the technical & policy decisions." This ability to discuss policy options within a model is an idea whose time has come with increasingly technocratic governments around the world.

When's the last time you heard about a government who wanted to engage in discussions with a particular mining company about an aspect of their flagship project, but weren't doing so because they didn't have the relevant technical expertise? Wood Mackenzie helped redesign mining policy in Ecuador and is now helping Egypt reconsider the use of oil & gas policy for the mining industry. The right macro policy is essential for a successful mining business, but doesn’t guarantee harmony at micro-scale of an individual mining project! That's what Green Line Mining is all about.

An extreme example of a Green Line mine plan is the one where they faced a dust constraint. The mine was close enough to a community of people that they had to limit how much blasting and trucking they did because of dust pollution. Whittle Consulting helped the company use a mathematical model of how much dust would be generated by different activities to maximize the NPV of the mine. They ended up re-arranging sequencing of the pits and phases in all kinds of creative ways. Gerald describes it as a work of art and I admit that what little I know about it strikes a beautiful balance between creativity and rigour.

For the desk jockeys looking for more rigorous work, search for more materials from Whittle Consulting on Risk & Uncertainty.

Gerald is clear that implementation hinges on interviews with key people in the business and that’s particularly evident in models with uncertainty, where a parsimonious model is essential. We want to reflect uncertainty in key aspects of system – we don't want to go overboard with normal distributions on every parameter in the model. I am partial to Monte Carlo simulation and am greatly impressed by the analysis I've seen from Whittle on the topic, but Gerald’s description of the "Scenarios Approach" is my most favourite analogy from his two-day seminar.

As Gerald says, "Pilots are particularly boring people under stress." That's because they have a plan, a back-up plan, and a back-up to the back-up plan. They have plans and access to a responsive system with ground control. Imagine if mining companies operated that way.

Do mining companies pre-rehearse scenarios to know what to do when something changes? What's your response function to rising metals prices?

I first met Gerald Whittle at the Sprott Symposium in 2017. He was there again in 2018 and gave a Money Mining seminar the following week. At the end of everything, he mentioned something he remembered from a speech by Ross Beaty in 2017. I had listened to it several times, but never heard what he heard, so I went and found the clip and made this recording.

>> http://cdn.ceo.ca/1dlnuik-RossBeaty-SilverPriceVsCutoffGrade.mp3

Someone asked Ross if they change the pace of metal production in response to metals prices. He said that they update things to some degree annually, but are largely committed to an existing plan. Mr. Beaty said, "There is a tendency to mine, as the price goes up, to mine the lower grade material and as the price goes down to mine the higher-grade material. So-called high-grading…" That is the classic Blue Line answer. 

I’ve asked Gerald Whittle if the mine planes produced by his integrated strategic planning methods are high-grading the deposits and he said, "It’s not high-grading, it’s right-grading." Gerald’s not one to shy away from telling you what he thinks and I believe he is exactly right, even if mining above the average grade of the deposit is (still) illegal in some countries!

To understood the tempest in a teapot here, consider what happens if you lower the cut-off grade without changing anything else. A lower cut-off decreases average grade for ROM production, right? Lower average grade means less metal production. Sorry if it’s not clear but this kind of thinking is why mining companies meet higher prices with lower production. And we wonder why shares in mining companies sometimes (often?) underperform the metals?

The converse gives another classic example of Blue Line thinking. If prices go down below your costs then you want to reduce costs immediately, right? You immediately want to restore profitability or show the street that you aren’t in too much trouble, so you increase throughput. Higher throughput means get production up and unit costs down. You may narrow the gap between prices and costs on a unit basis, but you're doing it by increasing total production. To quote Rick Rule, "losing money on every tonne and trying to make it up on volume."

In contrast to the Blue Line, the Red Line response function is a thing of beauty.

One of my favourite quotes from Gerald Whittle was his response to the question, "What do we do if we expect rising prices?" He said that, sometimes, the right thing to do is wait. The Devil's in the details, of course, but it is possible to maximize NPV by delaying production if you expect rising prices in some cases.

I like that quote about rising prices so much because so many mining executives are bullish on metals prices, but so few mining companies are able to delay production. The only example I know of a company that embraces their willingness to wait is Uranium Energy Corporation with their permitted ISR projects in the USA. UEC put the Palangana project into production briefly to show that it works, but took it offline pending higher uranium prices. What a bullish strategy!

The ideas around Blue Line, Red Line, and Green Line Mining deserve discussion in mining circles around the world. Again, a key to successful change is calling things by their name. These 3 phrases reflect so much and could prove to be powerful memes.

The Money Mining techniques are still popular among early adopters, but I'm starting to see signs of the early majority. The early majority are scared it won't work and need proof before they do it. The proof is out there, but it's still hard to find and understand. That's changing with every 2-day Money Mining seminar that Gerald Whittle runs around the world.

Contact Gerald Whittle to invite him out for your next executive retreat http://www.whittleconsulting.com.au/ and review the Whittle Consulting website to learn more. 

Originally published on LinkedIn: https://www.linkedin.com/pulse/taking-sledgehammer-your-mine-plan-gerald-whittle-consulting-bell 

Find PDF version here: https://www.scribd.com/document/386030159/Taking-a-Sledgehammer-to-Your-Mine-Plan-with-Gerald-Whittle-Whittle-Consulting 

Please note that I was not compensated to prepare and distribute this material. This is not investment advice.