Keynote speech
For
Harry Kenyon-Slaney, Chief Executive Energy, Rio Tinto
At
1250pm, Wednesday 16 October 2013 Brisbane Mining Club, Grand Ballroom
Acknowledgements:
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I want to acknowledge the traditional owners of the land on which we gather, the
Turrbal and Jagera people, and to pay my respects to their elders past and present.
Sponsors, guests, ladies and gentlemen
The Productivity Boom
I am really pleased and very honoured to be here today, in what is my first opportunity to
address the Brisbane Mining Club.
I must admit I am still basking in the afterglow of a major milestone.
This time yesterday I was opening the two billion dollar extension of Rio Tinto’s Kestrel
coking coal mine. This new long wall development will extend Kestrel’s life by 20 years.
A new mine is always a great occasion to mark in our industry – but to be blunt, the focus in
recent times has been more on survival than the development of new mines.
Queensland’s Treasurer, Tim Nicholls, who joined us yesterday, said mines like Kestrel will
play a central role in boosting the state’s economy. If this is to be the case, then I contend
that a new boom is needed – not one of size and volume as was the case over the past
decade, but one of productivity.
A boom in productivity is desperately needed if the Australian coal sector is going to find
answers to the difficult conditions it is facing.
As the Queensland Resources Council stated last month, the coal industry is experiencing
the toughest market conditions for a decade.
That said, I believe demand for Queensland’s high quality coals will remain solid as Asia
continues its journey of economic development.
Indeed, the International Energy Agency forecasts that global primary energy demand will
increase by 35 per cent between 2010 and 2035, with much of this new demand expected
to be met by coal.
But growth in volume has given way to an unremitting focus on raising productivity from
existing operations - In short our industry must now reset the way it does business if it is to
remain competitive over the long term.
Cautionary statement
This slide refers to the fact that this presentation may contain some forward looking
statements.
Why the mining sector needs a change in mind set
Firstly, what do I mean by productivity? Put simply I mean the number of inputs per unit of
output, including cost, volume, rate and hours worked.
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This productivity boom will require a change in mind set for our industry.
Cost control and aggressive capital management are back in vogue.
This is driven by declining returns and a need to demonstrate to investors that every dollar
they entrust us with will generate a return that rewards the risk they are taking.
We have to accept that we can no longer have growth at any cost. Growth has to be earned
the hard way by working harder, smarter and faster.
Our people are the cornerstone of our businesses. To deliver this boom in productivity
leaders must engage the hearts and minds of employees and articulate clearly why change
is needed. They need to understand how this new way of working will raise productivity and
improve the competitive position of our industry at this critical time.
Cost cutting is serious
Cost cutting has become a serious business and mining companies large and small have
announced aggressive cost reduction efforts, widespread layoffs and have cancelled or
delayed many new projects.
Companies across the sector are looking for every opportunity to shrink their outgoings
whilst maintaining or increasing production, thereby preserving margins.
To give you an example, Rio Tinto’s Australian coal business, which is the largest business in
Rio Tinto’s Energy product group, achieved more than $333 million in annualised savings in
the first half of this year.
These savings, which are continuing to grow, will play a significant part in ensuring Rio Tinto
meets its global target of $5 billion in cost savings by the end of 2014.
When Rio Tinto announced this target, the response from shareholders, analysts and the
media was broadly positive. But investors remain sceptical after a decade of rising unit costs
and now they want to see the money.
To do this we normally start by setting targets but in reality it is only then that the real work
begins.
We have to strike a balance between a fast and furious reduction in the cash that goes out
the door, and improving the value we create from every dollar we spend. In effect a
balance between bad costs and good costs.
To use a sporting analogy, the former can feel like a sugar hit because it addresses the
immediate problem, is relatively easy to administer and leaves you feeling as though you
are back in the race.
The latter, however, is more akin to a boot camp – you know it will address the underlying
cause and will set you up to win race after race, but it can be mighty hard to find the
willpower to see the programme through to the end, and you are not really sure which
aspect of your fitness is going to be the hardest to turn around.
At the risk of pushing this analogy too far, I would argue that all of us – companies,
contractors, service providers and Government - need to attend the boot camp in order
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that we can collectively extract better performance from our people, our machinery and
equipment, our suppliers, our infrastructure and yes, our laws and regulations.
If we get the balance right, we will unlock significant productivity gains and we will improve
our industry’s global competitiveness.
Economists tell us that Australia’s multi-factor productivity—the output produced from
labour and capital inputs—has scarcely grown this decade.
The Abbott government is already talking about a national productivity drive, and while this
is very positive, industry must play its part.
If our industry gets it right, we won’t allow costs to creep back in as conditions improve and
the memory of these dark times recedes.
One of the great scourges of modern business is the loss of time to inefficient behaviours,
practices and processes.
This theft of time costs us dearly and eats into the working hour, day or week and reduces
our capacity to do real value-adding work.
I am sure you can all identify areas in your businesses where time is lost.
In our sector, it can range from unscheduled downtime, inefficient hand over from
maintenance to production, inefficient operation of equipment, repetitive component
failure, reduced equipment life cycles, reduced tool time through inefficient permitting or
governance processes, excessive internal or external bureaucracy – I could go on.
An example of productivity improvement in the mining sector
Let me give you just one example of how we are addressing this ‘theft of time’ in our
Australian coal business.
Each of our haul trucks is now fitted with GPS technology.
The technology identifies areas where the haul road surface is poor or damaged, and
immediately notifies the site control room.
This enables road repairs to be made more quickly, and also improves the fleet’s cycle time,
reduces fuel use, and prolongs equipment life.
As they say, time is money.
An example of precision and productivity in Formula One racing
Outside of mining, one of the best examples of speed and precision is in Formula One motor
racing.
Routine tyre stops can be over in less than three seconds. In fact, races are often won and
lost because of the pit stops and pit crews, not the drivers.
But this was not always the case. Formula One says that even as late as the 1970s, pit stops
were ‘disorganised, long and often chaotic’.
So what changed? Two things:
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Technology - with the introduction of car to pit communication; and
Regulation - when changes were made to allow safe fuelling during the race.
The current record, set in August by Red Bull, is a four tyre changeover at a barelybelievable 2.05 seconds … **Instructions: click on slide 5 to activate a short 11 second clip.
Once played the slide will revert to a static image **
Here, personal engagement is fundamental – each individual must be accountable and
understand their role within a team.
I am sure you can see the parallels with our sector. We also need to maintain expensive
equipment in peak operating condition and bring it back into service as fast as possible.
We must make sure that our valued and expensive employees can work as efficiently as
possible. And we must call upon leaders to constantly scrutinise anything that prevents this.
Asking employees to act as owners, not managers
So the challenge is to create a world where, as our CEO Sam Walsh has articulated very
clearly, employees view themselves as owners and not managers of the business, and where
they treat its money as if it were their own.
We are asking our people to convert every decision they make into dollars be it through
cost, time or value – but to always do so in a way that does not elevate the underlying risk
of doing the task.
This approach is already delivering significant results for us.
In our coal business in the Hunter Valley, a superintendent challenged the traditional way of
rebuilding a dozer. As a result, he halved the time usually taken for this work, and saved
more than half a million dollars.
We have 70 dozers across our operations and typically they need rebuilding every 4 years.
Averaged out, that’s around 17 to 18 dozer rebuilds every year – so you can see the value
created.
The same approach has enabled us to save almost 600 thousand dollars on the cost of
rebuilding water carts. We have 19 water carts across our Australian coal business and they
are overhauled with similar frequency.
In recent months I have been travelling across our coal and uranium operations, specifically
to meet employees and hear about the challenges they face as we ask them to cut costs and
improve productivity.
One of the loudest messages I’ve heard is that leaders must engage more effectively with
their people. We have to learn to communicate in a way that is tailored to their fast-moving
days and their shift patterns.
We need to listen carefully, and to act on what we hear.
There is enormous opportunity to tap into people’s desire to talk, to debate, to question
and to offer up their ideas.
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In my experience, people want to know three things: what they are expected to do, how
they are doing, and what the future holds for them. If we can address these questions
through good dialogue and engagement, there is virtually no limit to the improvements we
can make.
Common goals for government and industry
There is another important aspect that I have not yet mentioned.
Governments play a crucial role in supporting the productive capability of an economy. This
includes through investment in education and training, science and research, and
community infrastructure.
Government and industry share a common goal of maximising profitable production whilst
protecting community and environmental interests.
In his victory speech last month, Prime Minister Tony Abbott declared: “Australia is open for
business” and Tim Nicholls reiterated the same message yesterday up at Kestrel.
The expectation is of a new government agenda that will encourage investment, economic
growth and job creation.
The federal government was also elected with a mandate to abolish the carbon tax, an
expensive additional impost on our sector.
To rebuild Australia’s competitiveness, we need government to help restore an appetite for
risk and investment.
And if we expect government to help drive this change, we – as an industry – need to
communicate more effectively with them about what should be done.
We need to identify and remove regulatory inefficiency. We need to explain the need for
certainty in policy making. And we need to be clear about the costs and delays that arise
from inefficient approval processes.
In my business, and I expect in yours too, there is work that does not add value and which
we simply must stop.
Similarly, we need to help policy makers see when the original intent of regulation is
engulfed by duplication or onerous processes.
At one of our coal mines in the Hunter Valley, we obtained state and federal government
consent for an extension after a rigorous three and a half year public process.
A New South Wales court overturned that decision, creating uncertainty for every major
new investment project in the state, as well as for existing mines simply requiring approval
to continue operating.
We’ve appealed to the New South Wales Supreme Court and are awaiting an outcome.
Meanwhile we’ve asked the NSW Planning Minister to restore clarity and certainty to the
planning system in his state through regulatory reform.
Mining is about long lead times. If we’re to invest with confidence and achieve sustainable
growth, we need predictability in policy and political certainty.
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There is progress. Already here in Queensland we are pleased that serious efforts are being
made to cut red and green tape and just this week the Government announced plans to cut
the approval time for exploration permits to 90 days from the recent average of 22 months.
Working with our people
A key area of regulation is industrial relations law. It must be fair and provide appropriate
protection for employees, while balancing individual desires with business and national
needs.
In any workplace, the way people work together, and management’s relationship with
employees and unions, can significantly affect productivity.
Often, the debate on IR focuses on the minutiae of the relevant statutory system and
neglects the critical issue of how people can work better together.
Rio Tinto has a full range of employment arrangements and union agreements, and our
approach is always to focus on employees not industrial relations.
This brings a very different focus, and builds employee engagement.
Leaders involve their teams when there is an issue to be dealt with. Teams work together to
improve business performance.
This approach is totally consistent with my earlier comments about engaging with our
employees to address current business challenges.
The gains of the next decade will rely overwhelmingly on improvements in productivity
In closing, it’s worth reflecting on some comments from the Treasury’s Macroeconomic
Group, which advises the Federal Government on matters relating to the performance of
the economy.
At last year’s Australian Conference of Economists, Dr David Gruen said the gains in
Australian living standards of the past decade were more easily achieved than in the 1990s,
but they were achieved in ways that cannot be replicated.
This was put down to the boom in Australia’s terms of trade.
He went on to say that the gains of the next decade will rely overwhelmingly on
improvements in productivity. Today’s challenges will encourage new technologies and
work practices, and allow resources to move to more productive uses.
The mining industry has recognised this. At Rio Tinto, we started the productivity
conversation with our people more than 12 months ago.
It’s a serious and urgent conversation which our people are embracing enthusiastically as
they rise to the challenge of acting like owners and not managers.
From where I sit, I welcome the light bulb moment that has occurred and I am sure investors
do too. Thank you.
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16 October 2013 | Brisbane Mining Club
The Productivity Boom
Harry Kenyon-Slaney
Rio Tinto Chief Executive Energy
Cautionary statement
This presentation has been prepared by Rio Tinto plc and Rio Tinto Limited (“Rio Tinto”) and consisting of the slides for a
presentation concerning Rio Tinto. By reviewing/attending this presentation you agree to be bound by the following conditions.
Forward-looking statements
This presentation includes forward-looking statements. All statements other than statements of historical facts included in this
presentation, including, without limitation, those regarding Rio Tinto’s financial position, business strategy, plans and objectives
of management for future operations (including development plans and objectives relating to Rio Tinto’s products, production
forecasts and reserve and resource positions), are forward-looking statements. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Rio
Tinto, or industry results, to be materially different from any future results, performance or achievements expressed or implied by
such forward-looking statements.
Such forward-looking statements are based on numerous assumptions regarding Rio Tinto’s present and future business
strategies and the environment in which Rio Tinto will operate in the future. Among the important factors that could cause Rio
Tinto’s actual results, performance or achievements to differ materially from those in the forward-looking statements include,
among others, levels of actual production during any period, levels of demand and market prices, the ability to produce and
transport products profitably, the impact of foreign currency exchange rates on market prices and operating costs, operational
problems, political uncertainty and economic conditions in relevant areas of the world, the actions of competitors, activities by
governmental authorities such as changes in taxation or regulation and such other risk factors identified in Rio Tinto's most
recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission (the "SEC") or Form 6-Ks
furnished to the SEC. Forward-looking statements should, therefore, be construed in light of such risk factors and undue
reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this
presentation.
Nothing in this presentation should be interpreted to mean that future earnings per share of Rio Tinto plc or Rio Tinto Limited will
necessarily match or exceed its historical published earnings per share.
© 2013 Rio Tinto - All Rights Reserved
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Why the mining sector needs a change in
mind set
• Current focus is cost control and capital management
• Future growth will need to be:
• at less cost
• in faster time
• with fewer inputs
• Engaging employees will be key to increasing productivity
• Higher productivity will help Australian mining be globally competitive
4
Cost cutting is serious
5
An example of productivity improvement in the
mining sector
GPS technology fitted to haul trucks is enabling faster road repairs and less wear/tear on trucks
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An example of precision and productivity in
Formula One racing
Image from You Tube
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Asking employees to act as owners, not
managers
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Common goals for government and industry
• Maximising profitable production
• Protecting community and environmental interests
• Industry must communicate its needs to government for improved certainty:
- more timely approvals
- less red and green tape
9
Working with our people
• Winning employees’ hearts and minds is key to lifting productivity
• Leaders must engage their teams to address current business challenges
• Working together is critical to improving business performance
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“
The gains of the
next decade will
rely overwhelmingly
on improvements in
productivity
Dr David Gruen
Executive Director Domestic,
Macroeconomic Group