Productivity across the global mining

sector is starting to improve

Our latest data show an upward trend—from a low base.

Nathan Flesher, Mukani Moyo, Stefan Rehbach, and Eben van Niekerk

JUNE 2018 • METALS & MINING © hsvrs/Getty Images

 Over the past year, several indicators of different
aspects of the global mining sector’s performance
have confirmed that it is now turning around after
the dark days of 2014, 2015, and early 2016. The
Bloomberg World Mining Index shows that the
sector’s return on capital has rebounded strongly
from the bottom of the trough it reached in 2016. The
S&P GSCI Industrial Metals Index of commodity
prices has risen by nearly 60 percent from its low, in
January 2016. The MSCI Metals and Mining Index
of company share prices has rebounded even more
dramatically—up more than two-and-a-half times
from its low point, in January 2016.
What is happening on the productivity front? Our
research shows that the sector’s performance is rising Our research shows that the biggest contributions
Universal
in 2018
this area too—albeit modestly so far. The MineLens
Productivity performance
Productivity Index across
(MPI), McKinsey’s the global mining
proprietary
Exhibit 1 of 2
indicator of the global mining sector’s productivity
(see sidebar, “About the MineLens Productivity
Index”), shows an increase of 2.8 percent a year in
productivity performance for 2014 to 2016 (the
most recent period researched). While productivity
performance remains far below the levels reached
before the demand supercycle struck, MPI data show
that the sector is making some headway: its 2014 to
2016 MPI score is starting to move up from the period
of stagnant productivity in the five-year period from
2009 to 2014 (Exhibit 1). Observations from our
work in the field, as well as news of productivity
gains from major mining companies, suggest that
the trend is continuing.
Raising productivity by limiting spending
and reducing head counts
to higher mining productivity have come from a
industry
sustained push to reduce mine workforce head
counts and boost labor productivity while modestly
increasing output (Exhibit 2). Employment has

Exhibit 1 Since 2014, mining productivity has begun to reverse course with a gradual increase.

MineLens Productivity Index (MPI), index (2004 = 100)

-9.6% 0% +2.8%
per annum per annum per annum
100

90

80

70

60

50

2004 2006 2008 2010 2012 2014 2016

Source: Company reports and websites; MineLens by McKinsey; McKinsey analysis

2 Productivity across the global mining sector is starting to improve

 Universal 2018
Productivity performance across the global mining industry
Exhibit 2 of 2

Exhibit 2 Since 2014, mines have increased their productivity by limiting spending and
improving labor productivity.

Production Employment
Total material moved, Number of workers,
index (2014 = 100) index (2014 = 100)

110 110

105 105
Productivity
100 100
MineLens Productivity Index, index
(2014 = 100)
95 CAGR 95 CAGR
+1.8% per annum –3.1% per annum
110
90 90

105 2014 2016 2014 2016

100 Capital expenditures Operating expenses

Net asset book value, Expenses,3
95 CAGR1 index (2014 = 100) real terms2 index (2014 = 100) real terms2
+2.8% per annum
90
110 110
2014 2016
105 105

100 100

95 CAGR 95 CAGR
+1.6% per annum +0.8% per annum
90 90
2014 2016 2014 2016

1 Compound annual growth rate (2014-16).

2 Capital expenditures and operating expenditures have been adjusted for mine cost inflation. Capital expenditures include book value of plant
and equipment.
3 Not including labor costs.

Source: MineLens by McKinsey

fallen by around 3.0 percent a year, while production
(or output) has increased by 1.8 percent a year. At
the same time, mining companies have tightly
controlled capital spending and expenditures for
nonlabor operations—particularly in the most
recent year of the period researched, when outlays
on both items fell.
These performance dynamics differ significantly
from what happened during the period of stagnant
productivity, from 2009 to 2014. During those
years, the industry managed to raise production
by 4 percent a year while holding the increase in
its capital expenditures to 3 percent a year. That
represented a major change in conduct from

Productivity across the global mining sector is starting to improve 3

About the MineLens Productivity Index
McKinsey’s MineLens Productivity Index uses
a simple but comprehensive methodology to
measure aspects of productivity that operational
managers can control. MPI’s basis is the well-
established Cobb-Douglas production function,
used to measure productivity in national economies.
We have adjusted the function so that we can
measure productivity in mining operations. The MPI
comprises four elements: physical mining output,
employment at the mine site, the value of assets at
the site, and nonlabor costs. Physical mining output
is measured as total material moved, so changes
in ore grades, stripping ratios, or commodity prices
don’t affect the MPI.
the pre-2009 peak of the supercycle, when the
sector’s capital expenditures rose by 24 percent
annually. Despite these efforts, overall productivity
performance for the period was hurt by substantial
increases in employment (over 8 percent a year) and
operating expenditures (around 6 percent a year).
The industry’s productivity performance is arguably
the key determinant of its long-term ability to
translate higher commodity prices into increased
earnings. The MPI is specifically designed to
track true underlying productivity: how much
total material (ore and waste) is being shifted by
using what amount of resources. It thus not only
disregards the influence of grades, strip ratios,
and mining commodity prices but also takes into
account the rising cost of mine supplies, such as
diesel fuel.
These latest trends signaling a small uptick in
productivity are all the more important in today’s
context. The reason is that as demand picks up and
4 Productivity across the global mining sector is starting to improve
We have developed an extensive data set to
conduct analyses using the MPI, which covers
mines representing all major mining geographies
around the world, all major mining commodities,
and a range of company sizes. Detailed data have
been gathered for each mine from publicly available
sources for all of MPI’s four components: production
volumes, number of employees, net assets, and
costs not related to labor.
For more information about MineLens and MPI, see
minelens.com. For information about MineSpans,
the research arm of MineLens, visit minespans.com.
metals and minerals prices recover, the mining
sector again confronts some of the same dynamics
that led to the collapse in productivity performance
during the supercycle. The sector has been seeing
strong growth in demand and substantial price
increases for battery-related mining commodities
such as cobalt, nickel, lithium, and, to a lesser extent,
copper. Prices for other commodities, however, have
remained flat or, in some cases, declined. The sector
must therefore be careful to stay on track toward
better productivity regardless of commodity by
nurturing today’s first green shoots of what remains,
so far, a fragile recovery in MPI.
How to improve productivity performance
What steps should mining companies take to ensure
that they continue to improve their productivity?
In the short term, they will need to guard against
relaxing their discipline on capital and operating
expenditures (including head counts) in the face of
the demand and pricing rebound. These companies
have to ensure that they extract each ton of dirt
at the best possible cost, so that they can pocket a
greater portion of the higher prices currently seen in
the market as demand gains momentum.
At the same time, as our previous articles on
MPI and mining productivity suggested,1 mines
should continue to address the causes of declining
productivity through the following initiatives:
ƒƒ Embed effective management operating
systems at mines. Establishing such systems
will make the performance of operations more
transparent and identify areas for improvement.
The operating systems should also free people and
resources to focus on productivity and operational
excellence and should support effective
performance management. This approach
will help resolve a long-standing challenge for
many mining companies: making productivity
performance (and its measurement) a priority.
Operators have typically concentrated on
improving one or two variables, such as reducing
costs or capital intensity or increasing throughput.
ƒƒ Prioritize operational excellence and the
development of capabilities. Operational
excellence implies a sustained focus on
reducing costs and improving throughput, and
that will force mining companies to embed
manufacturing systems and continuous-
improvement methods within their
organizations. To improve performance over
time, this manufacturing-inspired approach
focuses on standard work and the disciplined
execution of processes. Areas of focus include
eliminating waste, reducing variability, and
making assets more productive through
advanced reliability and maintenance.
To improve productivity, mining companies
have to build the capabilities of both their
organizations and the individuals who work
in them. Many mining companies still regard
productivity increases as the domain of a
Productivity across the global mining sector is starting to improve
continuous-improvement department or of a
handful of lean experts or Six Sigma black belts,
not a core competence that should be embraced
throughout the organization.
ƒƒ Focus on innovation. Innovation and adoption
of breakthrough technologies could also help
in the productivity battle. The mining industry
has room to raise its game here. Digitization, in
particular, offers several useful approaches.2
One of the most accessible is to draw insights
from the data that mining companies routinely
gather, and then use that information to forecast
when a piece of equipment may fail. Estimating
the probability that specific components will
break down (rather than using a traditional
time-based approach for replacing them) helps
reduce maintenance spending and prevents
interruptions that affect production.
Meanwhile, real-time data and better analytical
engines are enhancing scheduling and processing
approaches that can help to maximize the utilization
and yields of equipment. In the mine pit, combining
traditional dispatching with smart algorithms can
optimize the efficiency of machine movements. In
processing plants, applying new mathematical
techniques that look for hidden relationships
between second- and third-order variables can
improve yields by 3 to 10 percent within months.
Digitization also facilitates increased automation
and mechanization. Automated haulage and drilling
have been commercialized. Now in testing are
other technologies, such as automated blasting and
shoveling, which make it possible to reduce not only
labor costs but also the number of people working in
the most dangerous areas.
The MPI’s return to positive territory marks a
significant achievement for the global mining
industry. But it is important to recognize that the
5
 recovery in productivity remains fragile. Mining Nathan Flesher, an associate partner and senior
companies must continue to increase their solution leader of MineLens, is based in McKinsey’s
underlying productivity. Instead of becoming Silicon Valley office. Mukani Moyo is a senior expert in
distracted by short-term spikes in prices and by the Toronto office. Stefan Rehbach is a senior expert
pockets of demand growth, they should remain in the Düsseldorf office. Eben van Niekerk, in the Perth
office, is a solution manager at MineLens.
focused on improving their productive operations
in the long term. As the dramatic changes in
The authors wish to thank Friso De Clercq, Liesbet
the sector’s fortunes over the past decade have
Grégoir, and Ajay Lala for their contributions to
underlined, mining companies should stay focused
this article.
on productivity initiatives that can help them
control their destiny throughout the demand cycle. Designed by Global Editorial Services.
Copyright © 2018 McKinsey & Company.
All rights reserved.
1
See Ajay Lala, Mukani Moyo, Stefan Rehbach, and Richard
Sellschop, “Productivity at the mine face: Pointing the way
forward,” August 2016, McKinsey.com.
2
For a more extensive discussion of how digitization can help
mining productivity, see Hugh Durrant-Whyte, Ryan Geraghty,
Ferran Pujol, and Richard Sellschop, “How digital innovation can
improve mining productivity,” November 2015, McKinsey.com.

6 Productivity across the global mining sector is starting to improve