The Melbourne Mining Club, Melbourne Town Hall, Thursday 11 October 2001

Minings Myths and Realities

Barry Cusack
Managing Director, Rio Tinto Australia and President, Minerals Council of Australia
Thank you for asking me to address you today. It is no
small thing to follow a speaker as distinguished as Sir Arvi
Parbo the doyen of Australian mining and patron of this
club.
Two months ago we heard Sir Arvi talk about the
contribution minerals and energy have made to this country.
He described how continuing success in finding, producing
and selling minerals had come to be taken for granted by the
Australian public, many of whom were ignorant of the
economic and social dividends that mining produces.
A more prosperous and secure society has the time to focus
on the negatives attached to any form of economic endeavour.
Today we operate in a different world from that of the men
and women who built Broken Hill, Mt Isa and the Pilbara to
public acclaim. Today we cannot take public approval of our
activities for granted.
With that in mind, I am going to talk about the future of this
industry; and I am going to approach my subject obliquely by
touching on a couple of my favourite hobby horses. The first
of these is the way we miners think about time, and how that
affects our investment and planning strategies. The second is
a concern for the way Australian mining attracts and develops
a pool of talented people who will be tomorrows leaders.
Then I want to say something about the realities of mining
in a world where both investors and the public have higher
expectations of resource companies. My chief point is that
Australian mining is entering a period unlike any we have
experienced previously, and we must understand the factors
that are driving change.
Okay, time. We live in an age which values immediacy.
People want gratification of their needs and desires this
instant! The demonstrators catch cry says it all: What do
we want - ? When do we want it? Now!
I suggest that one reason that our industry sometimes has a
problem explaining itself to modern audiences is that mining
professionals have a different time frame. We deal in
materials that were created aeons ago from star dust. As
miners and metallurgists we can trace our professional
ancestry back at least to the fourth millennium BC. And, in
this, the twenty first century AD, major resource companies
like Rio Tinto own assets whose productive lives exceed 50
years. The gestation period of a modern mining operation can
be up to ten and even twenty years. The planning horizon is
decades.
We move to a different beat than that of the politicians with
their three or four year electoral focus or of the financial

markets, concerned about the next quarters results. The big

challenge for a modern resource company is to reconcile these
urgent contemporary rhythms with the more measured
physical realities of resource development.
In our current consumerist society, accustomed to the idea
of ever shorter shelf lives and comfortable with the idea of
planned obsolescence, industries which plan projects that will
outlast their creators are an anomaly. The people with the
vision and capabilities to plan, build and operate such projects
are also rare. The ability to think long term and to handle
complexity is the essence of corporate leadership and in any
society, at any one time, there are relatively few people with
that ability.
Once, resource companies had little trouble attracting such
talent. Bright people were attracted to our industry because it
made a visible difference to the way we lived, and because it
was seen as creative and exciting. In a relatively closed
economy, mining brought in export income and Australian
mining professionals were among the minority with a window
on a wider world.
The reality is that mining still makes a difference to the way
we live. Miners still have an international outlook. And, our
industry is still inherently exciting.
What has changed is that the rest of the economy has
woken up. Ideological, technical and regulatory barriers to
international trade have crumbled. Other industries have
accepted the need for competition against global benchmarks.
Whole new industries have been invented and a new graduate
must choose from a bewildering selection of opportunities.
The case for choosing a career in mining is no longer as
obvious.
Yet that case exists and it is a strong case. The
fundamental need for minerals and energy in a world where
there are great disparities in living standards is an inescapable
reality. So too, is global population growth within the
lifetime of everyone in this room. How efficiently, how
effectively and how fairly that demand is satisfied matters.
And it matters in a way that designing a smaller, more
fashionable mobile phone or marketing a trendy caffeineladen sports drink never will.
Theres a myth that mining is yesterdays industry in the
eyes of a generation that prizes technical sophistication.
Exposure to a modern mining operation soon puts that illusion
to rest. I doubt if any business has exploited scientific and
technological discoveries more avidly than a mining business
seeking a competitive advantage. In particular, the major
minerals companies have been among the leaders in taking

The Melbourne Mining Club

advantage of information and communications technology and

we need to continue this by attracting the best and brightest.
The Minerals Tertiary Education Council aims to lift the
standards not only of undergraduates, but also of
postgraduates. Not all of the latter seek further academic
honours. The demands on professionals will place great
emphasis on continuous professional development.
The
challenge to our universities is to provide the latest material in
easily accessed ways.
This demands a cooperative and
collaborative tertiary sector.
Intellectual challenges abound in the minerals industry for
any young man or woman wanting a stimulating and
rewarding career. However, I am not sure that our industry
appreciates how important it is to challenge our young people.
I believe that we have to make a deliberate effort to expose
them to responsibility at an earlier age and in as wide a range
of roles as possible. Tomorrows executive needs to be
informed on many technologies, have well developed social
skills and be comfortable in operating in a range of cultures.
There is a good reason to making sure our people get the
best training and the widest experience possible. They will
take up positions of importance at a critical time for mining.
In the course of my professional lifetime I have witnessed
extraordinary change to our industry, changes in technology,
in markets, in public regard for, and expectations of, our
industry. Yet that process of change shows no sign of
stopping and promises to transform the industry. It is a
transformation that must take place for economic, social and
environmental reasons.
It is no secret that, as an investment, mining overall has
failed to fulfil the promise that seemed so obvious in the
sixties and early seventies. In the last fifteen years few
companies have earned their cost of capital. And equally few
have delivered above average shareholder returns.
Its not hard to point to economic reasons for this lacklustre
performance. The oil shocks of the seventies constrained
economic growth and led to structural over-capacity. The
break-up of the FSU in the years after 1989 diverted a flood
of metal into western markets.
Some high cost capacity closed as a result, but for many
producers the response was to increase production, seek
increased efficiencies and cut costs. Increases to labour
productivity were significant, but the benefits went almost
solely to the customers in the form of lower real prices.
Suppliers, employees and governments did well from our
industry, which regularly set new records for production and
exports; shareholders did not do so well. No wonder then
that, in the last five years, the share of the resources sector in
the All Ordinaries went from 33 per cent to 14 per cent. On a
global scale, minings share of stock markets dropped from 5
per cent to 1 per cent over the same period.
One response has been to blame the new, or knowledgebased, economy for attracting investment away from the
mineral and energy sector. IT companies typically have
postulated a vision and growth strategy that make those of the
resources sector look very mundane.
Thats a face-saving myth and we should think carefully
before we attribute our problems to the obvious attractions of
these glamorous newcomers. The reality is that the new

economy has had many positive affects on the minerals

industry that tend to get overlooked. The PC that sits on your
desk has about thirty different minerals in it and demand for
metals associated with electricity transmission copper and
aluminium - has risen. The internet uses 8 13 per cent of the
electricity produced in the United States, according to the US
Energy Secretary. The continued electrification of the world
is driving metal and fuel consumption intensity.
Then, as I have already said, our industry has seized upon
IT to help it in its search for greater efficiency and
productivity and for a relatively small capital outlay. If the
sixties, seventies and eighties were about capturing the
economies of scale and exploiting new mining techniques,
this is the era of capturing the benefits of knowledge-based
technologies. You see their application in all aspects of
mining: in exploration; in delineating the ore body; in
optimising the mine plan; in scheduling plant; in checking
consistency and quality; in managing wastes and emissions; in
controlling mill processes, and in dovetailing production and
delivery with the customer.
These are the obvious applications of IT, used to make an
operation more productive, cleaner, safer and dependable.
But there is another side to the IT revolution, increasingly
being resorted to by larger companies determined to wring
advantage from global operations. In house, companies aim
to spread best practice from operation to operation and to
improve their business systems, as well as sharing back-office
services.
Other initiatives involve co-operation between competitors
in areas such as shipping and the use of e-procurement
services. Then there is the development of screen trading
which is bringing a new level of transparency to the
marketing of minerals and metals. It threatens intermediaries,
but promises to bring customers and suppliers into a closer
relationship. None of these developments add tonnes to
production, but they expedite and facilitate every aspect of a
business. Yet who benefits?
Its a moot point whether cost savings have maintained the
historical downward trend on prices, or whether lower prices
have driven cost savings. What is certain is that low
profitability has convinced capital markets that the mining
industry provides poor returns because in the past it has
employed capital inefficiently.
A recent ABN-AMRO
analysis of 116 mining and metals companies estimated that
the mining industry averaged a 9.6% return on capital
employed last year, slightly over the industrys cost of capital.
Todays investors look less at the production forecasts of an
operation and more at the earnings and cash flow forecasts.
When demand increases and prices fall the industry can
only look inward for the reason. The simple answer is that,
due to the inherent optimism that is a feature of our industry,
supply has more than kept pace with demand. Its a
compliment to the industrys technical competence (if not its
commercial acumen) that, despite increasing environmental
and social levies and other constraints, most suppliers have
proved equal to the challenge.
One response to overproduction has been to reduce
exploration expenditure. Global expenditure on mineral
exploration fell from a peak of US$5.2 billion in 1997 to

The Melbourne Mining Club

$US2.6 billion last year. The trend on the part of major

minerals companies has been towards brownfields exploration
with a view to the synergies such discoveries would provide,
and collaboration with knowledgeable local companies.
Another, related response, recognising the fragmented
nature of the industry and its absence of pricing power is a
trend towards consolidation. In a sense it is more a
reconsolidation, given that there is not much difference
between the situation as it is now and as it was in 1970. In
fact, the degree of concentration in aluminium and copper is
less than it was in the 1960s and 1970s.
What we are seeing is the phenomenon of large resource
companies attempting to attain the size that will allow them to
register on world capital markets and attract global custom.
Once, such size would have raised concerns of slow reflexes
and a bureaucratic culture. Now, thanks to IT and a different
management philosophy the advantages of size can be
identified and leveraged. We can only hope that larger
companies will take a more cautious attitude to installing new
capacity. Only then will the self-inflicted pain of declining
real prices and narrow margins be relieved.
That brings me to a very important component of the
change which is going to transform our industry. It stems
from the fact that while the investment community can see the
positives behind the size and global nature of businesses such
as Rio Tinto, that same profile worries many ordinary people.
We have become a threat because global companies appear to
have power without accountability. It is hardly a rational fear
but, as Sir Arvi pointed out in his address, it is nave to think
that the rational argument will always win the day especially
in the short term.
As a colleague of mine put it recently, for the first time in
history the mining industry is being judged less on what it
does and more on how it does it.
As a result, our industry has had to enlarge the scope of its
interests and expertise. We have always known that the
environment mattered. Indeed, when environmental politics
were at their most turbulent, the miners took ironic
consolation in the knowledge that they employed more
environmental scientists than any other industry.
One lesson learned in that arena was that it was, and is, not
enough to fulfil all the legal and regulatory requirements
imposed by Australias three levels of Government. People
want to know about what is going to affect them even if it is
only vicariously. If a company does not involve the
community in all aspects of a resource development then
someone, somewhere, will assume the worst and work to
frustrate that development.
Probably, that frustration will be voiced over the internet
and win support from one of the community organisations or
NGOs that have proliferated in the last few decades. The
information and communications technology that has
contributed to the survival of our industry has also
strengthened its critics by giving them insights and access that
were once not available to the general public. Such
technology, however, can allow us to turn transparency into a
means of defusing hostility, if it is done well and with honest
intentions.

Nor is it just a question of listening to people who fear the

genuine environmental, social and economic consequences of
a mining operation in their neighbourhood. The debate
continues at a macro-level around the world, conducted by
people who may never see a mine, but who feel strongly
about the conditions under which resource industries should
be allowed to operate. That debate increasingly revolves
around the concept of sustainability.
Just how well our industry conducts its side of this debate
could determine the future for Australian mining.
Sustainable development first came to the publics attention
at the Earth Summit held in Rio nine years ago. That
Summit produced Agenda 21 which outlined an action plan
for integrating economic and social development with
environmental protection in the name of sustainable
development. Interestingly the mining industry was not
mentioned in the document, although oil and gas were. Yet it
was apparent to industry observers that the minerals sector,
where development involves many complex trade-offs, must
be deeply affected by actions taken in the name of sustainable
development.
Come forward six years to a meeting of ten mining and
metals company chairmen and chief executives held in
London. What occupied the minds of these leaders was the
apparent failure of the industry to counter either the antipathy
displayed by a minority towards mining, or the apathy of the
majority to suggested measures that would severely damage
it. Something different had to be done, and quickly.
That realisation was to lead to the creation of the Global
Mining Initiative (GMI) which has grown to represent pretty
well every major minerals company. The GMI evolved from
a determination to engage with as wide a range of the
industrys critics as possible; to listen to those critics and to
try and reach a mutual understanding.
The keystone of the GMI is the Mining, Minerals and
Sustainable Development (MMSD) project, designed to
involve non-industry participants (including governments,
NGOs, conservation groups) in an analysis of our industry
and the options available to it in the move to a more
sustainable society.
Its an arms-length exercise. The industry puts up most of
the cash for the project, but has no control over what aspects
of the industry are investigated, who is consulted, or how the
report is written. The only things that are certain are that the
contents of that report are likely to be provocative and that
they will be taken seriously. The report will be the
centrepiece of a conference to be held in Toronto in May next
year, involving the industry and stakeholders. From that
conference should come some indication of what the twenty
first century mining industry will look like.
A report and a conference do not guarantee change. For
that reason the GMI has set up the International Council on
Mining and Metals (ICMM) as an international voice for the
industry charged with maintaining a dialogue and effecting
change.
More to the point, it will allow the global minerals industry
to contribute constructively to the World Summit on
Sustainable Development that will be held in South Africa

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later in 2002. Our aim must be to be seen, not as part of the

problem, but as part of the solution.
To sum up; the Australian mining industry faces two
challenges that are interlinked. The first is to stop destroying
shareholder value by ditching the myth that the next spin of
the minerals cycle will save our bacon. Only by being
realistic about the slow growth of mineral demand, and thus
of our industry, can we be sensible about creating new
capacity. Only then will we work our assets as closely as
possible to their technical limits and get better returns on the
capital entrusted to us.
The second challenge is that of convincing the world that
we can mine sustainably. I do not think we can do this
without some changes to the way we operate; changes that
will be more clearly understood a year or two from now. Nor
do I think that such changes will be cost-free, despite those
who argue that eco-efficiency will foot the bill.
What I do believe, is that we have no choice. Companies
that will not, or cannot, meet higher public expectations will
face increasing opposition and lose the confidence of the
market.
Those who can, will enjoy a corresponding
competitive advantage. But it is important that companies
recognise the need to surmount both challenges, for you
cannot succeed in one and not the other.