Striving for Dominance
With measures of luck, perseverance and determination, Noranda Inc. grew out of the highly successful exploitation of the Horne Cu-Au deposit in northwest Quebec, almost eight decades ago. It later spread to other parts of the province as well as into Ontario, British Columbia and the United States. Noranda eventually became an international diversified natural resources company, including forest products and petroleum.
During 13 years at the helm, Noranda’s president and CEO David Kerr has seen a number of changes, including a return to the company’s mining roots. The latest restructuring began late in 1997, when Noranda decided to shed its forestry and oil and gas assets to become a highly focused base and light metals mining and metallurgy company. More recent programs are attempting to trim operating costs and achieve better profits, in order to be competitive with the best metals companies.
Along the way, Noranda has also taken ownership positions in other successful miners. Through its 49.9% interest in Falconbridge Ltd., Noranda has its hand in nickel, copper and zinc. Noranda owns 28.4% of Battle Mountain Gold Co., a gold producer, and 58.8% of Novicourt Inc., a significant Cu-Zn miner. It also owns a 33.75% share of the large Antamina Cu-Zn-Ag project in Peru, scheduled to begin mining in 2002. In May, Noranda acquired a 6% interest in Rio Algom Ltd., another significant copper producer with its own 33.75% interest in Antamina.
In its turn, Noranda is controlled by Toronto-based Brascan Corp. (about 40% interest). Says Noranda executive vice-president and COO Dave Goldman, “The Brascan interest has brought us financial strength, right from the beginning [in 1981] when they infused $500 million into Noranda when we badly needed it.” Goldman points to Noranda’s tremendously strong balance sheet today, with $1 billion in cash. He notes: “Brascan could easily dilute its holdings in the right circumstances.”
The major capital investments in the core businesses during 1995-99 resulted in start-up at Falconbridge’s Raglan and Collahuasi mines; this year will see Noranda’s Magnola and Quantum Leap plants coming onstream. “The future lies in mega-projects, particularly in the mining end,” says Goldman. “Antamina is very characteristic of the kind of partnerships that we see ourselves being involved in as we go forward.”
Part of the restructuring process involved realizing that Noranda had to improve its management practices. First the company had to be set up very clearly along business lines, breaking into the copper, zinc, aluminum, recycling and magnesium business units.
“The fundamental strength of our company in the past was that the divisions were very much like the independent miner off doing his thing,” says Goldman. “We haven’t taken advantage of the leverage that working together could afford us.” So was born the idea of Shared Business Services for procurement, transportation, information services and human resources.
This has resulted in some unique opportunities and partnerships, such as the one announced earlier this year with Atlas Copco Wagner Inc. for servicing and replacing the underground haulage equipment fleets. Noranda is using asset management software solutions like that supplied by Indus International at the company’s new magnesium plant, Magnola, to help integrate procurement, assets, maintenance, inventory, human resources and finances.
The three-year Margin Improvement Program was intended to reduce ongoing annual operating costs by $200 million by the end of 2000. As improvements were found, it was realized that the target was too low: savings of $285 have now been targeted.
“We did well in the first one-and-a-half years, as we picked the low-hanging fruit,” says Kerr. “It was obviously getting difficult to identify more of these.”
The next step was to bring in a more rigorous program to identify the larger savings. Six Sigma was chosen as a philosophy, a system of statistical measurements, and a strategy for optimizing business processes. More than 100 employees were chosen from amongst all divisions to work full-time for a minimum of two years as “Black Belts”. They have been taken off their regular jobs (and not replaced), trained beginning last September, and challenged with completing four or five projects per year. Each project is to effect at least $250,000 in ongoing annual savings.
“We found another whole layer of fruit, which we would not have found without sophisticated analytical tools and training,” says Kerr. There are 79 Six Sigma projects in the first wave, being completed this spring, yielding in excess of $49 million in annualized improvements. There are still three more waves of projects to complete in 2000.
He adds: “When the Black Belts go back to their jobs, they will be better employees. The discipline that has been developed in them is spreading around the company. Both Margin Improvement and Six Sigma programs have already been very effective. Beyond improving earnings to the company, they have been good morale builders, making people enthusiastic about what they see happening.”
Interview With David Kerr
Has Noranda at last found the right course toward long-term profits? In an interview with CMJ in April at Noranda’s downtown Toronto head office, president and CEO David Kerr outlined the major issues facing his company and the whole metals industry.
CMJ: Is Noranda a mining company or a metals company?
Kerr: It’s a mining and metals company. We’re spending about $90 million per year on exploration consolidated with Falconbridge, so obviously mining is important to us. But we haven’t lost sight of the fact that we have built up a lot of metallurgy skills. We spent about $36 million in 1999 in technology development between Noranda’s and Falconbridge’s technology centres.
CMJ: Has the restructuring since 1997 achieved the effect that you wanted?
Kerr: Yes, the divestment of our forest products and oil and gas interests has done a lot of the things that we hoped for. The shareholders benefited directly from the distribution of the Canadian Hunter Exploration and Nexfor shares [the end of 1998]. The investment community now sees us as a mining and metals company. The sale of Norcen shares has enabled us to commit to a number of new projects.
CMJ: With the emphasis on a performance culture, why is Noranda still suffering from disruptions at operations, for example at the Bell Allard and Brunswick mines this spring?
Kerr: These things do happen. They are unusual events, but there are power outages and there are mining accidents. Hopefully the discipline developed through Six Sigma will reduce these events. Also the speed at which the team acted to minimize the disruption at the Brunswick mine [because of a conveyor collapse in April] is evidence of a strong performance culture.
The stoppage was first estimated to be at least 30 days, but it actually took only six days to resume operations.
CMJ: What goal would you like to achieve at Noranda?
Kerr: I would like to see us have a company that can generate better than 12% return on equity. That would be a major accomplishment. It will confirm Noranda as a world-class metals company.
We have had a 5-6% rate of return in the last 20 years. Our company was built to one set of standards. Then the world changed, and we had to retrofit, so we had to spend lots of money just to stay in business. That didn’t provide a good rate of return, but those days are behind us. Now we expect a project to provide a good rate of return, or we don’t do it.
CMJ: What is the most critical issue facing Canadian mining companies today. Kerr: There are the issues of land access for exploration, and market access for our products. Concerns around the safe use of metals can be very limiting to the sale of products. Another problem is image. Mining can be done in a safe way and an environmentally responsible way. We have to position metals and mining as an important part of the necessary infrastructure of the 21st century. Noranda Inc. production and operating summary, year-end 1999 1 Gasp mine closed in October 1999 due to depleted reserves. 2 US$170 million expansion will double Altonorte smelter’s capacity by 2003. 3 Heath Steele mine closed in October 1999 due to depleted reserves. 4 The Gallen open pit mine has worked intermittently since 1997. Mining is completed, and stockpiled ore will be processed during 2000. 5 The Huntingdon aluminum foil plant is being expanded, with ramp-up production from its new plant expected to begin in January 2001. Huntingdon’s production will expand by 75%. 6 The Magnola magnesium plant will begin commercial production in late 2000.
Group 1999 smelted and refined metal production 1999 production 1999 cash No. of (000 tonnes) (000 ounces) operating margin employees (Cdn$ millions) Cu Zn Al Mg Pb Ni Ag Au Copper 1,2 and Recycling 311 41,389 1,202 194 2,707 Zinc 3,4 259 108 157 2,455 Aluminum 5 222 155 3,880 Magnesium 6 (80%) 0 – 200 Falconbridge (49.9%) (Noranda’s share) 88 65 47 325 – TOTAL refined 399 324 222 0 108 47 41,389 1,202 1,202 9,242
CMJ: What is the most critical issue facing Canadian mining companies today.
Kerr: There are the issues of land access for exploration, and market access for our products. Concerns around the safe use of metals can be very limiting to the sale of products. Another problem is image. Mining can be done in a safe way and an environmentally responsible way. We have to position metals and mining as an important part of the necessary infrastructure of the 21st century.
Noranda Inc. production and operating summary, year-end 1999
1 Gasp mine closed in October 1999 due to depleted reserves.
2 US$170 million expansion will double Altonorte smelter’s capacity by 2003.
3 Heath Steele mine closed in October 1999 due to depleted reserves.
4 The Gallen open pit mine has worked intermittently since 1997. Mining is completed, and stockpiled ore will be processed during 2000.
5 The Huntingdon aluminum foil plant is being expanded, with ramp-up production from its new plant expected to begin in January 2001. Huntingdon’s production will expand by 75%.
6 The Magnola magnesium plant will begin commercial production in late 2000.