Taking a Sledgehammer to Your Mine Plan with Gerald Whittle, Whittle Consulting

Peter Bell, 12 August 2018

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.

>> Picture of cover page, "Report on the Money Mining Seminar, Whittle Consulting By Peter “@Newton”
Bell, October 31, 2017".
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.
>> Screenshot from Whittle Consulting report on Condor optimization study.

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!
>> Screenshot from my YouTube video showing the delta in NPV for Whittle from 2009-2016.

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.
>> Excerpt from “Know Your Meme” page
on the Red Pill meme.

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!

>> #NewtonFilms -- Whittle Consulting https://youtu.be/QWQP84vy1eA

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.

>> Adapted from numerical example provided by Whittle.

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?

>> Screenshot page 46

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

Also on CEO.CA: https://ceo.ca/@Newton/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.