1. MINING PRODUCTIVITY: WHY HAS IT FALLEN? WILL IT RECOVER? MINING PRODUCTIVITY: WHY HAS IT FALLEN? WILL IT RECOVER? John E. Tilton Pontificia Universidad Católica de Chile and Colorado School of Mines Email: jtilton@mines.edu PUC Department of Mining Engineering Santiago, Chile April 26, 2013

2. LABOR PRODUCTIVITY 1985-2011 CHILEAN COPPER INDUSTRY (Tons per Own Worker) Source: Cochilco

3. SIMILAR GLOBAL TRENDS Australia, Canada, US, and other mining countriesAustralia, Canada, US, and other mining countries Coal, iron ore, and other mineral commodities Coal, iron ore, and other mineral commodities Both labor and multifactor productivity Both labor and multifactor productivity

4. PREVAILING VIEW Falling productivity likely to continue over the long runFalling productivity likely to continue over the long run New technology no longer able to offset depletionNew technology no longer able to offset depletion China’s growing demandChina’s growing demand Less attractive depositsLess attractive deposits Less technological changeLess technological change

5. AN ALTERNATIVE PERSPECTIVE Falling productivity is mostly cyclical Falling productivity is mostly cyclical Result of high prices and efforts to expand output rapidly Result of high prices and efforts to expand output rapidly Productivity likely to rise if prices fall Productivity likely to rise if prices fall

6. RECENT RESEARCH 2012 RioTinto request Interpretative survey of the literature over the past several decades Copper, aluminum, iron ore and coal

7. FOCUS AND APPROACH Two central questions –What are the major drivers of changes in mining productivity? –Are recent changes largely secular or cyclical? Approach – –Identify determinants of productivity and the extent to which they may vary cyclically –Empirical evidence – does productivity tend to rise and fall with commodity prices?

8. MAJOR DETERMINANTS Innovation & technology –Major vs minor technological advances –IT technology –Embodied vs disembodied tech change –Learning by doing Resource quality –Ore grades – Stripping ratios – Other

9. OTHER DETERMINANTS G overnment regulations Worker quality Economies of scale Capacity utilization Unplanned stoppages (eg, strikes)

10. CYCLICAL DETERMINANTS Innovation Resource quality Worker quality Unplanned stoppages High cost and inefficient mines close when prices decline Cost control vs output

11. EMPIRICAL EVIDENCE Copper –Chile in recent years –US in 1980s Metal Mining - Canada 1989-2006 Iron Ore - US and Canada in 1980s Coal - US in early 1970s

12. LABOR PRODUCTIVITY 1985-2011 CHILEAN COPPER INDUSTRY (Tons per Own Worker) Source: Cochilco

13. CHILEAN LABOR PRODUCTIVITY AND THE COPPER PRICE, 1985-2011 (Tons per Own Worker, 2012 US$ per Ton) Sources: Cochilco, UNCTAD, World Bank Productivity Price

14. CHILEAN LABOR PRODUCTIVITY AND THE COPPER PRICE, 1985-2011 (Tons per Own Worker, 2012 US$ per Ton) Sources: Cochilco, UNCTAD, World Bank Productivity Price

15. CHILEAN LABOR PRODUCTIVITY AND THE COPPER PRICE, 1985-2011 (Tons per Own Worker, 2012 US$ per Ton) Sources: Cochilco, UNCTAD, World Bank Productivity Price

16. PRICES AND PRODUCTIVITY METAL ORE MINING, CANADA, 1989-2006 Sources: Bradley & Sharpe, 2009

17. LABOR PRODUCTIVITY IN THE U.S. COPPER INDUSTRY, 1975-2001 Source: Tilton, 2003

18. COPPER HEAD GRADES US COPPER INDUSTRY, 1971-1993 Source: Tilton and Landsberg, 1999

19. LABOR PRODUCTIVITY AND PRODUCTION IN THE U.S. IRON ORE INDUSTRY, 1970-1995 Source: Schmitz, 2005.

20. PRODUCTIVITY IN THE U.S. COAL INDUSTRY, 1947-1991 (1972 = 100) Source: Ellerman and Berndt 1998 as cited in Darmstadter 1999.

21. PRODUCTIVITY IN THE U.S. COAL “During the 1970s nearly everything seemed to conspire to reduce labor productivity, but the largest effect was attributable to the rising price of coal... Both statistics and anecdotes suggest that the first response of coal-mining operators was almost literally to throw labor (and other inputs) at the coal face. The inevitable result was lower productivity.” Souce: Ellerman and others, 2001, p. 405

22. FINDINGS FINDINGS History suggests a strong cyclical component in productivity trends When prices rise, productivity falls, and vice versa So mining productivity is likely to rise again when prices falls

23. IMPLICATIONS IMPLICATIONS Rising productivity means mining costs may decline in the future So copper prices could also fall Not necessarily bad news for producing firms and countries And, clearly good news for consumers and society as a whole

24. REFERENCES REFERENCES Darmstadter, J. 1999. Innovation and productivity in U.S. Coal Mining, in Productivity in Natural Resource Industries, edited by Simpson, R.D., Resources for the Future, Washington, DC. Ellerman, A.D., Stoker, T.M. and Berndt, E.R. 1998. Sources of Productivity Growth in the American Coal Industry, MIT Center for Energy and Environmental Policy Research, Working Paper no. MIT- CEEPR WP-1998-004, March. Schmitz, Jr., JA, 2005. What determines productivity? Lessons from the dramatic recovery of the US and Canadian iron ore industries following their early 1980s crisis, Journal of Political Economy, pp. 582-625. Tilton, JE, 2003. Creating Wealth and Competitiveness in Mining, Mining Engineering, September, pp. 15-22.

25. MINING PRODUCTIVITY: WHY HAS IT FALLEN? WILL IT RECOVER? MINING PRODUCTIVITY: WHY HAS IT FALLEN? WILL IT RECOVER? John E. Tilton Pontificia Universidad Católica de Chile and Colorado School of Mines Email: jtilton@mines.edu PUC Department of Mining Engineering Santiago, Chile April 26, 2013

28. LABOR PRODUCTIVITY AND PRICES FOR ALUMINUM, VARIOUS COUNTRIES, 2000-2010