Turning Thermal Coal to Copper? Why the Metrics Matter

When I worked for a mining company, some of the most eagerly anticipated days in the office were the release of our quarterly production reports. Not as sexy as the financial results– (or terrifying, depending on whether the year was 2015 or not–) but a good barometer of how we were performing as a company.

We waited expectantly through the Singapore working day until just before 7am London time, then clicked excitedly as the emails hit our inboxes, to be greeted with the announcement ‘Group copper equivalent production increased by 1%...’ The confusion was palpable - how does my thermal coal become copper? I mean, I know the copper smelting process probably requires power or heat at some point but what’s the formula?

There would seem to be a good number of reasons not to do this. Firstly, in a diversified mining company everyone who doesn’t work in the copper division suddenly feels slightly subjacent – especially those divisions that contribute more to the Group than copper. I’ve done the calculations for one such company that reports this way and the relativities aren’t even close – using FY18 prices(*) the iron ore division produced more than +50% of copper equivalent iron ore in Q3 2018 compared to copper equivalent copper. And the latter even lagged combined coking and thermal coal equivalent copper. I guess it’s sexier to be a copper miner.

I could understand it if the altruistic objective is to provide shareholders with a baseline with which to compare operating performance between periods. But in this case, should you really be able to exclude assets that underperformed as a result of operational difficulties? Fair dinkum if you have to declare force majeure as the result of a weather event, but the responsibility for the direct failure of equipment to get your product to market would seem likelier to reside with the company than with Joe the Cameraman.

Finally, this seems to uphold the now outdated notion that all production is good production. But looking at the Q3 report of another large miner, where the focus is squarely on increasing the percentage share of premium products, speaks to the new paradigm. To return to the copper equivalent reporters, if they tweaked their methodology to use average prices between periods, which has the intuitive appeal of being able to capture the value side of the equation, they would have been able to report a 14% and 8% increase in copper equivalent production respectively. Very sexy.