DIGGING OUT: KENNECOTT RESURFACES IN AN ERA OF GLOBAL COMPETITION

David B. Morris

Kennecott corporation

1993

TABLE OF CONTENTS

I. INTRODUCTION 1

II. GROWTH, STAGNATION, AND DECLINE 3 origins of Kennecott ...... 3 Jackling•s New concept •...... 4 Guggenheim Financial Backing . . . . . • . . . . . 7 Control of the Hill . . . . • . . . . . 10 The Jackling organization 12 Genesis of Kennecott copper corporation . 14 Growth Between the wars . . . • • . 16 over the Hill . . . . • • . • • 19 Allure of Diversification . . . . . • 23 Peabody Coal and Anti trust_ . . . . 25 carborundum and its Aftermath 26 Independence Lost 29

III. NEW MANAGEMENT 32 Kennecott Minerals company • 33 Joklik's Long-term Strateav .... 35 The New strategy in Action . . . 38

IV. COST REDUCTION WITHOUT MAJOR CAPITAL SPENDING 40 Elements of KMC 40 Incremental Cost Reduction 1980-84 • • • . 43 Probing the cost Reduction Frontier in 1980 • 44 Improving Productivity on the Job . • • . . 49 Accelerating the Effort in 1981 • • 51 Manpower Reductions in Early 1982 • 53 Shutdowns at Ray and Chino . . . 56

i Additional 1982 Phases of Cost Reduction 60 consolidatinq the Gains in 1983 and 1984 62

V. WASHINGTON INITIATIVES ...... 72 Government Controlled Copper Production . . . 72 Kennecott Initiatives ...... 74

VI. EVOLUTION OF LABOR RELATIONS ...... 82 The 1980 Labor contract ...... 82 A New Approach to Labor Relations 84 Copper Negotiations in 1983 ...... 91 A Quest for Concessions ...... 93 The 1986 Labor Contract ...... 96 Good News, Bad News • 104

VII. MODERNIZATION OF COPPER OPERATIONS . 107 Chino Modernization . 108 Mine and Concentrator . . 109 smelter . . • . • . • ...... 112 Utah Copper Modernization ...... 115 Fundinq in a Depressed Copper Market • . 119 Chanqinq Plans ...... 12 4 Two More Chanqes of ownership 126 Construction and startup • • . . 12 7 Finishinq the Job . . . • • • • • . 13 0

VIII. NEW OPPORTUNITIES IN MINERALS ...... 137 Minerals Exploration • . . • . • ...... 131 Development of the 1980 Exploration Portfolio • . . 139 Discoveries since 1980 . . • ...... 141 Ridgeway and Greens Creek ...... 148 Green Mountain ...... 151 Expansion into Coal • • ...... 151 Kennecott Assets in 1993 ...... 153

ii IX. AN OUTLINE FOR GLOBAL COMPETITIVENESS . 155 Revival of Utah copper . . 155 Comeback of u.s. Copper . 158 National Competitiveness . 160

NOTES • . . . . . • ...... • . . . 163

iii LIST OF FIGURES

Figure 1 The copper-rich hill at the intersection of Bingham Canyon and Carr Fork prior to open-pit mining in 1904. 4 Figure 2 First Utah Copper Mill at Copperton in 1907. 6 Figure 3 Steam shovel and rail operations at Bingham Canyon in 1906. 8 Figure 4 Magna Mill built by Utah Copper (1907 photograph). 9 Figure 5 Boston Consolidated Mill later called the Arthur Mill (1908 photograph). 10

Figure 6 Copper mining facilities i~ 1908. 11 Figure 7 Boston Consolidated and Utah Copper workings in Bingham Canyon prior to 1910 merger. 12 Figure 8 Kennecott's Alaskan operations, circa 1915. 14 Figure 9 Kennecott Copper Corporation properties in 1915. 15 Figure 10 Source of Kennecott's copper production, 1916-1992...... ' . . . . . 16 Figure 11 Daniel c. Jackling, circa 1930...... 18 Figure 12 Utah Copper smelter acquired from ASARCO in 1959...... 19 Figure 13 Copper ore mined at Kennecott's four u.s. properties 1960-1980. iv ...... 21 Figure 14 Utah Copper smelter and 1200-foot stack following $300 million modernization (1988 photograph). 22 Figure 15 Comex copper prices, quarterly average, 1972-1992. 30 Figure 16 Kennecott Minerals Company properties in 1979. 33 Figure 17 G. Frank Joklik. 35 Figure 18 McGill, Nevada, smelter in 1975. 42 Figure 19 Unit costs of copper production at Utah Copper. 43 Figure 20 Utah Copper power plant in 1980. 47 Figure 21 Relative labor productivity of major u.s. copper producers in 1979. 49 Figure 22 Kennecott Refining Corporation (KRC) in Baltimore, Maryland. 64 Figure 23 Ray, Arizona, open-pit mine. 65 Figure 24 Unit costs of copper production at Ray Mines. 66 Figure 25 Unit cost of copper production at Chino Mines. 67 Figure 26 Joklik (left, at microphone) addresses union leaders at 1981 annual meeting. 86 Figure 27 Surface facilities at Ozark Lead mine, Missouri, in 1980. 90

v Figure 28 Modernized Chino mine and concentrator in 1985. Ore haulage conveyor connecting mine (upper left) to concentrator (lower right) is visible in the center of the photograph...... 111 Figure 29 Modernized Chino smelter in Hurley, New Mexico, (1985 photograph). 114 Figure 30 Utah Copper facilities in 1985 before modernization. 116 Figure 31 Utah Copper modernization plan revised to relocate flotation at Copperton and approved December 1986. 126 Figure 32 In-pit crusher under construction in 1988. Belt conveyor system leads from crusher to former rail tunnel. 128 Figure 33 Copperton Concentrator in 1991. Ore moves by conveyor (left) to covered ore storage and then through underground tunnels to concentrator building (center)...... 129 Figure 34 Bingham Canyon Mine in 1991. 130 Figure 35 Fourth line at Copperton Concentrator began operating in 1992. New 36-foot diameter SAG mill (top) dwarfs worker (center). Two new ball mills show in the foreground. 131 Figure 36 Artists drawing of new Utah Copper smelter scheduled for completion in 1995...... • • 13 3 Figure 37 Kennecott expenditures on mineral exploration...... 138 Figure 38 Flambeau, Wisconsin, mine development project in 1992. vi ...... • • • • • • • • • • • • 14 0 Figure 39 Rawhide gold mine in 1991...... 14 3 Figure 40 Barneys Canyon gold mine in 1991. 144 Figure 41 Lihir Island, PNG, superimposed with artist's drawing of possible open-pit gold mining operation. 147 Figure 42 Milling facilities at Ridgeway gold mine, South Carolina. . . . . 14 8 Figure 43 Greens Creek mine in Alaska's wilderness. 150 Figure 44 Major operating mines and undeveloped minerals properties held by Kennecott in 1993. 154 Figure 45 Copper production and work force productivity at Utah Copper. 156 Figure 46 Copper Production and Labor Productivity at U.S. Copper Mines • • • • • • • • • • • • • • • • • • • • • . 15 9

vii

I. INTRODUCTION

Kennecott is best known for the open-pit copper mine the company has operated at Bingham Canyon, Utah, for most of the twentieth century. This mine is famous for engineering advances introduced there at the turn of the century. Innovators at Bingham Canyon revolutionized copper mining when they demonstrated for the first time that a low-grade porphyry copper deposit could be mined economically from the surface with large-scale earth moving equipment. By avoiding the high costs of traditional underground mining, the new approach effectively expanded the world's resource base to include low-grade copper mineralization formerly considered uneconomic. The mass production methods first introduced at Bingham Canyon have become standard practice around the world at porphyry copper deposits that, today, supply the major share of the world's newly mined copper.

The Bingham Canyon mine became the centerpiece of the portfolio of copper properties collected together under the Kennecott name in 1915. For the next 30 years, through World War II, Kennecott concentrated on improving and expanding these copper properties. After the War, the firm revised its strategy and set out to diversify its earnings base and reduce its dependence on copper. Thirty five years later, in 1980, having neglected its copper business and frustrated in its attempts to diversify, Kennecott was headed for extinction.

The story of Kennecott's growth and subsequent stagnation and decline has been told in various places, including reports to share holders that the company issued without interruption, from the t i me it was formed in 1915, until the last year it operated as an

1 independent entity in 1980. Since then, however, the historical record is sketchy. The chronicle of Kennecott's struggle, near demise, and eventual renaissance after 1980 deserves to be recorded. It is a compelling and instructive tale with much to say to any industrial enterprise facing a serious competitive threat. Kennecott's extraordinary cost cutting effort revitalized the firm, transforming it from a failing enterprise into, what is today, one of the lowest cost major copper producers in the world.

This volume briefly examines the origins of Kennecott Copper Corporation, the growth years, and the post-World War II events that left Kennecott seriously weakened by 1980. Against this background, the Kennecott story is then brought up to date. The bulk of this document deals with strategies, decisions, and actions that renewed Kennecott's historic copper properties after 1980.

2 II. GROWTH, STAGNATION, AND DECLINE

Origins of Kennecott

The most important and enduring of Kennecott's several roots grew in Utah's Bingham Canyon. This mineral-rich drainage had been the site of gold, silver, and lead mining during the last half of the nineteenth century. But new copper discoveries and high copper prices redirected Bingham's miners in the opening years of the twentieth century. By 1906, more than 40 companies were mining small but high-grade copper sulfide lodes in the canyon. Some of these rich pockets of ore lay within a hill that rose a quarter­ mile above the intersection of Bingham Canyon and Carr Fork. This hill, at the core of the Bingham Canyon mineral complex, also held the upper reaches of a huge disseminated porphyry copper deposit, the future site of Kennecott's Bingham Canyon mine.

At the beginning of the twentieth century, conventional thinkers dismissed as uneconomic the possibility of mining the low-grade porphyry copper deposit at Bingham Canyon. Yet one man realized that advances in industrial technology had outreached conventional wisdom. Daniel C. Jackling, a metallurgical engineering graduate of the Missouri School of Mines, supplied the vision and energy that made a mine of the Bingham Canyon porphyry and, in doing so, he revolutionized the copper mining industry.

3 Fiqure 1 The copper-rich hill at the intersection of Bingham Canyon and Carr Fork prior to open-pit mining in 1904.

Jaeklinq's New concept

Jackling was introduced to the Bingham Canyon deposit in the final years of the nineteenth century. At the time, he was in charge of the mill and gold recovery plant at the Mercur gold mine about 20 miles south of the current Bingham Canyon open pit. Jackling's employer, who acquired an interest in the Bingham Canyon porphyry, directed Jackling and his Mercur colleague, R. c. Gemmell, to evaluate the Bingham deposit. Based on extensive sampling of the deposit, Jackling and Gemmell identified a copper ore reserve of 12.4 million short tons at an average grade of 2 percent copper and

4 probable additional ore amounting to 25 million short tons. Their tests in an existing mill indicated that 75 percent of the copper contained in the Bingham Canyon ore could be recovered in a conventional gravity separation mill.

By the standards of the day, the grade of this large deposit was too low to support profitable mining. Tradi tiona! underground methods, suited to mining modest volumes of ore concentrated in pockets or veins, were just too costly for mining the widely dispersed copper minerals disseminated throughout the Bingham Canyon deposit. The ore, however, lay at an average depth of only 40 feet beneath the surface. Jackling and Gemmell took advantage of this fact and proposed an unorthodox mining scheme.

The report they prepared in 1899 recommended developing the deposit from the surface by means of steam shovels that would first strip away the 40-foot thick layer of overburden and then mine the low­ grade ore in quantity, at a rate of 2,000 short tons per day. The plan for high-volume mining envisioned steam shovels loading both ore and waste directly into rail cars. The ore would then be carried by railroad 15 miles to a new concentrator they proposed be built near the shore of the Great Salt Lake, where water was readily available for the concentrating process. The report also recommended construction of a smelter and an electrolytic refinery to complete processing of copper ore to copper metal.

In 1899, Jackling and Gemmell captured the essential features of the development that would subsequently take place on a scale even larger than they envisioned. The report made clear that from the beginning Jackling intended to break with tradition and mine the Bingham deposit from the surface with steam shovels and rail haulage. This, of course, was the key innovation that would make it possible to mine the low-grade orebody at a profit. The ground­ breaking report, however, did not convince Jackling•s employer to

5 come up with the funds required to proceed with the ambitious project.

Although Jackling accepted other employment and left Utah, he d i d not forget the potential of Bingham Canyon. In 1903, Jackling and his associates obtained an option on the property and found the financial backing that led to the incorporation of the Utah Copper Company on June 4, 1903. The fledgling firm built an experimental mill at Copperton near the mouth of Bingham Canyon. This 300-ton­ per-day facility was created as a test-bed to demonstrate the feasibility of large-scale operations at Bingham.

Fiqure 2 First Utah Copper Mill at Copperton in 1907.

At the outset, Utah Copper Company had neither the time nor the funds to strip the orebody and mine from the surface, as Jackling

6 had proposed in 1899. Thus, ore to feed the Copperton concentrator was mined initially from underground stapes. At the beginning of July 1904, the Copperton concentrator started regular operation and turned a profit for the year.

Guqqenheim Financial Backinq

Having verified Jackling's concept on a small scale, Utah Copper sought the substantial funding needed for the next stage of development. It was no easy task to overcome the skepticism of potential backers, but the innovative project got the attention of the Guggenheim group, which had extensive experience financing mines and smelters. Still, the Guggenheim coalition committed funds only after an exhaustive and costly engineering study had confirmed Jackling's projections. In 1905, the Guggenheim Exploration Company and other Guggenheim interests agreed to finance the development of a mine and concentrator for Utah Copper. As part of the deal, the Guggenheim dominated American Smelting & Refining Co. (ASARCO) got a favorable 20-year contract to smelt the copper concentrates produced by the operation. From that point on, the Guggenheim connection would have a major bearing on the evolution of Utah Copper Company.

With Guggenheim financial support, large-scale development of the Utah Copper property began in 1906. In the spring of the year, Utah Copper's first steam shovel began stripping overburden. Within less than two years, additional shovels and rail haulage equipment had advanced stripping to the point that two-thirds of the ore was being produced by surface mining, and the end was in sight for the underground operations. Construction of a 6, 000-ton­ per-day concentrator at the location Jackling had envisioned in 1899, also started early in 1906. The Utah Copper concentrator-­ subsequently known as the Magna Mill--began operating in August 1907.

7 Fiqure 3 Steam shovel a nd r a il opera tions at Bingham c a nyon in 1906.

Although Utah Copper led the way in developing the disseminated porphyry copper orebody, another firm shared the copper-rich hillside in Bingham Canyon. Utah Copper controlled the lower section of the hill, but the Boston Consolidated Mining Company had established a position on the upper part of the hill. On the scene first, Boston Consolidated had developed a profitable underground mine in relatively high-grade copper sulfide ores. Then, following the example set by Utah Copper, Boston consolidated built an experimental mill in Copperton to test the economic potential of low-grade porphyry copper ore. Convinced that the porphyry ore could be mined at a profit using large-scale mining and processi ng methods, Boston Consolidated developed the upper part of the hill while Utah Copper worked the lower section.

8 Fiqure 4 Magna Mill built by Utah Copper (1907 photograph).

Like Utah Copper, Boston Consolidated started surface mining operations early in 1906. The two companies used similar methods: large-scale blasting shattered the copper bearing rock, and steam shovels then loaded the broken ore directly into rail cars. This was the first time that copper had been mined from the surface with large-scale earth moving equipment. Although steam shovels were common in the iron ore mines of the Mesabi Range, transferring these methods to steep slopes and tough mining conditions in the rocky cliffs of Bingham Canyon presented a major challenge.

Boston Consolidated built a concentrator near the shore of the Great Salt Lake, just west of Utah Copper's Magna Mill. Later christened the Arthur Mill, the Boston Consolidated concentrator began operating in 1907. Like the Magna Mill, the Arthur facillty took several years to reach full production. The Arthur Mill was built to treat 3,000 short tons per day of ore, half the init1al capacity of the Magna Mill.

9 Figure 5 Boston Consolidated Mill later called the Arthur Mi l l ( 1908 ph otograph).

Anticipating r1s1ng volumes of copper ore from Bingham Canyon, and with a long-term contract to process the output of Utah Copper, ASARCO built a smelter near the lake shore not far from the Magna and Arthur mill sites. The smelter, which began operating in 19 0 6, was designed specifically to process the porphyry copper ores and sized to handle 500 short tons per day of copper concentrate. The location of the smelter relative to the mills and the Bingham Canyon mine is shown in Figure 6.

Control of the Rill

As the first decade of the new century entered its final years, both of the mining firms working the Bingham Canyon porphyry managed to survive the financial panic of 1907, and both solved the

- ~horniest problems of mining and concentrating the porphyry copper ore. Still, ownership of the orebody was divided: the top of the

10 Fiqure 6 Copper mining facilities in 1908.

hill was controlled by Boston Consolidated and the lower half by Utah Copper. As the end of the decade approached, the surface operations of Utah Copper threatened to undercut Boston Consolidated ground. It was clear that the two firms could not continue their independent large-scale mining operations in what was a single natural orebody.

The inevitable consolidation of the two operations took place in 1910, when the financial interests behind Utah Copper prevailed, and the Utah Copper Company absorbed the Boston Consolidated Min1nq Company. Among other things, the outcome solidified the place ot Daniel Jackling in the history books. As the organizing force behind the Utah Copper Company and its leader until 1942, he earned

11 primary credit for the concepts, techniques, and organization that introduced mass production methods to copper mining.

Fiqure 7 Boston Consolidated and Utah Copper workings in Bingham Canyon prior to 1910 merger.

The merger of 1910 marked the beginning of a long period of technological improvement supported by capital spending. By the time World War I broke out in 1914, the Magna and Arthur mills had been remodeled and their joint capacity had been doubled to 18,000 short tons per day. This capacity was pushed to meet wartime demands, and copper production in the peak year of 1917 reached nearly three times the output of 1910.

The Jacklinq Orqanization

Prior to the 1910 merger, Jackling and his associates had extended their reach to other porphyry copper developments in the Western United States. The second Jackling porphyry was the Arizona property of the Ray Consolidated . Copper Company, which was incorporated on May 11, 1907, with Jackling as vice president. By 1911, porphyry ore produced by underground block caving methods 1

12 was being processed by the new Ray concentrator, which was modeled on the Magna facility in Utah. The concentrator was located in the town of Hayden, 20 rail miles from the mine, where there was an ample supply of water and a suitable area for tailings disposal. As at the Utah operation, concentrates were smelted in an adjacent plant built by Guggenheim-affiliated ASARCO.

While the Ray property was being developed, the Jackling organization gained control of the Chino porphyry copper deposit in New Mexico. Chino ore was mined from the surface and transported by rail to a new concentrator--again modeled on the successful design of the Utah facility. The concentrator was located nine miles from the mine, near a water supply and land suitable for tailings disposal. Copper concentrate produced by Chino was shipped to another ASARCO owned smelter in El Paso, Texas.

Before Utah Copper took over Boston Consolidated in 1910, the Guggenheim interests had gained control of the Nevada Consolidated Copper Co. near Ely, Nevada. Nevada Consolidated mined porphyry copper ore from both the surface and underground. In addition, the firm operated a concentrator, a smelter, a power plant, and a 130- mile railroad that connected Ely with the Southern Pacific mainline. Production at the Nevada operation began in 1908, ahead of both Ray and Chino. At the time of the merger in Utah, the Guggenheim group arranged a favorable exchange of its interest in Nevada Consolidated for shares of Utah Copper Company. Thus, the Nevada operations became the fourth and final addition to the Jackling porphyries. Thereafter, the four porphyry copper properties shared the considerable technological and managerial resources of the Jackling organization.

1 3 Genesis of Kennecott Copper Corporation

Although Utah Copper and the other three Jackling porphyries would become the largest part of the future Kennecott Copper Corporation, another remarkable , but less enduring, mine would supply the Kennecott name. The organizational outcome was a result of the Guggenheim connection.

The Guggenheim group was part of the Alaska Syndicate formed in 1906 to finance development of the Kennecott mine, a group of underground copper deposits in a remote area of Southeastern Alaskao The ore grades were remarkable: one of the orebodies assayed a phenomenal 7 0 percent copper. But it took years to

Figure 8 Kennecott's Alaskan operations , circa 1915.

14 Fiqure 9 Kennecott Copper Corporation properties in 1915.

develop the mining property and its supporting infrastructure. The syndicate was compelled to build a 200-mile railroad through extremely rugged terrain that separated the mine from the nearest port. The railroad was an engineering marvel, but a very costly

15 on~. Once production commenced, the high-grade ore made the Alaskan project extremely profitable. Still one business historian suggested, "the years required to bring [the Kennecott mine] into full production dragged on so long beyond expectations that, from a payback point of view, the Alaska Syndicate was not a success."2

When World War I broke out and copper prices rose, the members of the syndicate transferred the Alaska property to a new public corporation. To make the new enterprise attractive to potential shareholders, the Guggenheim Exploration Company agreed to include two other. copper interests as part of the new Kennecott Copper Corporation. One was the Braden Copper Company, which owned and operated the underground El Teniente copper mine in Chile. The other was the Guggenheim's 37 percent interest in the Utah Copper Company, which, in turn, held interests in the Nevada, Ray, and Chino porphyry copper operations. The locations of the major copper properties associated with Kennecott, when the corporation was formed in 1915, are shown in Figure 9.

Growth Between the Wars Fiqure 10 Source of Kennecott's copper production, 1916-1992.

From the time of its Thousands of short tons formation to the end of aoo-.------,------, Dehne World War II, Kennecott BOther U.S. Copper Corporation 600 concentrated on the development of the copper 400 properties that had been associated with the company 200 from its beginning. Copper production reported by the Kennecott enterprise from 1916, the first full year of its existence, through 1992

16 is shown in Figure 10. (Copper production from the partially owned Nevada, Ray, and Chino operations is not included in the statistics prior to 1933, when Kennecott increased its interest in these operations to 100 percent.) Total copper production capacity ot the original Kennecott properties more than doubled over the JO­ year period ending in 1945, even though the namesake Alaskan m1ne was exhausted by 1938. In response to wartime demands, the company's 1943 output peaked at 637,000 short tons of copper, a Kennecott record that held for 26 years.

Copper was always a volatile business, as illustrated by what took place at the Utah Copper property after Kennecott was formed. The end of World War I put the copper market in a slump. Both Utah concentrators were shut down for a time, and copper production for four years, 1919 through 1922, averaged less than the output of 1910.

Utah Copper took advantage of the lull in demand to remodel the idled facilities and install a key technological advance in the concentrators. The company replaced outdated gravity separation methods with modern froth flotation, which boosted copper recovery substantially. Gravity separation had recovered about 60 percent of the copper contained in the ore, but the new technology increased copper recovery to more than 85 percent. By 1926, the capacity of the two mills grew to 50,000 short tons per day of ore, and copper output reached new highs in the last half of the 1920s.

Improvements in the mine kept pace with concentrator expansions. Steam shovels moving on railroad tracks were replaced with electr1c shovels that moved themselves on crawler tracks. The mine haulaqe railroad also was electrified 1n the 1920s.

The buoyancy of the 1920s was reversed by the Great Depression of the 1930s. Demand for copper dw1ndled, and the Arthur Mill closed for nearly six years. At the same time, l<'ennPcott curta1l~d

1~ operations at the Magna plant, and copper production at Utah Copper fell to the level of 1910. During the production lull, both mills were reconditioned and upgraded, and a molybdenite recovery plant was developed and tested, leading to the first commercial production of molybdenite in 1936.

As copper demand recovered in the late 1930s, copper production at Utah Copper rose to a new high in 1937. output fell briefly when the market slipped in 1938, but the demands of World War II called forth a maximum effort that culminated in an all-time peak annual production of 320,000 short tons of copper in 1943.

During the period of Figure 11 Daniel c. Jackling, circa 1930. expansion, the Utah Copper Company and the other three Jackling porphyries were progressively absorbed by Kennecott Copper Corporation. By 1923, Kennecott gained a controlling interest of Utah Copper with 77 percent of the shares. In 1936, Kennecott acquired 100 percent of the Utah Copper Company and in 1947, the Utah Copper Company was dissolved and Utah Copper became an operating division of Kennecott. The Ray and Chino organizations merged in 1924, and the merged company was then absorbed by Nevada Consolidated Copper Company in 1926. Kennecott Copper Corporation acquired all the assets of Nevada Consolidated in 1933, and organized the Ray,

18 Chino, and Nevada properties as a wholly owned subs1d1ary •1th Jackling as president.

over t he Hill

Kennecott's strategic focus shifted following World War II. After 30 years of expanding copper output, the company turned trom expansion to vertical integration of the historic copper mines. By 1960, Kennecott's downstream investments had eliminated the company's dependence on outsiders for smelting and refining--the Utah refinery opened in 1950; the Ray, Arizona, smelter started up

Fiqure 1 2 Utah Copper smelter acquired from ASARCO in 1959.

19 in 1958; the Utah smelter was purchased from ASARCO in 1959; and the Kennecott refinery in Baltimore, Maryland, began operating in 1959. This completed the integration of Kennecott • s copper production facilities from mining through refining.

The geology of Kennecott's orebodies was such .that ore grades tended to decrease as the open pit mines advanced down into the earth. After World War II, Kennecott expanded mining and concentrating capacity to sustain copper production levels as ore grades declined. For instance, Utah Copper boosted the joint capacity of the Magna and Arthur mills to 90,000 short tons per day by the early 1960s. Ore processing capacity increased again, to 108,000 short tons per day, when the company completed the new Bonneville crushing and grinding plant in 1966 as part of a $100- million expansion project.

Expanded mining and concentrating facilities did not increase Kennecott's copper production significantly, because increased ore tonnages were nearly offset by declining ore grades. The company's 1943 production peak was exceeded by a small margin in only two years, 1969 and 1970. The 713,000 short tons of copper produced in 1970 by the one Chilean and four domestic copper mines was an all­ time peak, yet the new record topped the company's 1943 output by only 12 percent.

After 1970, Kennecott's copper production slumped as shown in Figure 10 (page 16). The 1971 expropriation of Kennecott's Chilean mine took a large bite out of the company's copper production capacity. At the same time, copper output from Kennecott's four domestic mines began declining. From a high of 519,000 short tons in 1970, Kennecott's domestic copper production fell to 336,000 short tons of copper in 1980. As shown in Figure 13, declining grades were not offset by increased ore production after 1970. Prior to that, the annual tonnage of ore mined and treated increased by more than enough to compensate for declining ore

20 grade. Ore grade continued Fiqure 13 Copper ore m1ned at Yennecott's four U.S. propert1~5 to decline after 1970, but 1960-1980. ore product1on followed a decllning trend as well and accelerated the grade­ related fall-off 1n copper production.

Although Yennecott's copper business reached maturity after World War II, it was far from stable. Figure 10 (page 16) shows that the company's annual output varied widely after the war. The three deepest production slumps were the result of strikes. The 194 6 strike lasted 1 ~2 days. In 1959, workers were out 144 days, and the strike, wh1rh ran into 1960, totaled 171 days. Again a strike of 25q dcSys spanned two calendar years, 1967 and 1968, with 170 of those days in the low production year of 1967. Strikes were a r~gular occurrence at contract renewal time. Over the 35-year per1od tram 1946 through 1980, the workers represented by labor unions at f'tah Copper were on strike an average of 29 days per year, almost one month out of twelve.

New environmental laws and regulations that materialized 1n the 1970s added to Kennecott's burdens. The new requ1rements d1ctated non-productive capital expendltures and increased op~ratlng costs.

To comply with the Clean Alr Act of lq~n, for exa~ple, Yenn~1ott spPnt $3no million at Vtah c~~pPr 1nstall1ng n~w ~~~lt1nq t~chnoloqy that included Noranda cont1nuous ~~elt1nq furn~ r ~s, a nPw acid plant, and a 1,20J-foot stack. In addition to c ~pliance custs, uncPrtainti~s surrounding the energ1nq env1ron~~ntal agenda lntPrfPrPd w1th lnnq-term plann1nq for the coppPr operat1 ns.

4.1 Fiqure 14 Utah Copper smelter and 1200-foot stack following $300 million modernization (1988 photograph).

Two oil crises and the soaring inflation of the 1970s further exacerbated Kennecott's problems by escalating copper production costs at an alarming rate. Costs of materials and supplies consumed by the copper operations rose rapidly. The energy intensive mining and processing operations were particularly hard hit by sharp increases in fuel costs. In addition, inflation rapidly boosted labor costs as a result of labor contracts that provided automatic wage increases linked to the consumer price index.

By 1980, Kennecott's copper properties had become high-cost operations. Some of the factors driving cost increases were a function of geology: declining ore grades, longer haulage 22 distances, and increased waste stripping were inevitable as continued dlgging increased the depth of the conpany•s open-plt r"lnes. External factors, such as accelerating inflation and n~• ~nviron~~ntal requlrements, also contributed. Another factor 1n the cost explosion was the company's poor record ot lab r relat1ons. Fecurrlng strikes were costly, and 1neff1c1ent •urk pract1ces, prem1um wages, and lnflation-linked wage adjustments, wh1ch the co~pany negot1ated with its unions, pushed up e~plo]~~nt costs. And finally, Kennecott neglected the investment necessary to upgrade or even ~aintain its increasingly outdated faclllti~s.

The progress1ve weakening of the copper operations was easll.)" overlooked during the years of easy profitability. Kennecott anj its people became co~.placent, and the organization was slow tu respond to external threats and internal deterioration. Th..- attltude, "It's always been done that way," discouraged change. A rigld hierarchical structure was another barrier to innovation. A rnult1-layered organizat1on and ingrained bureaucratic trad1t1cns inhlbited comnunication and insulated management from th~ operat1ons. The distance between management and the act o! produclng copper is exemplified by the location of Utah Copp~r

~anage~ent and staff, who during the 1970s, filled six floors of an office building in downtown Salt Lake City, more than 20 miles tr~~ the operations they were supposed to oversee. Over the years, thP co~pany gradually slipped to becorne one of the least productlve and least eft icient copper producers in the United StatPs. Dfllteriorating metal markets exposed this vulnerability in the l~Rns.

~11~r • Qt P1v t rs1f icat1on

~hat happ~ned on the copper side of the enterprise is only part nt th~ r:st-~rrld ~ar II story. ~~ile harvesting profits fro~ th~ .. xlstinq rrpper buslnftss, Yennecott attP~pted to divPrslty Ltc;

21 earnings base through mineral exploration and investments in new business development. In 1944, Kennecott began active worldwide exploration for a variety of minerals, and by 1951, the company had established a new mineral exploration department reporting to a corporate vice president for exploration.

By the mid 1960s, after nearly two decades of trying, Kennecott's diversification effort had yet to show a positive contribution to the bottom line. The company entered an oil exploration joint venture with Continental Oil in 1945, but ten years later Kennecott's annual report to the stockholders contained no mention of the oil investment. The company also took a stake in some South African gold mines during the late 1940s, but these interests were sold in 1961 at a loss of $36 million. In a bid to extend its business downstream as a fabricator of copper products, Kennecott purchased an electric cable manufacturer, the Okonite Company, in 1958. Antitrust regulators brought suit, and after losing in court, Kennecott sold the acquisition at a financial loss of $6.6 million. By 1965, the five historic copper mining operations and Chase Brass, a copper fabricating business Kennecott had owned since 1929, were still responsible for nearly all the company's sales and earnings.

The company's 1965 annual report to its stockholders highlighted two operations and four mining projects that had come out of the diversification effort. All six of these properties were turned up by Kennecott's exploration program. Two of the six properties cited in the 1965 report, Quebec Iron and Titanium (QIT) and ozark Lead Company, were on the way to becoming significant elements of Kennecott. The other four were not successes. The Tintic, Utah, lead-zinc property operated intermittently between 1963 and 1977, but the small, trouble-plagued underground operation never made a .significant contribution. Kennecott's British Columbia Molybdenum property started producing in 1968, but unprofitable operations resulted in a $22.5 million write-off in 1970 followed by sale of

24 thtt prcp~rty in 19""3. The co:""pany • s 76 percent 1nterest 1n a NlqPrlan colu:""blte operat1on acqu1red in 1q~s never a~ount~d t

~uch anj ~as sold in 1~~9. F1nally, the Ruby Creek, Alaska, c~rr~r pro1~1t was abandoned after the develop~ent shaft flooded 1n 14~~.

Alth ugh r~nn~cott took a caut1ous approach to d1vers1ficat1on, anj th~ co~pany spread 1ts r1sks by modest investments 1n a nurt~r t proJects, the results of 20 years of effort were d1scouraq1n~.

EvPn Canadlan titanlu~ producer, QIT, ~hlch had bequn to g~nPr4t~ modest profits in the flrst half of the 196ns, was not a clear-r~t success. QIT turned in more than a decade of losses be!urP 1t finally reached the break-even po1nt.

Peabody Coal and Ant i truat

After tw~ disappointlng decades, ~ennecott took a n~w approarh t div~rsification and sPt out to transform the corpany in a s!rql~ larqtt transactlon. In lqt:lh, Yennecott went after Peabody r al

C~:""pany, the country's largest independent coal producer. Att~r protracted negotiations, ~ennecott acquired Peabody in March l4~A for cash and other considerations totaling $622 million. ~enn~r tt w~nt ahead with the deal even though the Federal Trade Co~Miss! n

(FTCj had announced that it would fight the =erger on antitru~t qrounds.

In the end, ~ennecott lost the battle Wlth the FTC and sold Peab jl 1n June 1977 for cash and notes with a value of $910 milllnn. Thla ar1ount was about $40 mlllion more than the book valuP rt r~nn.-cott'a equity in Peabody at the end of 19""F.. Thfl! !;alP q.-n.-rated an after-tax gain of $"" million, a paltry rPturn r nsid.-rinq the size of Yennecott's original and subsequ~nt

lnv~st~.-nts 1n PPab~dy and lnflation of roughly ""5 percent nvPr th~ nlnft y.-ars nf ownPrship. The Peabody adventure also imposed a strategic cost. The merger diverted both capital investment and management attention from alternative diversification opportunities and, more importantly, from the core business. The neglected copper sector deteriorated during the nine years that Kennecott was entangled with Peabody. In 1971, the government of Chile expropriated the profitable El Teniente operation. Government actions also posed serious problems for Kennecott's domestic copper properties: emerging environmental requirements limited smelter production, impeded planning, and forced non-productive spending on pollution controls. At the same time, production costs rose rapidly as a result of generous labor agreements and accelerating inflation. And the company did not realize a compensating increase on the revenue side: government price controls prevented Kennecott from enjoying the high copper prices of 1973 and 1974, then low market prices persisted from 1975 through 1978.

carborundum and its Aftermath

The sale of Peabody in mid-1977 left Kennecott with a major challenge: what to do with the proceeds? At the time, the copper business was riding out the third consecutive year of depressed prices. Weak copper prices reinforced the long-held notion behind the Peabody acquisition that Kennecott needed to broaden its earnings base and reduce its dependency on the notoriously cyclical copper market. Thus the company turned away from reinvesting the proceeds in copper. The company also rejected the option of distributing proceeds to the stockholders.

Instead, the company set out to "diversify by major acquisition." In Kennecott's 1977 annual report to the stockholders, the Chairman's letter explains that the search for an appropriate acquisition target began after the Peabody sale was consummated. The lack of preparation for the aftermath of the divestiture is

26 difficult to understand. Certainly, there had been ample warning: the Supreme Court had declined to hear Kennecott's appeal of the FTC's divestiture order as far back as April 1974, more than three years before the sale finally took place. As if surprised by the turn of events, Kennecott management desperately sought a "major acquisition." Chairman Frank R. Milliken wrote: "During the summer and fall ... [Kennecott and its advisors] evaluated more than a score of companies. At the end of October, the Carborundum Company was brought to Kennecott's attention .... " Some three weeks later, on November 16, 1977, the Kennecott board authorized a tender offer for Carborundum at $66 per share. This offer included a substantial premium over the market price, which had ranged between $31 and $41 per share during the first ten months of 1977.

Kennecott paid $571 million for Carborundum, which became part of Kennecott in January 1978. Carborundum, a manufacturing firm serving mostly industrial markets, operated a business that had little in common with the mining and processing activities familiar to Kennecott; there were few business synergies to be gained through the merger of the two firms. Kennecott management argued, however, that the addition of Carborundum would strengthen Kennecott financially, principally by stabilizing earnings, cash flow, and dividends, and thereby, easing business planning, increasing access to capital, and providing an outlet for the large cash flows generated at the peaks of the copper cycle. Management contended that diversification was essential to Kennecott's survival and a basis for future growth. 4

These hopeful conclusions were challenged almost immediately. The Curtis-Wright Corporation obtained nearly 10 percent of Kennecott's capital stock and mounted a proxy contest in advance of the May 1978 annual meeting of stockholders. Curtis-Wright proposed an alternate slate of directors committed to divestiture of the recent Carborundum acquisition and to distribution of the proceeds to the stockholders. Litigation ensued. The May election, which favored

27 the management slate of directors, was overturned and the court ordered a new election to be held in January 1979.

In the meantime, the Kennecott Board of Directors recruited a new Chairman and Chief Executive Officer, Thomas D. Barrow. Barrow took over on December 1, 1978, and two weeks later Kennecott and Curtis-Wright announced a settlement terminating litigation, stopping the proxy contest, and canceling the special January election. The two companies concurred on a jointly selected Board of Directors for Kennecott, Curtis-Wright pledged not to increase its Kennecott holdings above 21 percent, and the parties agreed to an objective study of the curtis-Wright proposal to divest Carborundum. The study was completed by a special committee consisting of three Board members, and in April 1979 the Board voted unanimously to accept the committee's recommendation to retain Carborundum.

This decision, however, did not disentangle Kennecott and curtis­ Wright. The two companies considered _a merger and held discussions for about a year, until October 1980, when merger talks broke off. Then Kennecott made a tender offer for Curtis-Wright stock in November 19 8 0, and acquired about one-third of the outstanding shares. Finally, in January 1981, the two companies negotiated a truce. They agreed to exchange the shares each held of the other firm. The two companies further agreed to terminate all pending litigation and not to purchase shares of the other for a ten-year period. In addition, Kennecott acquired the Dorr-Oliver subsidiary of Curtis-Wright and paid Curtis-Wright $168 million in cash.

It is ironic that Kennecott funded the transaction by selling a major exploration find--the largest undeveloped phosphate deposit in the country--a property more closely matched to Kennecott's core business than were the manufacturing activities of Dorr-Oliver. Kennecott had identified the phosphate occurrence in 1957 and subsequently had joined with a partner experienced in the technical

28 and marketing aspects of the phosphate fertilizer business to delineate and possibly develop the deposit. The depressed fertilizer market strengthened by 1980, and Frank Joklik (then President of Kennecott Minerals Company) negotiated a favorable financing and marketing agreement with a foreign consumer of phosphate rock. This arrangement substantially increased the value the property, and shortly afterwards the other partner made an offer for Kennecott's 50-percent share. Pressed for funds to buy its way out of the entanglement with Curtis-Wright, Kennecott traded half ownership in the venture for a payment of $165 million. The company netted a gain of about $100 million on the November 1980 sale of its 50-percent share of the North Carolina Phosphate Corporation.

Independence Lost

The settlement with Curtis-Wright ended 13 years of warring brought on by Kennecott's poorly executed push to diversify. The cost of the battles diminished Kennecott--the company was transformed from a net creditor before the Peabody acquisition in 1968 to a sizeable debtor at the beginning of the 1980s. The diversification fights also distracted Kennecott from attending to the core business, and Kennecott's neglected, capital-starved copper properties lost ground. ·As the 1980s opened, a weak balance sheet and uncompetitive copper operations left Kennecott especially vulnerable to weak metal prices.

This vulnerability was exposed by the collapse of copper prices. Figure 15 shows the movement of copper prices for 21 years beginning in 1972. Copper producers became accustomed to strong prices in the early 1970s. The period of depressed prices that followed during the late 1970s hurt the industry, but the copper market turned up again before U.S. producers were forced to institute major reforms. Instead, encouraged by the price rise 29 that peaked early in 1980, Fiqure 15 Comex copper prices, Kennecott and some of its quarterly average, 1972-1992 · domestic competitors Dollars per pound forecast continued high 3.50 .------,------. - ReaJ 1992$ copper prices for the years 3.00 II• - Nominal S II ahead. Copper producers, I I 2.50 I I however, were disappointed I I I I 2.00 I I as real copper prices I I A I \ 1\ subsequently dropped to the 1.50 I \ " t"' ~ ' '-.IV\ I \ lowest level since the Great \-" 1.00 Depression and stayed there until mid-1987. 0.50

0.00 -+-..,...... ,---,-...... --,...... ,-..,--.---,-...... -r---o----,----.---,--..,...... ,---r--' Having failed to balance its 7201740176017&0180018201~18&01~19001920 1 dependence on copper by diversification into other business and having squandered its capital in the attempt, Kennecott was unprepared to weather the copper price downturn. Yet Kennecott's story was not unique: other u.s. copper mining firms also faltered in their efforts to diversify their earnings bases. In the mid-1970s, University of Arizona professor Thomas R. Navin, showed foresight when he wrote: "If any American industry could benefit by diversifying it is copper. The opportunity to do so has come and gone and may never come again--not by voluntary measures taken internally by existing management. It is now much more likely that diversification will be imposed from the outside by tender offer or by rescue operations." 5

Kennecott finally achieved diversification, by absorption, when it was rescued by The Standard Oil Company of Ohio (Sohio) in a friendly takeover effective June 4, 1981. The new parent dissolved Kennecott's corporate superstructure, and the various major components--Carborundum, QIT, Chase Brass, and KMC--were separately positioned in the Sohio organization. After the reorganization, the Kennecott name was preserved by Kennecott Minerals Company. KMC continued to oversee the traditional copper mining, smelting,

30 refining, and sales operations; Ozark Lead Company; and a minerals exploration program.

31 III. NEW MANAGEMENT

Kennecott has known three management eras. Stephen Birch, developer of the Kennecott mine in Alaska, was President of Kennecott Copper Corporation from the beginning in 1915 to 1940. He and his carefully groomed successor, E.T. Stannard (1940-1949), led Kennecott during the Corporation's period of growth in copper. The untimely death of both Stannard and his chosen replacement in a 1949 airplane crash created a sharp leadership discontinuity.

Kennecott's next chief, Charles Cox (1950-1961) carne from the steel industry. He and his successor, Frank R. Milliken ( 1961-1978 ) , presided over a copper business that integrated vertically through smelting and refining but did not grow. This second era of management sought growth through a series of diversificati on efforts that eventually imperiled the corporation.

In December 1978, threatened by a hostile takeover, Kennecott's Board of Directors recruited Exxon Senior Vice President Thomas D. Barrow to replace Milliken. Barrow deflected the hostile bid for control, but the process of disengagement was time consuming, costly, and ultimately temporary. In 1981, Barrow surrendered Kennecott's independence when he arranged a friendly take over of the troubled corporation.

Kennecott's third management era began in February 1980, when Barrow put the historic minerals business in the hands of G. Frank Joklik. While guiding Kennecott through one of the most severe copper market depressions on record, Joklik conceived and nurtured a competitive revival of the copper enterprise. By the end of the

32 decade, Kennecott had regained its position as a leader in the world copper industry.

Kennecott Minerals Company

In an April 1979 reorganization, Barrow divided Kennecott Copper Corporation into several distinct business units. Kennecott's Metal Mining Division, which had been responsible for all the mining operations except QIT, was combined with minerals exploration and the mineral business development function to form the new Kennecott Minerals Company (KMC). Figure 16 shows the location of the major components of KMC.

Fiqure 16 Kennecott Minerals Company properties in 1979.

Kennecott Minerals Company 1979 Properties

KMC's principal operating assets were the three copper properties-­ Utah Copper, Chino, and Ray--and the ozark Lead Company in

33 Missouri. Other KMC operating units were Nevada Mines, the Tintic mine in Utah, and the Kennecott Refining Corporation (KRC) in Baltimore, Maryland. Kennecott's practically depleted, high-cost copper mining operations in Nevada had been shut down in 1978. Until 1983, the Nevada smelter operated intermittently, processing excess concentrates from Utah Copper, and functioning as a custom copper smelter. Kennecott stopped mining lead and zinc at Tintic in 1977, but the mine remained open until late in 1982 to supply flux for the Utah Copper smelter. The KRC copper refinery in Baltimore treated Kennecott material from Ray, Chino, and Utah Copper, as well as processing non-Kennecott material.

When it was formed in April 1979, KMC immediately moved from Kennecott Copp_er Corporation headquarters in New York City. KMC established offices in Salt Lake City, Utah--near Kennecott's flagship Utah Copper property. Glenn P. Bakken headed the new KMC organization and G. Frank Joklik took charge of the exploration, technology, and planning functions in Salt Lake city. Bakken, former president of Kennecott's Chase Brass unit, located in Cleveland, Ohio, had no previous experience on the mining side of the business. He commanded KMC for less than a year before returning to New York City as president and chief operating officer of the parent corporation.

Joklik then took over as president of Kennecott Minerals Company, in February 1980. Although the ownership of Kennecott changed several times during -the 1980s, and the expectations of its successive parent organizations varied, Joklik's appointment as president marked the beginning of more than a decade of management continuity within the minerals company itself.

34 Joklik's Long-term strategy Fiqure 17 G. Frank Joklik.

Joklik's career had been mainly in mining exploration and major project development, including the great Mt. Newman iron ore mines in Western Australia. Although he knew the mining business, he had limited experience in operations. Unencumbered by the traditional perspective that had long constrained innovation in Kennecott's operations, he brought a fresh approach to Salt Lake City. He formulated a new strategic plan for Kennecott's minerals business.

The Corporation's mid-1979 plan had assumed that the real price of copper would rise substantially to a five-year (1980-84) average nearly 30 percent higher than the 88 cents per pound realized by Kennecott in 1979. Financial analyses indicated that if the projected prices were realized or exceeded, KMC's modernization needs and the rest of the Corporation's capital plan probably could be funded without recourse to external financing. These same analyses showed that copper prices 20 percent lower than assumed would make it difficult to support even the Corporation's base capital plan, which did not include funds for modernizing the copper properties. 6

3 5 When Joklik took on the responsibility for planning, he placed special emphasis on the outlook for copper prices and established a mineral economics function to analyze the factors underlying copper price formation. He suspected that copper price forecasts adopted by corporate leaders were unduly optimistic and did not give sufficient weight to the tendency of government owned or subsidized operations in developing countries to produce excess copper during market downturns.

The planning exercise that Joklik steered in 1979 and early 1980 is thoroughly documented in the Kennecott Minerals Company Strategic Plan for 1980-1985, issued in March 1980, a month after he became president of KMC. This plan projected a 1980 copper price of $0.99 per pound, 20 percent less than Kennecott's mid-1979 projection of $1.24 per pound. The revised forecast for 1980 was on target: Kennecott actually realized an average copper price of $1.00 per pound for the year. over the long term, the strategic plan assumed that the real price of copper would rise gradually at an annual trend rate of about one percent. At the time, annual inflation was running about 8. 5 percent so nominal copper prices were projected to increase at an annual trend rate of roughly 9.5 percent. Nevertheless, Joklik understood that copper prices might not evolve along such a hopeful path. Indeed, he feared an extended period of weak copper prices.

In addition to taking a hard look at the copper price outlook, KMC planners put the operations of Kennecott and other domestic copper producers under the microscope. Joklik explained, "The thought ... was that we should understand our own business and measure it against that of our immediate competitors." The results of these studies and a guarded outlook for copper prices laid the groundwork for a new KMC strategy, which he summarized in the letter that transmitted the formal plan document:

36 " ••• the competitive position of Kennecott's copper operations is unsatisfactory and will become worse unless remedies are applied. "The poor competitive position is due to high-cost mines, antiquated concentrating and smelting facilities at some locations and labor contract provisions that cause low productivity.

"The three principal strategies that evolve from the conclusions of the competitive analysis are:

1. Reduce production costs, using the existing facilities and equipment,

2. Invest in facilities and equipment that will yield maximum benefits, and

3. Discover opportunities for investment in new natural resource projects that will lessen Kennecott's dependence on Utah [Copper], Ray, and Chino.

"In the present economic environment, when the prospect of another period of depressed copper prices is not out of the question, the first strategy is being emphasized. A ma~or effort is getting underway at all levels of KMC."

What distinguished Joklik's strategy from the policies of the past was the clear distinction between the first and second strategic elements. He championed the idea that Kennecott must immediately make every effort to cut costs in ways that did not require major capital spending. He categorized major investment in modern facilities as an essential, but separate, issue that would require extensive planning and take place over a longer time frame than the first element of the strategy. The third strategic element, diversification, related to the company's future over a still longer time span. 8

37 The New strategy in Action

The fresh strategy adopted in early 1980 was the launch pad for multiple new programs jointly designed to revitalize the enterprise. The several distinct efforts advancing along different, but mutually supportive, paths complicate the chronology of events. To tell this story in a understandable way, the company's major initiatives are explained individually in the next five chapters. Chronologically, the chapters overlap, successively flashing back in time to add another layer of detail to the story of Kennecott's reformation.

Chapter IV chronicles Kennecott's primary cost reduction effort, which set out to cut the cost of producing copper with the existing plant and equipment. The company applied cost reduction measures incrementally. A period of testing, re-evaluation, and refinement followed each cost reduction phase. This process yielded major savings between 1980 and the spring of 1985, when ever decreasing metal prices finally forced the shutdown of the Utah Copper operation.

While putting its own house in order, Kennecott actively lobbied the u.s. government to change foreign lending policies that exacerbated the copper industry recession of the early 1980s. Chapter V recounts Washington initiatives undertaken by Kennecott to limit U.S. lending that, in effect, subsidized copper mines controlled by foreign governments and, thereby, stimulated uneconomic copper production, which flooded the world market and depressed copper prices. The company's efforts helped bring the issue to the attention of nations policy makers and legislators, and the Congress enacted helpful legislation backed by Kennecott.

Chapter VI focuses on the interaction between Kennecott and the labor unions representing the company's hourly workers. A change in labor relations, which took place during the first half of the

38 1980s, culminated in a landmark labor contract that was signed in 1986. The cost-cutting benefits of the new contract enabled Kennecott to reopen the Utah Copper operation before the facilities were modernized.

Concurrent with the basic cost reduction effort, Kennecott began planning major investments to replace outdated mining and processing facilities with efficient modern equipment. Chapter VII chronicles the planning, funding, construction, and startup of the major investment projects Kennecott undertook to modernize its copper mining properties. It took years to realize all the benefits, but the combination of cost cutting and modernization turned Kennecott's Utah Copper operation into one of the lowest cost major copper producers in the world.

Reviving the copper business was, of course, the most pressing and immediate task facing Kennecott in 1980. Yet, as related in Chapter VIII, Joklik sustained a long-term strategic effort to diversify Kennecott's natural resources business and reduce the company's dependence on the existing copper properties. Despite years of depressed copper markets, loss of profitability, organizational upheaval, and the massive task of revitalizing the long-neglected copper operations, Kennecott was able to extend its minerals business to commodities other than copper.

39 IV. COST REDUCTION WITHOUT MAJOR CAPITAL SPENDING

In 1980, Kennecott began an aggressive multi-phase campaign to reduce costs of copper production. This basic cost reduction process sought to improve the operation in place, without recourse to major capital spending. Kennecott took an incremental approach. The process yielded immediate results, and substantial gains accumulated during the major cost cutting phases undertaken prior to the shutdown of Utah Copper operations in 1985. Moreover, the cost-conscious attitude instilled in the organization during the early 1980s continues to serve the mining enterprise today.

Elements of KMC

Kennecott cut costs throughout the organization, at KMC headquarters units--including administrative, engineering and technology, and minerals exploration functions--and at the operating properties. Table 1 lists KMC' s principal operating facilities, all of which were targeted for cost reduction.

The configurations of the three copper mining properties--Utah Copper, Ray, and Chino--were similar in several respects. First, they all operated open pit mines and shipped ore by rail to concentrators located some distance from the mine. Second, they all operated concentrators originally constructed before Kennecott was formed in 1915. Although these concentrators had been remodeled and upgraded over the years, the only new facility was ·the Bonneville crushing and grinding plant in Utah. And Bonneville did not have its own flotation capability; the ground ore from Bonneville was piped to the old Magna and Arthur plants. Third,

40 Table 1 Major facilities operated by KMC in 1980 (shows year of original start-up)

PROPERTY II MINE I CONCENTRATOR SMELTER REFINERY I I I I Utah Open-pit Magna (1907) Garfield (1978) Electrolytic Copper Arthur (1907) refinery Bonneville (1966) (1950}

Ray Open-pit Hayden (1910} Hayden (1958) ---

Chino Open-pit Hurley (1911) Hurley (1938) Fire refinery (1942)

Nevada Shut down permanently in McGill (1908) --- Mines 1978

KRC------Electrolytic Baltimore refinery (1959)

Ozark Under- Ozark (1968) ------Lead ground

they operated smelters that were younger than the concentrators. Yet only the Utah smelter had been extensively modernized to comply with the stringent environmental regulations issued in the 1970s. Even there the modernization had been incomplete, and some components of the old plant, originally built by ASARCO in 1906, were still in use.

After Kennecott's open-pit copper mine and concentrator at Nevada Mines were shut down in 1978, the Nevada smelter continued to operate. It processed purchased or tolled concentrates and sometimes took in the overflow from Kennecott's remaining copper operations.

Of the three major copper properties, only Utah Copper operated a refinery to produce electrolytic copper, a universally acceptable, readily salable product. The Chino smelter had facilities to

41 Fiqure 18 McGill, Nevada, smelter in 1975.

produce fire-refined copper, a product with a smaller and less certain market than that for electrolytically refined copper. The output of the Ray smelter was mostly refined at KRC, an electrolytic refinery Kennecott had originally built on the u.s. East Coast to refine copper from the company's El Teniente mine in Chile. After the expropriation of the Chilean property in 1971, KRC obtained feed by purchasing or tolling other companies' copper and by processing material produced by Kennecott smelters. KRC treated material from Chino and Nevada Mines and the overflow from Utah Copper, where the refinery was too small to handle all t h e smelter output.

42 The remaining major property, Ozark Lead Company in Missouri, was a relatively mode rn operation dating from 1968. The lead and zinc concentrates produced at ozark were sold to ASARCO under a long term contract.

Because a similar cost-cutting approach was applied at the five copper operations and at ozark Lead, the thrust of the program can be understood by looking at a representative element of KMC. The following exposition emphasizes Utah Copper, KMC's largest operation. What transpired at the Utah operation generally exemplifies KMC's overall program to reduce costs without major capital investment. To the extent they contribute to an understanding of the cost reduction effort, the unique experiences of the other KMC units are woven into the story.

Incremental cost Reduction 1980-84

Cost reductions achieved at Fi qure 19 Unit costs of copper production at Utah Copper. Utah Copper are depicted in Figure 19, which shows unit Cost per pound of copper (nom1nal dollars) costs of copper production $2 50,.------·-- Full cost + Inflation since 1980 from 1980 through 1992. No costs are shown for 1985 and $2.00 1986 when the operation was $ 1 50 shut down. The incremental cost reduction campaign $ 1 ()() Joklik started shortly after he was appointed president $050 Shut- of Kennecott Minerals Company more than offset the effects of inflation between 1980 and 1984: full costs (including depreciation but excluding credits for by-product revenues) actually declined by 9 percent while general inflation

43 ~ncreased by 27 percent. As a result, the full cost of p roducing .copper at the Utah operation fell by 28 percent in real terms over the four year period.

But declining by-product prices more than wiped out the cost­ cutting gains. After deducting revenues received for the by ­ product gold, silver, and molybdenum produced by Utah Copper , t he resulting net costs of copper production increased between 198 0 a nd 1984 in both nominal and real terms. In the first two years of the period, from 1980 to 1982, real net costs soared by nearl y 50 percent and turned Utah Copper into a money-losing operation. For the next two years, however, by-product prices stabilized, and net costs declined in both real and nominal terms in 1983 and 1984.

By the beginning of 1980, Kennecott had lost control of inflation­ driven cost increases. The u.s. GNP deflator, a broad measure of inflation, rose at an 8.6 percent annual rate in the first quarter of 1980, but Kennecott's costs rose faster. Energy and labor costs outran broad measures of inflation. For example, the company's labor contracts tied quarterly wage increases to the consumer price index, which skyrocketed to a 16.7 percent annual rate of increase in the first quarter of 1980. A downturn of copper prices after Joklik' s mid-February appointment made the situation worse and increased the pressure to cut costs immediately.

Probing the Cost Reduction Frontier in 1980

By mid-March 1980, Joklik acted on the first element of his strategy, "cost reduction without investment beyond replacements." He launched a company-wide effort that concentrated on operating costs, but also scrutinized overhead costs for duplication and inefficiencies and set out to reduce excessive in-process metal inventories.

44 KMC's new president asked the general managers of the company's six operating divisions--Utah Copper, Chino, Ray, Nevada Mines, KRC, and Ozark--"to search your division operations thoroughly and establish your own goals for production cost reductions, and to devise your plans for attaining them." He suggested, "You will need to reach out, perhaps, beyond the ways you may have been accustomed to operating and find new and improved ways to accomplish (this assignment)." Finally, he instructed, "You should quantify the cost reduction goals you set for yourselves, should describe how your plan will be implemented, and show schedules for attaining the various elements making up your plan."9

The general managers had six weeks to devise their own plans. The responses from the six operations differed markedly in substance and thoroughness. Overall, the managers• proposals neither broke new ground nor set challenging goals. For the most part, the plans failed to quantify either the magnitude of the expected cost reductions or the time required to achieve them. This initial exercise failed to break through the organizational complacency and did not yield substantive cost savings. Nevertheless, it did establish a baseline from which to stage a second effort.

By early May, KMC projected that 1980 costs of copper production would exceed actual 1979 costs by more than 15 percent, unless the company acted to offset inflationary increases. Joklik wrote to the general managers a second time asking them "to go through the exercise of planning cost reductions again, in considerably more depth and with better quantified and more ambitious objectives than your last effort." He set an objective "to reduce the cost increase from 1979 to 1980 to no more than 8 percent.nlO

Joklik and the general managers created an organizing framework for understanding and communicating cost-reduction plans. Cost improvements were classified in three categories, the three "M"s-­ Manpower, Materials, and Methods. "Manpower" referred to

45 organization, head count, and producti v i ty o f personnel. "Materials" included inventory control, avoidance o f i n fla tion­ prone items, and attention to pricing of purchased i t ems. "Methods" embraced better operating practices, such as i mprove d metallurgical recoveries and increased throughput at exi sting facilities.

The cost reduction effort adhered to several guidelines. Fi rst , cost savings would not be obtained by deferring work. For instance, normal advanced stripping of the orebody, i.e. , the orderly removal of overburden in advance of mining, was t o continue. In general, short-term cost savings that would only increase costs or create operating problems later would be avoided. Second, projected cost savings were considered goals rather than absolute commitments against which performance would be measured. This approach encouraged the general managers to be as aggressive as possible in forwarding innovative ideas that had potential to reduce costs.

By mid-June, the general managers had identified specific cost reduction items. Each item was quantified with expected annual savings (both total dollars and cents per pound) and an implementation schedule. When the individual items were slotted into the organizing framework described above, the complex cost­ cutting program could be summarized and understood in terms of basic business functions and fundamental resource requirements of the operations. The general managers found savings in all major functions--mining, concentrating, smelting, refining, and administration. Roughly half the projected savings were attributed to improved methods, about one-third to better manpower utilization, and the balance to more effective use of materials and supplies. 11

The potential annual savings identified throughout KMC operations totaled more than $50 million--a cost reduction equivalent to

46 Fiqure 20 Utah Copper power plant in 1980.

nearly 8 cents per pound of copper production. The total accumulated from hundreds of specific cost-reduction items, each offering relatively modest savings by itself. The single largest cost-reduction item at Utah Copper was a result of optimizing the mix of coal and natural gas burned by the division power plant, and this item accounted for less than 15 percent of the division's total estimated savings. Utah Copper also achieved significant savings as a result of methods improvement in the concentrators, where an analysis of the operations indicated that unit costs could be reduced by revising the process flow and shutting down a portion of the facility.

47 All the operations cut costs by increasing the utilization of both equipment and employees. For example, the Ray mine increased the _operating time of haulage trucks by reducing the idle time associated with shift changes and lunch breaks at the three-shift­ per-day operation. This type of change at the operations resulted in either production increases or manpower reductions. At Chino, more than half the 1980 savings were attributed to manpower cuts made possible by a reassessment and reorganization of work that resulted in productivity improvements, job combinations, and elimination of jobs. As a result, Chino was able to reduce total manpower by more than 7 percent. Improved manpower utilization also reduced overtime payments--the annual savings at the Utah Copper mine alone were estimated at more than $800 thousand.

The second 1980 phase of cost reduction overcame some of the difficulties that had plagued the first cost-reduction exercise. On the second attempt, cost savings were quantified, sources of the savings were identified, and specific actions were scheduled. Just as important, KMC began to break through the limiting assumptions and traditional attitudes that had constrained the initial effort. The second 1980 phase of cost reduction marked the beginning of a change in the management culture of KMC, a change that would become important over the long term.

In promoting fresh practices and attitudes throughout KMC, Joklik was assisted by Ivor G. Pickering. Although a long-time Kennecott executive, Pickering was more attuned than many of his colleagues to the critical need for major changes in the way Kennecott operated. Pickering had extensive operating experience, having been general manager at both KRC and Ray before becoming a vice president of Kennecott. From July of 1980 until he retired in July of 1982, Pickering was second in command at KMC as senior vice president of operations. His detailed knowledge of copper production operations and his commitment to change helped shape the cost-reduction effort that revitalized Kennecott.

48 Improvements did not come easily or quickly at first. Cost reductions in 1980 fell short of the gains that Joklik sought. KMC's average unit cost of copper production rose in 1980 by 12.1 percent, more than the 9.5 percent increase in the general rate of inflation. KMC identified substantial cost-saving measures, but implementation lagged. Only one-third of the identified savings were actually delivered in 1980. The rest were scheduled to come into play over the following two years.

Improvinq Productivity on the Job

Despite the disappointing Fiqure 21 Relative labor productivity of major copper results of the 1980 cost- u.s. producers in 1979. reduction effort, Joklik persisted in the belief that there was considerable opportunity for further cost

cuts. His conviction was ::o I supported by the competitive study he had initiated before becoming president of KMC. This study put KMC operations near the bot tom of competitive performance rankings. For instance, labor productivity at KMC operations compared unfavorably with that achieved by competitors. Using productivity at Utah Copper as a reference, 1 J Figure 21 shows relative productivity rankings for mining, concentrating, and

49 smel ting acti vities at other major u.s. copper m1n1ng propertie s . .Joklik suspected that KMC's poor comparative performanc e could not

~e expl ained solely by the obsolescence of KMC's physical p lant .

Sensing the potential for improvement, Joklik searched for endemic attitudes and practices that might contribute to low work-force productivity. He asked J. E. Petersen, an executive who had many years of industrial relations experience with Kennecott, to investigate the underlying causes of low productivity.

Petersen attributed a large part of the productivity shortfall t o low visibility jobs, which constituted roughly 60 percent of a ll KMC jobs. He estimated "actual working time in low visibility j obs approximates 40 percent of available work time .... " and calculated that a modest increase in working time, to 50 percent, would save KMC more than $37 million annually. He reported, "[A] large part of the problem is our failure to insist on satisfactory performance and our failure to consistently supply our employees with necessary parts on a timely basis." He suggested an ongoing program to train KMC supervisors at and above the level of the front-line foreman and urged KMC to solve the parts problem. 12

The same picture emerged from informal conversations with hourly employees. Workers reported sloppy maintenance practices, malingering on the job, deliberate slowdowns to force overtime work, and mistakes due to inadequate communication or lack of training. They also criticized front-line supervisors for lack of knowledge, poor scheduling of men and materials, lax oversight, .inadequate quality standards, and failure to heed hourly workers who reported deficiencies.13

In October 1980, Joklik created a new position, KMC vice president for performance improvement, to start a company-wide program to upgrade performance on the job. Over the next two years, supervisory training programs were established and attended by all

50 first-line and second-line supervisors in the company. In addition, employee communications were improved at the KMC and operating unit levels using various channels, including newsletters and bulletin boards. The performance-improvement program reflected a fundamental change in employee relations: KMC expected employees to do more than they had in the past, and the company supported these expectations with new training and communications initiatives.

Once performance-improvement attitudes, practices, and progra:"'s became securely established throughout Kennecott, the responsibility for continued operation of these programs was turnej over to the individual operating units. In mid-1983, after the approach was well rooted in the operations and central direct1on was no longer needed, KMC vacated the vice presidential position tor productivity improvement and returned the incumbent to operating duties.

Acceleratinq the Ettort in 1981

After establishing the performance-improvement effort, Jokl1k opened another phase of cost cutting at the beginning of 1981. He began by conferring individually with the general managers. They all agreed to realistic, but ambitious, goals that cut proJected average costs for 1981 by 11 percent. The targets were expressed in specific terms according to "the cost levels to be achieved and the principal areas from which cost savings were expected." 14 In less than six weeks, the general managers revised 1981 operat1nq plans to conform to the new targets. The streamlined plans ~ere submltted, reviewed, and implemented before the end of February 1981.

T•o bas1c approaches contributed to lowering unit costs of CO F~er product1on. First, copper product1on was increased, and ~e c:n j

51 dollar outlays were reduced. Production i ncreases carne from altering mine plans to raise the grade of the ore mined at all three mining properties. In additi on, i mproved ma intenanc e and increased equipment availability enabled KMC concentrators to sustain high operating rates and process stockpiled materi a l, a s well as freshly mined ore. The Chino concentrator, for examp l e , treated copper-bearing flue dust collected from smelter stacks and old concentrator spills that had accumulated in an impoundment.

Financial gains were broadly based: efficiencies in the use o f manpower and materials, improved methods, and reduction of in­ process copper inventories all contributed. For instance, the p l a n called for the elimination of 500 jobs throughout KMC. Utah Copper, which started out as the least efficient of the three copper mining properties, achieved the largest continuing gains. The Utah operation improved purchasing and use of materials, supplies, and energy; reduced manpower; and improved methods to increase throughput. The Utah refinery also increased revenues in 1980 and 1981 by substantially reducing in-process inventories of precious metals.

All told, benefits of the 1981 effort totaled more than $100 million. Some of the 1981 actions, such as changing mine plans to temporarily increase ore grades, could not be continued indefinitely, but the 1981 cost savings were not substantially obtained by borrowing from the future. All three copper mining properties reduced unit costs in real terms. For instance, full costs of copper production held steady at Utah Copper in 1981 -despite a 10 percent increase in the general rate of inflation. The success of the cost cutting was offset, however, by a disappointing decline in by-product prices that boosted the net costs of copper produced at Utah Copper by nearly 50 percent.

52 Manpower Reducti ons i n Earl y 1982

With the u.s. economy deep in recession, KMC's plans for 1982 were based on what was thought to be a conservative projection of metal prices. The price forecast had 1982 copper and by-product prices down slightly in real terms from 1981, and KMC was expected to post a 1982 operating loss. This was reason enough to continue w1th aggressive cost reduction, but continuing metal price declines increased the pressure to cut costs as 1982 unfolded. (See Figure 15, page 29).

To speed the pace of cost reduction, Joklik took a different approach in 1982. He set specific targets for KMC units in ter~s of required dollar or head-count reductions and then let the individual operating and staff units find a way to meet those targets without sacrificing their missions. Although this process was somewhat arbitrary and could appear capricious to those required to meet the targets, it shortcut the inev1table negotiations, compromises, and delays associated with the caut1ous collaborative approach that had characterized the 1980 and 1981 cost-reduction efforts. It was a drastic method, but one that overcame reluctance to change. It forced managers and workers to look for waste, to challenge inefficient practices, to exper1ment Wlth new methods, and to modify longstanding habits and trad1t1ons.

On January 22, Joklik introduced the first phase of 1982 cost reduction. The KMC cost-reduction goal totaled $36.5 milllon--SJO million from operations and the balance from staff organizations. 15 This time it took just two weeks to put together a revised plan, a plan that prom1sed savings of more than S5 o million.

But this was just the beginning. On February 22, Jokllk asked the general managers of the six operat1ng units to come up w1th addltional cost reductions, another $50 million. Staff un1ts were

53 expected to cut 1982 costs by an additional $9 million.16 It took another two weeks to plan this second 1982 phase of cost reduction .

. In March, Joklik called for a third cost-reduction phase. Taken together, the three phases of cost reduction he instituted in the first quarter of 1982 promised to shave 15 cents per pound off the cost of copper production by saving $116 million in 1982 ($136 million on an annualized basis) .

Manpower reductions Table 2 Total KMC manpower accounted for about half of reductions during first quarter 1982. the dollar savings in the first three 1982 phases of Reductions from 1981 cost reduction. The size of Year-end Authorization the cuts is shown in Head-count Percentage Table 2. Without reducing Salaried 775 28\ production, it was possible Hourly 1,468 15\ to trim the KMC salaried Total 2,243 18\ work force by more than one- fourth in early 1982. The magnitude of this cutback indicates the extent to which KMC costs had been bloated by redundant employees.

Similar excesses had developed over the years in the hourly work force, but the company proceeded cautiously with layoffs of represented employees. The Employment Security Provision (ESP) written into labor contracts limited the company's prerogative to release workers without a corresponding production cutback. Yet KMC did release 15 percent of the represented work force in early 1982. By that time, the company had advanced its relationship with its unions to the point that union leadership was persuaded to accept reductions in force and not invoke the provisions of the ESP. KMC's long-term effort to build a positive relationship with the unions is detailed in a separate section of this chapter, "Evolution of Labor Relations", which begins on page 82.

54 The first three 1982 phases ot cost reduction thinned total ~~C manpower by over 2,200 people, a reduction of 18 percent from the level authorized at the beginning of the year. The resulting cost savings totaled nearly $60 million in 1982. Once determined, the layoffs proceeded quickly. By the end of March, nearly 80 percent of the targeted positions were vacant. These were permanent layoffs. The company expected to produce at full capacity with the remaining work force.

Although assessments ot on-the-job performance indicated that there was a great deal of room for productivity improvement in KMC, no one was sure just how much further work force reductions could proceed without upsetting production. The cost-cutting process ..-as viewed as an exper1ment: the notion was to cut by successive increments until the minimum level of employment necessary to sustain production and other critical activities was found. Ivor Pickering noted at the time, "Some ot the reductions were made possible by specific job combinations, but most resulted from simply cutting the numbers of persons employed and requiring those remainlng employed to do the work that had been planned before reductions." 17

Feductions in the cost of materials were nearly as large as tho5e attr1buted to manpower. More efficient use of materials, suppl1es, and energy and negotiated price reductions for purchased goods contributed to cost savings. Nearly 30 percent ot the reduction 1n material costs came from maintenance supplies, and more than 25 percent resulted from reduced energy costs achieved by sw1tch1ng from natural gas to coal, using less energy, and renegot1at1ng contracts with energy suppliers. Additional savings were obta1ned by reusing reject grinding balls 1n the mills, renegotiating the price of scrap iron used in precip1tation plants, and substitut1nq cheaper flotation reagents that actually improved metal recover1es.

55 Shutdowns at Ray and Chino

As KMC cut costs, metal prices continued to decline at a rate that more than offset the company's savings. Although Utah copper reported an operating profit in 1981, both Ray and Chino suffered losses. By 1982, the steady decline of copper and by-product metal prices turned Utah Copper into a money loser as well. The accumulating losses forced KMC to consider a temporary shutdown or curtailment of one or more of the money-losing copper operations.

The company faced a difficult decision. Although selling copper at the prevailing price was a money-losing proposition, a cutback would not eliminate losses. For example, unavoidable fixed costs associated with care and maintenance of idled facilities would continue. On top of that were the one-time costs of shutting down and then restarting operations. For instance, payments to laid-off employees and the cost of fringe benefits for those employees continued for months following a layoff. When operations finally resumed, extra costs would be incurred to rehabilitate production facilities and retrain workers. A curtailment of production made sense only if the ongoing losses of continued production exceeded ongoing fixed costs and one-time shutdown and start-up costs.

The decision was complicated by the uncertain future course of metal prices. A production curtailment would be a losing proposition if copper prices recovered shortly after effecting the closure. Furthermore, it was not clear that Kennecott should be the first firm to curtail output. Some other u.s. producers with higher unit costs of production than Kennecott continued to operate at a loss. If others curtailed output first, the resulting reduction in copper supply might boost copper prices enough to relieve the pressure on KMC.

The appropriate allocation of any production curtailment among the three KMC copper operations was another key issue that factored

56 into the analysls. The cost structure or KMC's large-scale Mln1nq operat1ons favored either running an operation at full capac1ty or shuttlng it down corpletely. By spreading f1xed costs ovPr a reduced production volume, partial curtailment usually 1ncreased unit costs ot copper production. Thus, it made more sense tor

~ennecott to shut down completely one or more of the three copp~r operat1ons than to curtail copper production by partial cutbacks at all three.

In early 1982, KMC calculated break-even prices for each of thP three copper operations. At Chino, the analysis showed 10!;5~5 would be reduced by a shutdown of operations if the copper prlCP averaged less than 70 cents per pound tor a year or more. At Fay, the one year break-even price was nearly the same, 69 cents a pound. At Utah Copper, the calculated break-even price of 45 cents per pound ot copper was much lower than at the other two properties, largely because the Utah ore contained substant1al quantltles of by-product metals. In addition to being the lo•e~t cost r~c property, the Utah operation was the largest. W1th c:pper output twice that of Ray and four times that ot Chino, the r·tah operat1on accounted for more than 55 percent of KMC' s co1=per productlon.

By March 1982, the copper price had fallen below the calculatpj brPak-even costs at Ray and Chino, and improvement in the near-tern seemed unllkely. The dismal price outlook prompted KMC to announrP an lndefinite shutdown of the Ray and Chino operat1ons. Thlt; action, however, was part of an orchestrated plan to lncrPaSP pr1ces received on the balance of KMC's copper productlon.

In ~arrh 1qA2, KMC notified domestic customers that Comex-bd~Pj pricing of copper, first adopted in 19~8, would be abandonPd frr a list, or producer, price set by the co~pany. At the ti~e of th~ annr1unce:"'ent, only two other copper corpanies, representlnq 1" pPrcPnt of do~estic output, tled their selling prices to NP• a r~

s~ ·Commodity Exchange (Comex) quotations. The change in pricing policy was bundled with an announcement that KMC woul d shut down at ..Ray and Chino for an indefinite period. KMC decl ared that resumption of operations at these two properties woul d depend on economic conditions. The company expected news of the shutdowns to help support the copper price and reinforce the company 's new copper pricing strategy.

The shutdown decision meshed well with existing plans for the Ra y and Chino operations. Weak copper prices were a good reason t o reschedule and extend production interruptions already in the plan for these two properties. At Ray, an eight-week maintenance closure was already scheduled for the beginning of July; the revised plan advanced the shutdown to the beginning of May. Al l but the leaching operation shut down at Ray in early May. After scheduled maintenance work was completed in August, the work force was reduced to a care-and-maintenance level of about 200 employees--down from 1,850 six months earlier.

The special situation at Chino requires a brief explanation, because Kennecott began a major modernization there in 1980. (The justification and subsequent progression of the Chino project is detailed in the next chapter.) The first phase of the project, which included expansion of the mine and construction of a new concentrator near the mine, was nearing completion when Kennecott announced the 1982 shutdown. The new concentrator was originally scheduled to start up in May, and the existing concentrator was set to shut down a few months later in August. When falling copper prices induced KMC to revise production plans, the company advanced the shutdown of the existing concentrator to March and deferred startup of the new concentrator until August. Under the revised plan, the new concentrator was to be operated long enough to complete acceptance testing, at which time continued operations would depend on economic conditions.

58 The Chino mine and concentrator shut down at the end ot March anj the &:!~elter at the beginnlng ot ~ay. Strlpplnq cont1nuP:i 1n conjunction with the nearly co~pleted m1ne and concentrat r modernization. A co~binatlon of perranent and te~porary lay tt~ cut the work force from 1,E60 1n February to 500 erployees 1n Jun~. uv~r the next four months, e~ployees were recalled for acceptdn-p testing ot the new concentrator, and the work force cllrb~:i t about 950 ln the last quarter of 19R2.

After shutting down Pay and Ch1no, r~C copper sales commandPd d hlqher premium over Comex prlces than achieved ln 1981. Ov~r th~ course ot 1982, the new pr1cing strategy boosted copper revenu~~ b] about 2 cents per pound and brouqht 1n an addltional $4.5 mllll~n.

This financial gain, however, was only a small portion of th~ benefits realized by curtalling production.

When ~ennecott cut product1on, the domestlc copper industry was operating at about 85 percent of capacity. Other tirms qu1rkl 1 followed ~ennecott•s lead. Three weeks after the YennP~utt announcement, the co~pany•s pr1nc1pal domestic co~pet1tor, Phelp~­ Codge, announced a six-week shutdown of all its copper operatlon5.

By July, the domestic copper lndustry was operating at ab1 ut ~ percent of mine capacity. Yet the copp~r price contlnued to tall, and the Comex price averaged just under ~5 cents per pound durlnq the last three quarters of 1982. It KMC and other TT.S. prndurPrs had not curtailed production, copper prices would probably hav~ dropped more than they did and further reduced the r~vPnu._.q

Yenn~cott received from continulng production at Vtah Co~~Pr.

The shutdowns also contributed 1nd1rectly to long-tPrM r~~t reduction. t-.1lile Ray and Chino were idled, every icb •a•t srrutinized, and productiv1ty and efflciency were irprov~d bf applying zero-based budqeting to the eventual rPsu~ptlon t np.-rations. The extended shutdowns, linked to thfl! t-rr1n'"'-..Lrt~ t ccpp~r production, also help~d to persuadP wr1rkPrs and uninn~ trat cost-cutting measures were necessary to preserve jobs over the long term.

Additional 1982 Phases of Cost Reduction

Utah Copper continued to operate at full production, as two more 1982 cost-reduction phases trimmed the work force in the second quarter of 1982. In July, the sixth 1982 phase of cost reduction eliminated 900 jobs, mostly in maintenance functions. Maintenance had long been a problem at Utah Copper, particularly at the antiquated Magna and Arthur concentrators, both of which dated from the first decade of the century. But old equipment was not the only problem. The maintenance function was home to many of the low-visibility, low-productivity jobs that Petersen had identified in his 1980 study. The reduced maintenance work force was probably adequate for the job, but the maintenance function was poorly organized and burdened by a tradition of non-productive work

practices. Consequently, Utah Coppe~ experienced great difficulty maintaining the ancient concentrators, and repeated equipment breakdowns interfered with production. This was a problem that would take several years to resolve.

A seventh and final 1982 phase of cost reduction pruned the work force at KRC, the Nevada smelter, and Ozark. In November 1982, KMC closed the Tintic operation, which had been supplying flux for the Utah Copper smelter. The following year, KMC sold Tintic.

-By the end of 1982, a two-year campaign had reduced the permanent work force by more than 30 percent. Table 3 shows how the job cuts were distributed across the three major copper operations and the rest of KMC; the "other" category includes Ozark, KRC, Nevada Mines, Tintic, and KMC staff units, all of which shared in the cuts. The percentage change in the work force was fairly uniform across the company. The exception was Chino, where completion of

60 Table 3 Permanent manpower the modernization in 1982 reductions in 1981 and 1982. increased copper production capacity by 70 percent. Authorized Employment Adjusting for this expanded at Year-end capacity resulted in an 1982 1980 Change effective manpower reduction Utah 4,700 7,000 -33% at Chino of more than 50 Copper percent--an improvement that Ray 1,400 2,060 -32% includes the benefits of the Chino 1,300 1,590 -18% new technology. Other 1,400 2,050 -32% 8,800 12,700 -31%

The year-end 1982 employment shown in Table 3 represents the work force required to operate KMC mines and processing facilities at full production. Between the end of 1980 and the end of 1982, KMC cut 3,900 jobs from the full­ production work force, while increasing production capacity at Chino. These permanent reductions represented a continuing annual cost saving of about $120 million for the whole of KMC. The annualized savings in the copper operations alone equated to roughly 15 cents per pound of copper production at full capacity. Temporary layoffs, associated with production curtailment at Ray and Chino, provided additional savings by reducing the number of employees actually on the job at the end of 1982 to less than 7,500.

The full financial benefits of the work force reductions were not realized immediately because termination costs continued for about six months after the layoffs. When the results were tallied for 1982, the seven phases of cost reduction had saved KMC about sao million. Manpower reductions saved about $45 million, improved purchasing and use of materials, supplies, and energy saved roughly $30 million, and the balance came from salaried personnel who took a 10-percent pay cut and donated 2 weeks of 1982 vacation to the company. All these steps cut costs in both nominal and real terms at Kennecott's three major copper properties. For example, full

61 costs of copper production at Utah Copper declined by 7 percent in nominal terms and 12 percent in real terms between 1981 and 1982.

consolidating the Gains in 1983 and 1984

In 1983, the company began to realize the full benefits of the cost-reduction actions taken in 1981 and 1982. The operations were adjusting to new operating modes, productivity was rising, and termination costs, which had limited immediate cost savings from manpower reductions, were coming to an end. At Chino, the concentrator modernization, undergoing acceptance testing in the final months of 1982, promised to cut costs by 20 cents per pound of copper and boost productivity to 90 short tons of copper per man-year, up 12 5 percent from the 4 0 short tons per man-year achieved in 1980.

Still, KMC was not profitable because of persistently depressed copper prices. The recent improvements had not relieved the pressure to cut costs further. This time, however, generic cost reduction of the sort that addressed the common inefficiencies and low productivity that permeated Kennecott in 1980 no longer offered the massive savings needed. After a two-year crusade, opportunities for sweeping manpower reductions had been nearly exhausted, and price cuts already negotiated with many suppliers limited room for further concessions.

Even so, Kennecott achieved modest savings by continuing the push to control costs of personnel and purchased items. In 1983, for instance, Kennecott negotiated significant reductions in electric power rates for the Utah Copper and Chino operations. Additional savings were negotiated with coal and natural gas suppliers, and another cut in power rates at Chino was negotiated in 1984. Revising medical and dental insurance programs for non-represented employees produced additional savings in 1984. Finally, intensive

62 efforts to improve productivity permitted Kennecott to continue gradual reductions in the work force needed to operate at full production.

By 1983, however, the center of attention had begun to shift from the generic to the particular. Kennecott fashioned a collection of specific actions to address unique opportunities. The evolution of the subsequent cost-reduction effort is best understood by examining Kennecott's major initiatives one at a time. A discussion of labor issues is deferred to the section on labor relations, which begins on page 82.

Kennecott headquarters--Along with the operations, Kennecott streamlined the headquarters staff. The company began in 1982 by eliminating 133 positions in administrative, technical, and exploration units. Then before midyear 1983, Kennecott trimmed headquarters staff by another 153 people, a 31 percent cut. The Engineering and Construction and Process Technology units took the largest percentage cuts and released 71 people in 1983. The internal design engineering function was eliminated in favor of outside contractors, but at the same time project management was strengthened. Some Process Technology projects were eliminated or stretched out, but essential support for operations was retained.

Tolling operations--At the beginning of 1983, Kennecott was processing toll material at the Nevada smelter and the KRC refinery in Baltimore. But the company was unable to obtain enough toll material to keep these operations going throughout the year. The Nevada smelter was shut down in mid-June, and a two-stage shutdown of the KRC tankhouse was completed at the end of June. Rod casting continued at KRC, using Utah Copper and toll cathodes.

Ray--An analysis of possible operating modes at Ray led to a decision to restart only the mine and concentrator in August 198 3 , and leave the silicate ore processing plant and the smelter closed .

63 Fiqure 22 Kennecott Refining Corporation (KRC) in Baltimore, Maryland.

Silicate ore, mined at a lower than normal rate, was stockpiled and concentrates were sold to ASARCO. When operations resumed at about 80 percent of full production, operating costs were reduced by the favorable terms negotiated with ASARCO, the modified operating mode, above average ore grade, a lower than average stripping ratio, and further reduction of manpower requirements.

Ray had been the highest cost copper producer in Kennecott, but changes to the mine plan and technological innovations reduced costs sharply. In 1984, Ray metallurgists adapted existing f~cilities to handle limited amounts of native copper ore, thereby increasing copper production and reducing unit costs. Previously, native copper ore encountered in the mining sequence had been

64 Fiqure 23 Ray, Arizona, open-pit mine.

stockpiled because it could not be treated in the existing facilities.

In 1985, Ray metallurgists made another breakthrough. They developed and brought into production an economic means of treating silicate ore. After a vat-leaching process had proven uneconomic, Ray had stockpiled silicate ore. Applying a new heap-leaching scheme, Ray placed silicate ore on impermeable pads, leached the ore heaps with acidic water, and recovered copper from the effluent by solvent extraction and electrowinning (SX-EW) technology. Improved copper recovery methods and a new mining plan established Ray as a long-term, low-cost operation.

The evolution of unit costs of copper production at Ray from 1979 until the property was sold to ASARCO in 1986 is shown in

65 .Figure 24. Because Ray ores Fiqure 24 Unit costs of copper contained only minor amounts production at Ray Mines. of recoverable by-product Cost per pound of copper (nominal dollars) metals, net costs (after $1 . 40.------r------~ deducting by-product $1.20 credits) were little different than the full costs plotted in the Figure. Between 1980 and 1986 Kennecott's cost-reduction program at Ray trimmed the $0.40 real cost of copper $0.20 production by more than 50 $0.00 percent. 1980 1981 1982 1983 1984 1985 1986

Chino--When testing was completed at the end of 1982, the new Chino concentrator was expected to reduce unit costs of copper at full production by nearly 25 cents per pound, to 85 cents per pound (in 1983 dollars). The modernized operation could produce 110, ooo short tons of copper per year, but the existing Chino smelter could not treat all of the expanded concentrate output. Considering the high cost of shipping excess concentrates to another smelter and the low copper price, the economics of operating the new concentrator at full production were less attractive than a five­ day-per-week schedule that matched concentrate output to existing smelting capacity. Although the five-day schedule increased unit operating costs slightly, it reduced projected operating losses. After successfully completing acceptance testing in March 1983, the output of the new concentrator consistently exceeded design parameters. As a result, costs of copper production after the first phase of Chino modernization were lower than expected.

Completion of the smelter modernization and expansion in October 1984 (see page 108) enabled Chino to increase production to full capacity by the beginning of 1986. Although initially hampered by 66 equipment failures and other Fiqure 25 Unit cost of copper production at Chino Mines. problems, the modernization at Chino substantially Cost per pound of copper (nominal dollars) reduced costs, as shown in $1 .40 ,.------.------, ~ Full cost +Inflation since 1980 Figure 25. Between 1980 and $1 .20 1986, full costs of copper $1 .00 production were nearly cut in half in real terms. $0.80 Chino, like Ray, recovered $0.60 only minor quantities of by­ product metals. $0.40 $0.20 Utah Copper--While Chino $0.00 dealt with the challenges 1980 1981 1982 1983 1984 1985 1986 inherent in the startup of a new concentrator and smelter, Utah Copper struggled with two worn out concentrators, both more than 7 5 years old. Maintenance deficiencies had accumulated at the two Utah plants during years of neglect prior to 1980. Low equipment availability impeded production, and management recognized that the concentrators could not sustain the targeted production level; thus, at the beginning of 1983 planned concentrator throughput was reduced from an average of 107,000 short tons to 103,000 short tons per day of ore.

In late 1982, Kennecott had taken steps to rectify the underlying problems in the concentrator maintenance function: management of the maintenance function was strengthened, a study was launched to identify bottlenecks that could be broken by small capital investments, and revised work practices were negotiated with the Steelworkers union.

In December 1982, the company and the union signed a new Concentrator Millwright Agreement. The landmark agreement permitted Utah Copper to combine various maintenance workers-­ machinists, carpenters, boilermakers/welders, pipefitters, sheet

67 metal workers, and painters--under a single new job classification Ior field repair duties. Under the new millwright classification, a single represented employee could perform maintenance tasks that would formerly have taken several workers. The improved productivity allowed Kennecott to reduce maintenance manpower by nearly 100. By February 1983, Kennecott had reassigned 425 hourly workers to new jobs. 18

Problems in the concentrator subsided for a few months, but by mid- 1983, poor equipment availability and mechanical problems at the Arthur and Magna concentrators again hampered production. The maintenance problems were compounded by low metal recovery caused by oxidized ore. By July, daily concentrator throughput was 10,000 short tons less than forecast. As production slipped, Kennecott reinforced the maintenance improvement effort by installing a new concentrator manager, increasing personnel in problem-prone areas, improving planning and scheduling of maintenance with a computer­ based system, and introducing intensive operator training. 19

Then in August, the company began recalling about 200 workers from layoff for an intensive six-month campaign to eliminate the serious maintenance backlog in the concentrators. The temporary effort was designed to catch up on maintenance that had been neglected, in some instances for decades. In the third quarter of 1983, low equipment availability constrained average concentrator throughput to 89,000 short tons per day and copper recovery to 80 percent. The special maintenance campaign improved both the reliability and performance of the antiquated concentrators. This effort returned effective concentrator capacity to 103,000 short tons per day and increased copper recovery to 85 percent. 20

While attacking problems in the concentrators, Kennecott also reduced costs by changing mining methods at Utah Copper. Haulage trucks replaced the rail system used to haul ore in the lower reaches of the pit. The switch to trucks increased flexibility in

68 mining and permitted Utah Copper to reduce the stripping ratio, raise the ore grade, increase the size of ore loading shovels, and reduce operating and maintenance manpower in the mine by nearly 190 people. The change to trucks cut projected operating costs by 12. 7 cents per pound of copper, more than enough to offset the unit cost increase associated with the drop in projected 1983 concentrator throughput from 107,000 to 103,000 short tons per day.

The cost savings realized by replacing rail with trucks were largely a one-time occurrence occasioned by postponement of stripping. The life-of-mine stripping ratio did not change, but the current stripping ratio was reduced from 3.1:1 to 2.4:1, which was still higher than the 0.85:1 average for the remaining life of the pit. Two factors contributed to the reduction of stripping. First, trucks allowed significantly steeper operating slopes than practical with rail. And second, removal of track immediately opened up ore to mining. For instance, a large tonnage of relatively high-grade material was exposed by removing rail switchbacks that interfered with mining and limited slope angle in one entire quadrant of the pit. In the mine as a whole, the steepening of pit slopes made possible by the change to truck operations opened up 80 million short tons of ore that could be mined over a period of six to seven years with no additional stripping. 21 By mid-1983, 50 percent of the ore mined was being moved by truck, and by September, trucks were carrying all the ore inside the pit.

The rail-to-truck conversion cost nearly $22 million, but the effect on net present value of advancing the mining schedule yielded a high rate of return and a one-year payback on this investment. Most of the expenditure, $18 million, went to modify the electrical distribution system in the pit: electrical equipment was upgraded to supply reliable power for large shovels in the lower levels of the pit, and electrical transmission cabl es were raised to provide clearance for new 170-ton haulage trucks.

69 Related capital of $7.5 million was allocated for additional haulage trucks needed in 1984. Considering that all but $4 million of the total capital required for the switch to trucks was included in plans then being developed for modernization of the mine and concentrator, the conversion to trucks was effectively an advance on modernization.

The change in the mining method was just one of the modest capital projects with a rapid payout pursued by Utah Copper in 1983. Another $11.8 million project, with a two-year payout, upgraded flotation in the concentrators. At the Magna concentrator, 864 small flotation cells were replaced with 20 large, 1,500 cubic-foot cells. At the Arthur concentrator, the tailings retreatment plant was modified to process primary feed instead of tailings. Such a modification had already proven successful at the Magna plant. The improvements boosted overall copper recovery by 2 percentage points, from 86.6 percent to 88.6 percent, and also increased precious metal recoveries. The increased metal production, as well as reduced outlays for maintenance anq power, trimmed unit costs of copper production by 1.8 cents per pound.

By the fourth quarter of 1983, Utah Copper was moving ahead on a number of cost-cutting fronts. Nature, however, did not cooperate. In the last week of January 1984, Joklik told Sohio management: "At Utah we were doing fine until the last couple of months of 1983, when we had the heaviest snowfalls in recorded history. Precipitation in the fourth quarter was 250 percent of average. The ore turned to mud and then froze. As a result, conveyor belts, transfer chutes, and screens were clogged and became inoperative. We are still digging out, but severe weather conditions are continuing. Our costs for January, as in December, will be way above normal. 1122

Problems caused by the severe winter of 1983-84 seriously dimmed the prospects for 1984, as Joklik went on to explain: "We have made an adjustment to these conditions by lowering the production targeted at Utah by 13 percent to

70 90,000 tons per day for 1984 and by laying off a further 400 salaried and hourly employees to correspond with this reduced rate of production. This action will take about 20,000 tons of copper off the market."

The subsequent developments that led to a two-thirds reduction of production at Utah Copper in mid-1984, and then to complete shutdown in the spring of 1985, are best understood in the context of Kennecott's relationship with its unions. Like other aspects of the business, labor relations improved significantly during the 1980s. After recounting Kennecott's Washington initiatives in the next chapter, the labor relations story is picked up in Chapter VI.

71 V. WASHINGTON INITIATIVES

During the 1980s, Kennecott was involved in several ma j or regulatory and legislative initiatives with Congress and the Executive Branch. These initiatives took place incrementally over the decade and occurred primarily in the areas of trade, environment, and tax relief. Throughout all of these efforts, the Utah congressional delegation, particularly Senators Jake Garn and Orrin Hatch, and Congressmen Jim Hansen and Howard Nielson, were extremely supportive. In fact, many of Kennecott's Washington successes, which also benefitted the citizens of Utah, were a result of their personal efforts. Congressional Members of the Senate and House Copper Caucuses were also of tremendous help, including--but not limited to--Senators Pete Domenici (R-NM) , Barry Goldwater (R-AZ), Paul Laxalt (R-NV), and John Melcher (D­ MT); and Representatives Jim McNulty (D-AZ), John Rhodes II (R­ AZ), Jim Santini (D-NV), Morris Udall (D-AZ), and Barbara Vucanovich (R-NV).

Government Controlled Copper Production

Starting in the 1960s, some governments in the copper-rich developing countries of Latin America and Central Africa began nationalizing major copper mining operations within their borders. By 1980 governments had taken control of a significant share of world copper production capacity. Formerly, most of these mines had been controlled by major copper firms based in the industrialized countries. Kennecott, for example, had owned and operated the El Teniente mine, which was nationalized by Chile in 1971. By diluting the concentration of ownership and increasing

72 the number of significant players, nationalization effectively destroyed what had been a worldwide copper oligopoly.

Increased government involvement transformed the nature of the world copper market. Because profitability was not the overriding factor driving operating and investment decisions, government­ controlled copper producers often failed to respond to market imbalances signaled by falling copper prices. Instead, governments reacted to demands of workers, domestic suppliers, and foreign lenders--and the need for foreign exchange. Government managers found it difficult to curtail uneconomic operations during the early 1980s--even after copper prices fell well below the level that would have forced the operations to shut down if privately owned. By virtue of sovereign borrowing, government guarantees, and currency devaluations, government-controlled operations could sustain uneconomic copper production much longer than could private competitors facing the same market circumstances.

When world copper demand fell during the recession that followed the 1979 oil crisis, world copper output failed to adjust accordingly, mainly because of over production by government­ controlled producers. The market imbalance persisted and worsened in the early 1980s. As a result, world copper inventories grew, and real copper prices dropped to lows that had not been seen since the Great Depression. Eventually the world economy recovered and copper demand revived, but it took years for rising consumption to deplete excess copper stocks, which had accumulated during the early 1980s. The surplus depressed copper prices until mid-1987 (see Figure 15, page 29).

As copper prices approached historic lows in the early 1980s, private domestic copper mines were forced to curtail operations, and low-priced copper imports penetrated the u.s. market. Kennecott shut down its Ray and Chino operations in the first half

73 of 1982, curtailed output at Utah Copper by two-thirds in mid-1984, and shut down the Utah operation completely in the spring of 1985.

Kennecott Initiatives

Despite the market imbalance caused by government-controlled foreign copper producers, Kennecott did not advocate protectionist policies, such as, import tariffs or quotas. At best, such measures would have provided uncertain and temporary relief to domestic copper producers. At the same time, they would have created a competitive disadvantage for domestic customers--the copper fabricators. By artificially pushing the u.s. copper price above the world price, protectionist policies would have injured u.s. fabricators, because foreign fabricators would have been able to sell products cheaper than comparable goods made in the u.s.

Convinced that protectionist measures would be counterproductive in the long run, Kennecott believed that the u.s. government should act on another front. The company pressed to restore free market principles to the world copper market by highlighting governmental policies and practices that subsidized uneconomic foreign copper producers and encouraged unwarranted expansion of copper production capacity in developing countries.

The practices of international lending agencies exacerbated the vicious cycle of falling copper prices and rising foreign copper production in two ways. First, government-controlled copper producers were able to ignore market factors because international lending agencies--the Compensatory Financing Facility of the International Monetary Fund (IMF) in particular--supplied developing country governments with funds to cover revenue shortfalls resulting from continued operation of production facilities that became uneconomic as copper prices fell. Second, international lending subsidized further development of uneconomic

74 government-controlled copper operations. Development banks, funded by the United States and other industrialized countries, loaned money to developing country governments for the express purpose of building new and expanded copper production facilities. The excess production capacity funded by these loans, sometimes extended at concessional interest rates, had a depressing effect on world copper prices.

The problem of excess copper production was exacerbated by fears that developing countries would be unable to service large debts. Lenders--both international agencies and private banks--urged debtor nations to maximize copper exports. Ironically, the pressure exerted by lenders further aggravated debt service difficulties as excess production depressed copper prices and reduced the copper revenues of debtor governments.

Concerned that U.S. government policies and international and private bank lending practices had encouraged and subsidized unwarranted expansion of copper production capacity in developing countries, Joklik, assisted by General Counsel Donald P. deBrier and Washington Representative David A. Litvin, undertook a major lobbying effort in early 1983. At the time, Congress was working on the International Monetary Fund (IMF) Funding Bill. With leadership from Utah Senator Jake Garn (R), then Chairman of the Senate Banking Committee, and Congresswoman Mary Rose Oakar (D-OH), a member of the House Banking Committee, Kennecott pushed for adoption of a provision on foreign loan evaluations. Kennecott's lobbying effort successfully countered strong opposition from bankers and the Executive Branch, and the Kennecott-backed amendment became law on November 30, 1983. 23

The effect of the foreign loan evaluation amendment was to require U.S. commercial banks to screen foreign mining, processing, or fabricating projects larger than $20 million on the basis of economic viability, without regard to direct or indirect government

75 subsidies. The amendment required U.S. banks to conduct a "written economic feasibility evaluation" of a pending project proposal, for it to be approved by a senior bank official, and to be retained on file for review by Federal bank officials.

The written evaluation was to include the profit potential of the project, the impact of the project on world markets, the inherent competitive advantages and disadvantages over the project's life, and the effect of the project on the overall long-term economic development of the host country. The evaluation was also to address whether the loan could reasonably be expected to be repaid from project revenues without regard to any government subsidy.

Even though this foreign loan project evaluation requirement should have been standard banking practice, Kennecott's analysis of bank lending in the 1970s found a disturbing pattern of ill-justified international loans. Without appropriate economic analysis of project merits, private banks routinely extended major project loans to developing countries. In ~orne cases, the World Bank, another developmental bank, or the host government itself provided financial guarantees as a means of encouraging private bank lending. Over the long-term, uneconomic projects created unserviceable debts that imposed continuing large financial drains on the unfortunate borrowers. Because losses from such government­ owned projects were considered part of the national debt, financial relief could be obtained from the IMF, and the projects could continue to operate without regard to market conditions.

Misdirected lending had contributed to the persistent copper market slump that forced private-sector companies, such as Kennecott, to curtail operations in the early 1980s, while government-controlled facilities with greater financial resources could continue to operate, even though their real costs of production were higher than the shutdown private-sector operation. The Kennecott-inspired amendment to the 1983 IMF Funding Bill helped correct this perverse

76 lending bias by ensuring that private U.s. banks completed an appropriate economic analysis of the project.

The foreign loan evaluation amendment was a long-term solution to one aspect of the problem that beset the international copper industry. Still, it only dealt with private loans for future projects; it did not deal directly with lending practices of the international development banks, and it had no provision for redressing the damage already done by ill-conceived lending. Nevertheless, the lobbying effort Joklik launched in 1983 did help to alert legislators, government officials, and the general public to problems caused by government subsidies to copper producers in developing countries. Subsequently, Senator Garn attached a copper industry amendment to the fiscal year 1985 Supplemental Appropriations Bill. The Garn amendment strengthened the laws that guided u.s. directors of the international development banks. As part of the annual appropriations bill, the Garn provision had the force of law for only one year, but it expressed the concern of

Congress and helped to curtail ~ubsequent development bank involvement in unwarranted foreign copper projects.

Kennecott's Washington efforts were aimed at correcting governmental policies that distorted an international free market for copper. The company did not ask for protection from low cost foreign competitors, but did seek to eliminate direct and indirect government subsidies that created and sustained uneconomic copper producers. Throughout the 1980s, Kennecott adhered to the principle of free trade and opposed protectionist measures. This position was tested in the fall of 1983 when ASARCO and the other major domestic copper producers asked Kennecott to join in a major copper trade case under Section 201 of the Trade Act of 1974.

Section 201, the "escape clause" of the Trade Act, is designed to provide temporary shelter from imports while a domestic industry uses the "breathing space" to modernize, reduce costs, and become

77 competitive again. There is a two-stage procedure: an analysis of injury and causation by the International Trade Commission (ITC) and a wholly discretionary decision by the President as to whether or not relief would be in the national economic interest. The President has the discretion under Section 201 to impose quotas or tariffs.

Kennecott was strongly opposed to the imposition of quotas or tariffs on imported copper, but under existing laws a trade action was the only practical way the copper industry could take forceful collective action to get an in-depth public hearing of its plight. It was the only way to turn the spotlight on conditions that were causing massive shutdowns and unemployment in the domestic copper industry. Reluctant to support an action that might lead to protectionist restraints on copper trade, but wishing to retain a voice in the industry pleading, Kennecott reached a compromise with the rest of the domestic copper producers involved in the case. Kennecott would not participate actively in the case, but would lend its name -to the trade action anq contribute limited funds on the condition that the petitioners would agree to oppose any attempt by the Administration to impose quotas or tariffs on u.s. copper imports.

Kennecott believed that such a trade action would give the copper industry an opportunity to show the Reagan Administration, Congress, and the public that:

(1) The survival of a strategically important u.s. industry was at stake,

( 2) The problem was a distorted world copper market not operating under free-market principles, and

78 (3) The u.s. copper industry, through cost reductions and modernization, would be a profitable, long-term participant in the international copper market.

The copper industry subsequently filed its case with the International Trade Commission (ITC) on January 26, 1984. The petition alleged that imports, particularly from Chile, had increased significantly and were the substantial cause of serious injury. The ITC unanimously found that the domestic copper industry was suffering serious injury: production was substantially curtailed, capacity utilization was less than two­ thirds, half the largest mines were closed with over 40-percent of the work force unemployed, and industry losses had reached $523 million by 1983 alone. Further, the Commission found that copper imports had increased both absolutely and as a share of domestic production, and that these imports were the substantial cause of serious injury.

At the stage of the case when the Administration began considering an appropriate remedy to help the industry, Kennecott became actively involved and joined the domestic copper and brass fabricators in opposing quotas or tariffs on copper imports. Joklik met with senior policy makers in Congress and in the Reagan Administration and proposed an alternative approach. He argued that the U.S. should institute government-to-government dialogues with major copper producing nations to promote free market economic principles in the worldwide copper market. Such talks could address market-distorting government subsidies without imposing further distortions in the form of protectionist tariffs or quotas.

On September 6, 1984, the Reagan Administration rejected the copper producers' request for any trade relief. The Administration concurred with Kennecott's position that quotas or tariffs would be contrary to the national interest, because domestic fabricators and consumers would end up paying more for copper than their foreign

79 competitors. But the Administration resisted any measures that might restrict developing country exports, because these countries desperately needed export revenues to service huge financial debts and maintain political stability. Thus, Kennecott's proposal for government-to-government discussions also was rejected at the time as inimicable to the Administration's free-market economic policies. Subsequently, the Kennecott proposal was adopted in another form by the Bush Administration. 24

Kennecott had favored government-to-government negotiations as a means of reestablishing free market principles in a copper market distorted by government subsidies. Thus, the Reagan Administration's total refusal to help the domestic copper producers was a disappointment. Still, the unpalatable remedy available to the President--the imposition of quotas or tariffs-­ was avoided.

Underlying the Reagan Administration's decision was a preconception that the U.S. copper industry was ~nherently uncompetitive, so trade relief was futile as a means of revitalizing the industry. In the early 1980s, some economic pundits were predicting the demise of the nation's extractive, smokestack, and manufacturing industries. 25 The American economy was supposedly undergoing a transformation to "service" and "high technology" industries. Some held the view that -extractive industries were better allocated to developing countries with cheap labor and little, if any, environmental protection.

Ironically, the decision not to grant trade relief for the copper industry was linked with plans to help a larger and more influential metals industry. The Reagan Administration, which had already decided to grant sweeping trade relief to the steel industry, wanted to be seen as striking a blow against protectionism just before the November 1984 elections. Republican votes in the Western States were much more secure than in the 80 states of the "steel belt," and the copper case was a convenient opportunity for a strong anti-protectionist statement. A few days after the decision in the copper case was issued, President Reagan directed the U.s. Trade Representative to negotiate voluntary restraint agreements (VRAs) for the steel industry to cover October 1, 1984, through September 30, 1989. The copper industry, was left to fare on its own devices.

81 VI. EVOLUTION OF LABOR RELATIONS

over the years, Kennecott and the rest of the u.s. copper mining industry had become accustomed to regular deadlocks with labor unions at contract renewal time. The periodic interruptions cost both sides--the company in lost production and workers in lost wages.

The 1980 Labor contract

Kennecott and its copper unions entered another round of labor bargaining in 1980. At issue was the renewal of 45 individual contracts negotiated in 1977 with 13 international and 55 local unions, representing about 9,500 workers at five Kennecott locations--Utah Copper, Ray, Chino, Nevada Mines, and KRC. The contracts all expired simultaneously at the end of June.

The negotiations proceeded in traditional fashion. The company bargained on economic issues at the "big table" with a union coalition representing all but one of the local unions at Kennecott's four copper properties. Simultaneously, negotiating teams representing various groups of workers at the five sites negotiated hundreds of local issues covered by the terms of 45 separate labor contracts. This complicated bargaining arrangement contributed to the difficulty of reaching a timely settlement. A final settlement required that all negotiations be completed, and delays in reaching an agreement at any one of the local bargaining tables could stall the process.

82 The union bargaining coalition was led by the United Steelworkers of America. The Steelworkers represented nearly 70 percent of the union members at Kennecott's copper properties. The unions' position on economic issues was patterned on labor settlements achieved in other heavy industries. Particular emphasis was placed on settlements in the steel and aluminum industries, both strongholds of the Steelworkers union.

Although economic bargaining was conducted on a company-wide basis, the unions never achieved their objective of industry-wide bargaining in copper. Nevertheless, the unions generally succeeded in establishing a pattern settlement that was accepted with minor variations throughout the industry. The unions' task was simplified by the simultaneous expiration of labor contracts at most operations of the major copper companies--Kennecott, Phelps Dodge, Anaconda, Magma, and ASARCO. The unions generally focused attention on a lead company, usually Kennecott, to obtain an initial settlement for the industry. After one company settled and resumed production, the rest typically fell in line and accepted the established settlement pattern.

Although the copper companies talked among themselves and made some effort to coordinate their bargaining strategies, the unions were more successful than the companies in sustaining a united position. Union discipline was imposed by the Nonferrous Industry Conference, made up of the various unions involved and dominated by the Steelworkers. The conference retained the right to veto any agreement negotiated with an individual company before that agreement was submitted to a ratification vote by the membership. This arrangement made it difficult for an individual company to cut a deal that deviated from the pattern settlement.

The 1980 labor negotiations opened in May and continued for two months. When labor contracts expired at the end of June, the Kennecott talks stalled. The sticking point was the company's

83 proposed adjustment to COLA, the automatic wage increase linked to the consumer price index. The company proposed eliminating a single COLA increase for the quarter beginning in July 1980, just as was done two months earlier in the steel industry settlement, which eliminated COLA for the quarter beginning May 1, 1980. The unions balked on the grounds that "special circumstances" influenced that elimination in steel but Kennecott had no similar justification. In the absence of a new contract, the unions called a strike beginning on July 1.

The parties did not resume talks until mid-August. An agreement was reached on economic issues before the end of the month, but negotiators took another week-and-a-half to resolve outstanding local issues. Kennecott workers finally returned to their jobs on September 9, after being on strike for 71 days. Kennecott was the first in the industry to settle. It took Phelps Dodge another month and the other companies longer to reach agreement with their unions.

During the 10-week strike, Kennecott lost more than 80,000 short tons of copper production, and the company incurred shutdown costs totaling $58 million, not counting lost profits. At the same time, represented employees suffered a payroll loss amounting to $39 million. An analysis of the economic settlement indicated that it would increase labor costs roughly in line with the expected rate of inflation over the three-year term of the contract. In retrospect, neither side gained enough from the delayed settlement to justify the magnitude of the losses that accumulated during the work stoppage.

A New Approach to Labor Relations

Representatives of both the unions and the company publicly expressed their dissatisfaction with the traditional bargaining

84 process that had produced unnecessary losses for both sides in 1980. Seeking a better way, Kennecott's new management and the company's unions together set out to change their relationship. The main thrust of Kennecott's plan to foster positive industrial relations was "open communications and problem solving on a timely basis."26

The concept was quite simple: the company and the unions agreed to sustain a problem-solving dialogue throughout the term of the contract. They reasoned that this approach would give them a chance to deal with issues as they arose, rather than deferring problem resolution to the triennial contract talks. They hoped, thereby, to avoid work stoppages that served neither party.

This new approach was advanced by two joint undertakings. First, management and the unions formed special continuing committees at each operating property to deal with issues such as performance improvement, contracting out, job evaluation, and safety and health. Second, the two sides scheduled annual meetings in 1981 and 1982. These meetings were a forum for union and company leaders to review and attempt to resolve outstanding issues without the pressures of a deadline dictated by a nearby contract expiration date.

The annual meetings were a new idea in the copper industry. The first meeting was held in Phoenix, Arizona, in early November 1981. The theme was "a strike-free 1983." About 100 delegates from the international and local unions representing Kennecott's copper workers met with company management.

Joklik addressed the gathering and discussed the business environment, the health of the industry and the company, the need to improve cost competitiveness, and the company's investment plans. He highlighted three goals of the company's performance improvement program. First, he promised to improve the quality of

85 Fiqure 26 Joklik {left, at microphone) addresses union leaders at 1981 annual meeting.

supervision through a specialized training program. Second, he pledged "to provide better training for our workers, equip them better, [and] supply them more promptly with the tools and materials they need." Third, he committed to "better communications between our employees at all levels."

Frank McKee, Steelworkers union official and chairman of the Nonferrous Industry Conference, also spoke. He recognized the decline of the copper industry and emphasized the need for closer collaboration between management and the unions. He cited the examples of the steel and aluminum industries, which had found ways of avoiding the sort of work disruptions that plagued the copper industry.

86 Both sides praised the constructive interchange that took place during the first annual meeting. The high-profile gathering also received favorable press coverage. Following the meeting, and throughout 1982, similar discussions continued at the various Kennecott properties.

The new relationship with the unions was built on substantive actions, as well informative talks and problem-solving discussions. For instance, Kennecott followed through on the commitment to upgrade supervisory skills. Early in 1982 Joklik could report: "We established a supervisory skills training program, which consisted of a course given to 1,500 salaried employees, including our first-line supervisors. Union officials were invited and almost all of them accepted and completed the training course. The feedback from those who attended was highly favorable. 1127

Kennecott's new labor relations strategy in the early 1980s had two major objectives. The first and most obvious was to set the stage for negotiating a satisfactory labor agreement in 1983 without a strike. The second and more immediate objective was to persuade the unions to accept reductions in force, which were an essential component of the cost-reduction program discussed earlier in this chapter.

Joklik and Human Resources Vice President Judd Cool took care to keep the unions informed of upcoming changes in operating plans. Shortly before Kennecott announced indefinite shutdowns at both Ray and Chino, both men met with a gathering of union leaders in Los Angeles on March 11, 1982. Joklik wrote: "We gave them a frank and detailed description of the state of our business and asked them not only for their acquiescence to the major layoffs we are undertaking, but their active cooperation in preserving the jobs of the majority through enhanced effort and attitude.

"They were aware that some of our planned reductions involved changes in work rules and in job classifications.

87 "Judd [ Cool ] and I left the meeting on cordial terms wit h both the Steelworkers and the craft union representatives."28

Kennecott's approach to labor relations was quite d i fferent t han that of other troubled heavy industries. For example, For d, General Motors, and the trucking industry all obtained wide ly publicized financial concessions from their unions. In return , these companies conceded to union demands in other potentially costly areas such as job security.

By contrast, Kennecott worked quietly with union leadership, out of the public eye. By not asking directly for concession bargaining, Kennecott avoided confrontation and gained immediate relief without the penalties usually attached to union concessions. Others took a different approach. Phelps Dodge, for example, pled with its workers in May 1982 for financial concessions--for rollbacks of wages, COLA, or benefits. But Phelps Dodge's direct appeal to the workers backfired. Officials of the Steelworkers union refused even to meet and discuss Phelps Dodge's request, and the company's plea for relief went unanswered. 29

Kennecott management realized that the company had to exhaust all reasonable alternatives before the unions could be expected to consider financial concessions. In March 1982, Cool explained: "For concession bargaining to be successful in Kennecott, we first have to take every major action at our disposal to reduce costs. This includes both hourly and salaried force reductions, which are now underway. Last but not least, the Steelworkers union has to be in a position to understand and to be politically able to accept concession bargaining. Except in a few isolated cases, the Steelworkers have not been cooperative participants in the concession bargaining movement."30

The effectiveness of Kennecott's approach was confirmed by the remarks of Steelworkers' official and chairman of the unions' Kennecott Coordinated Bargaining Committee, Robert J. Petri s , wh o

88 said, "Kennecott doesn't need to hold concession bargaining, they're achieving the greatest concessions by producing at full levels with several thousand less people."

One example of the gains achieved by Kennecott's approach was the concentrator Millwright Agreement that allowed consolidation of maintenance jobs in the Utah Copper concentrators. As noted previously (page 67), this agreement provided management with the flexibility essential to achieving cost-reduction goals. Kennecott and the union leadership signed the agreement in early December 1982, and the pact was ratified by members of the affected Steelworkers local union a few weeks later.

Support for ratification of this key agreement was undoubtedly bolstered by the open discussions between Kennecott and the copper unions at their second annual meeting in Phoenix on December 8-9, 1982. Joklik laid out the grim economic situation faced by the company and told the assembled union leaders, "I can't guarantee to you that if the present business conditions continue we won't have to make further economies and perhaps reduce our copper production."

At the time, both the Ray and Chino operations were shut down-­ although some employees had been recalled for acceptance testing of the new Chino concentrator. The price of copper had dropped more than 10 cents per pound since the first annual meeting a year earlier. And Kennecott was still losing money despite the multi­ phase cost-reduction program that had trimmed the hourly and salaried work force by 27 percent in 1982. Joklik asked for the unions' cooperation in solving local problems that for the company were "survival issues".

Although the company was not ready to ask for concession bargaining in copper, the lead business was another matter. Kennecott's ozark Lead operation was a modern facility unencumbered by the tradition

89 Fiqure 27 Surface facilities at Ozark Lead mine, Missouri, in 1980.

of burdensome work practices that plagued the copper properties. Nevertheless, Ozark was losing money and lead prices were not expected to recover any time soon. Labor costs were the only significant area for cost reduction left at ozark.

Kennecott began in January 1983 with a 30-percent cut in production and manpower at Ozark. This reduction pruned losses without increasing unit costs of production, but complete shutdown was an equally attractive option at the prevailing price. Under threat of shutdown, the company asked the steelworkers union, which represented hourly employees at ozark, for concessions that would trim annual losses by about $1 million. These concessions would have reduced the company's employment costs by roughly 15 percent,

90 or $3 per hour. Only one year into a three-year labor contract, the union assented to negotiations, and an agreement was drafted and submitted to the local membership for ratification. When the workers voted down the accord by a two-to-one margin, the company immediately shut down Ozark, on March 4, 1983.

Copper Negotiations in 1983

The shutdown at Ozark came a few weeks before contract negotiations in copper formally began on March 21, 1983. The advanced start of copper bargaining--about two months earlier than normal--was one indication that the relationship between Kennecott and its unions was less adversarial and more constructive than before. It also signaled a desire on both sides to reach an agreement without a strike.

In addition to settling without a strike, Kennecott sought to hold the line on wages, to amend the COLA provision, and to reduce the unfavorable differential between the wage and benefit costs of Kennecott and its domestic competitors. But Kennecott's top priority in the 1983 negotiations was to extricate the company from the Employment Security Plan (ESP) that had been negotiated in 1964. Provisions of the ESP, in effect, guaranteed employment to represented employees who would otherwise be laid off because of changes due to automation, technological change, or improved work methods. Under the plan, candidates for layoff would be retained on the payroll in entry-level jobs with nothing to do.

The ESP was a serious problem for Kennecott principally because i t i nterfered with plans to modernize Utah Copper. The economics of modernization depended on achieving reductions in force made possible by productive new facilities, and the ESP prohibited those essential reductions in manpower.

91 On April 4, two weeks after the negotiations began, Joklik and cool met with union leaders McKee and Petris at the negotiating site in Phoenix. Since 1980, Joklik and McKee had met several times, both formally and informally. They had established a personal basis for candid and open discussions, a relationship that contributed to forthright and productive communications. The Kennecott executives explained the company's bargaining objectives forthrightly, in essentially the same terms that Joklik used in his presentation to Sohio senior management the next day. A week later an economic agreement was reached, and the agreement was ratified by the unions' Nonferrous Industry Conference a few days later, on April 16--two-and-a-half months before the contract was set to expire.

The essence of the economic bargain was a tradeoff between ESP and COLA. The Employment Security Plan was eliminated. In its place, Kennecott established a Technological Benefits Plan at a one-time cost of $7.5 million. Kennecott also agreed to retain COLA with no change in the formula. Beyond COLA, the economic agreement provided no increases in wages. Addi~ional provisions limited the escalation of benefit costs, particularly medical, vacation, and insurance costs. Because the COLA formula did not provide for full indexing of inflationary increases and because benefits were trimmed, hourly labor costs were expected to increase at a rate significantly below the rate of inflation over the three-year term of the contract.

Once the economic terms were settled, the parties turned to local issues. The second phase of negotiations was summarized by Cool: "After we concluded our economic bargaining in April 1983, we continued bargaining with the local unions for changes in adverse contract provisions and work rules. Our focus was on changes that would generate real dollar savings and impact our bottom line. For example, we sought to eliminate crew consists, arbitraries and preparatory time payments. In some cases, we sought to reduce lunch periods and remove certain work assignment and scheduling restrictions. Initially, we met with a great deal of resistance, but by July first, we had

92 settled all of our local issues. The cost reductions we achieved in local issue bargaining were significant. At our Arizona division, I believe that I can safely say that the successful resolution of local issues made the difference that allowed us to resume operations after being shut down for over a year. 31

For the first time in 21 years, Kennecott and its unions reached a copper agreement without a strike. From Kennecott's point of view, the settlement held the line on real labor cost increases in the short term and also laid the foundations for long-term savings that would come from the modernization of Utah Copper.

A ouest for concessi ons

The 1983 labor contract was negotiated against a background of economic recovery and rising copper prices. The Comex price had risen over 30 percent, from a monthly low of 58 cents per pound in June 1982 to 76 cents per pound in April 1983, when the parties agreed on economic terms. Although the economic recovery persisted, the recovery of copper prices was short lived. After the contract was ratified in July 1983, the Comex price retreated to a monthly low of 56 cents per pound in October of the following year.

As the copper price slid, Kennecott's losses mounted. Despite a concerted cost-reduction effort over four years, cost savings were overtaken by the price dec 1 i ne. Even though Utah Copper had recovered from two of the most severe winters on record, had overcome problems of low equipment availability at the concentrators, and had boosted ore throughput comfortably ahead of projections, the operation was losing money in the spring of 1984. Joklik summed up the situation at Kennecott's copper operations when he said, "We are running about as lean as we can and operating as well as we can."

93 Kennecott had practically exhausted the opportunities to increase labor productivity, to improve operating methods, and to trim the cost of operating materials and supplies. Hourly labor costs, which accounted for about one-third of total operating costs, were the single largest remaining potential source of savings. Faced with a deteriorating copper market and heavy losses, the company finally decided the time was right to pursue concession bargaining in copper. In mid-May, Kennecott formally asked the labor unions representing workers at its copper properties to reopen the labor agreements ratified less than a year earlier. Several other copper companies soon made the same request.

In the absence of a favorable response from the unions, Kennecott announced in mid-June that the Utah Copper division would be curtailed by two-thirds beginning July 1, 1984, unless the unions agreed to concessions that would substantially reduce labor costs. The company said that the curtailment would result in the layoff of approximately 2, ooo employees. The unions failed to respond by the deadline and Kennecott began a phased curtailment of the Utah operations on the first of July.

The unions finally agreed to meet with Kennecott and three other copper companies in Ontario, California, on July 9, 1984. The companies presented their arguments for reopening labor contracts. The union leadership was divided on the companies' request, and when the unions met again on July 12, they decided, by a split vote, to reject the companies' requests to renegotiate labor contracts. Kennecott continued with the phased curtailment that reduced the Utah Copper work force to about 2,200 employees by early 1985.

Kennecott persisted in trying to convince the copper unions to reconsider and come to the negotiating table. Finally, in December, the unions agreed. Talks between the unions and six

94 copper companies began in Albuquerque, New Mexico, on January 14, 1985.

In Albuquerque, Joklik told the unions "if substantial cost reductions don't materialize, it will be necessary to shut Utah Copper down •••. "

The decision to take such a drastic step had been carefully weighed by Kennecott and Sohio. Fully recognizing that the issue of labor costs would have to be addressed sooner or later, management chose to take a stand at Albuquerque. In the absence of concessions providing sufficient relief, Kennecott committed to a complete shutdown of Utah Copper.

Kennecott • s initial offer to the unions would have reduced the company • s average hourly labor cost by nearly 25 percent. The company proposed reductions in wages, COLA, and benefits, and linked restoration of these concessions to a scale of Comex copper prices. One of the other copper companies negotiating 1n Albuquerque, ASARCO, made an offer that substantially undercut Kennecott's proposal and offered automatic restoration of concessions. After five days of negotiating, Kennecott made a final offer that would have reduced labor costs by slightly more than 15 percent.

The unions pushed the ASARCO offer on the other compan1es negotiating in Albuquerque. When only one other company, Inspiration, fell in line, the unions• Nonferrous Industry Conference refused to endorse the ASARCO and Inspirat1on settlements. Thus, negotiations concluded without an new agreement.

The complicated bargaining situation had posed a huge barr1er to settlement. It was impossible to negotiate a pattern agreement that satisfied several copper companies and the multiplic1ty ot

95 international and local unions all represented in Albuquerque. In laying the groundwork for negotiations, Joklik had met with newly elected Steelworkers president, Lynn Williams, who seemed to understand the situation. After the negotiations failed, Joklik observed, "There's no doubt that the Steelworkers' leadership strongly supported our case, but couldn't prevail with their local presidents and with the crafts." Nevertheless, the line of communication opened with Williams proved fruitful in the years to come.

Failure to negotiate adequate concessions led to the shutdown of Utah Copper. The mine ceased operations at the end of March 1985 and downstream processing facilities were phased out over the course of about six months. Before the end of the year, approximately 2,200 employees were laid off and the Utah Copper work force was reduced to a care-and-maintenance contingent of about 250 people.

The 1986 Labor Contract

The breakdown of the 1985 talks was a disappointment, but it did not weaken the company's determination to resolve the labor-cost issue. Since 1980, Kennecott had doggedly pursued Joklik's cost­ reduction objectives, often succeeding only after repeated attempts. This same long-term view and persistent effort characterized Kennecott's approach to labor relations. By the middle of 1985, detailed preparations were well underway in .anticipation of the expiration of labor contracts at the end of June 1986.

Kennecott's 1986 labor strategy was firmly based on the realities ~f the marketplace. Despite five years of cost cutting, the copper market had reduced Ray and Chino to the break-even point and had precipitated the shutdown of Utah Copper. Kennecott attempted to

96 bring home to its workers and their union leaders the import of the competitive conditions faced by the company. Kennecott also made the point that the company's workers, themselves, must take account of competition and adjust their expectations in accord w1th competitive labor markets in the areas where Kennecott operated. Kennecott argued that it could no longer support the premium waqes and benefits of the past.

The focus on competitive labor markets had two implications. First, the average level of wages and benefits needed to fall. And second, the relative wages paid at various skill levels required adjustment. On average, wages paid by Kennecott were about ) 5 percent higher than those paid for a similar mix of skills in the local areas where Kennecott operated. But the wage different1al varied with the type of job. At the lower end of the hourly pay scale, Kennecott paid a janitor roughly twice as much as he could expect in a similar job elsewhere in the community. At the upper end, a skilled craftsman ~,rned about 35 percent more at Kennecott than typically paid by other area employers. The distort1on 1n relative labor rates had been created over time by contractud COLA increases that aFplied equally to all represented employees, regardless of job grade.

Kennecott came to the 1986 negotiations with two princ1pal objectives. First, the company aimed to reestablish a reasonable relationship between Kennecott wages and benefits and those prevai 1 ing in the marketplace. Second, the company sought to eliminate contractual restrictions that artificially and unnecessarily limited productivity improvement. Kennecott intended to pursue these objectives by good faith bargaining. But 1f the parties were unable to reach a settlement by the time the ex1st1nq labor contracts expired, the company was prepared to implement 1ts final offer and continue to operate its copper properties

9"7 Contingency planning, to continue copper operati ons wi thout a labor contract, began in the middle of 1985. Kennecott prepared detailed operating plans addressing security, staffing, transpor t of supplies and product, and other matters that woul d determi ne the company's ability to operate during a strike. The plans a imed t o return Ray and Chino to pre-strike levels of operati on as s oon a s possible following a strike. Two alternative plans for Utah Copper provided for either continued care and maintenance of the shutdown operation or, if economically justified, resumption of operations at a production level of 60,000 short tons of ore per day. The company's determination to continue operations in the event of an impasse in negotiations became increasingly obvious to the workers and to the public as the contract expiration date approached. For instance, the extensive preparations included the construction of fencing around production facilities.

Negotiations began even earlier in 1986 than they had before the strike-free 1983 settlement. The talks opened in Phoenix on

February 3. At the time, approximate~y 5,000 of Kennecott's 6,500 represented workers were on lay-off status. In his opening remarks, Joklik explained that, despite the substantial improvements in efficiency that Kennecott had achieved since 1980, the company and its employees still faced a difficult economic situation. He told the assembled union leaders what this meant for the company's workers: "Kennecott can offer wages and benefits that are highly competitive in the communities in which it operates, and Kennecott is committed to maintaining a safe work place; but Kennecott cannot offer the same level of wages and benefits the company was able to provide in the past, and each employee must be able to contribute a full day of work each day on the job--unhampered by artificial restrictions."

The same day, Cool outlined the company's economic proposal, which included wage reductions, elimination of COLA, and significant reductions in benefit costs. Kennecott's proposal called for a

98 one-third reduction of hourly employment costs, which averaged about $24 per hour. The size of the proposed reduction was an indication of just how far Kennecott wages and benefits exceeded the going rates of pay. After subtracting the proposed cuts, the resulting compensation package was still highly competitive 1n communities where the company operated.

Based on labor market surveys, the company believed that its proposed wage and benefit scale was sufficiently appealing to attract workers with the necessary skills in the event that negotiations stalemated. When asked by reporters if the company intended to hire non-union workers if contract talks failed, Cool responded, "It's an alternative that's available to us."

Following the four-day opening meeting in Phoenix, the negotiations turned to local issues. Nearly three months were reserved to work out local issues at the various divisions. Local issue bargaining was carried out under a pre-negotiating agreement, an unprecedented arrangement secured from the unions before the talks began. Under terms of this agreement, local unions at each operating property bargained with Kennecott as a group rather than individually as had been past practice. The agreement also provided that the 41 individual labor contracts then in force at the several properties would be replaced by a single master contract at each property. This new arrangement simplified the bargaining process and reduced the opportunity for any single local union alone to hold up the bargain.

Kennecott's revised approach to labor relations, adopted 1n the wake of the strike-marred 1980 negotiations, was based on the assumption that, given the facts, workers and their union leadership would respond rationally. Therefore, management made a point of keeping workers and union leadership informed regard1nq the state of the business and the company's strategic directlon. The annual meetings with union leadershlp and the early beg1nn1ng

99 of negotiati ons in 1983 and 1986 were all part o f an effort to avoi d disputes based on misinformation. In 1986, Kennecot t took an addi tional step to reinforce its credibil ity by openi ng the fir m's financial books to the unions.

The company also took its story directly to the union membership. The vehicle was a series of employee meetings held during the third and fourth weeks of April. These meetings began with a professionally prepared audio-visual presentation that recounted the company's history, its struggle during the early 1980s, and the dire situation the company now faced. Then employees had an opportunity to question a Kennecott panel consisting of Joklik, Cool, the General Manager of the local property, and other personnel from Kennecott's industrial relations staff. At each location, Kennecott reserved the first session for union officials. To provide all represented employees with an opportunity to attend, four additional sessions were held in Utah and three each were held at Ray and Chino. Following the formal presentations, Kennecott panelists fielded tough, and sometimes hostile, questions from employees. The spirited question-and-answer periods sometimes went on for several hours. Kennecott executives also made the company's case at meetings with local opinion leaders, including business people, government officials, and representatives of the media.

All along, Joklik's approach to labor relations had been guided by the desire to increase the company's credibility in the eyes of union leaders and the membership. To this end, the company attempted to be straightforward, factual, and accurate, and to avoid misinformation, bluster, and empty threats when dealing with labor issues. For instance, when Joklik addressed the unions in February 1986, he did not attempt to use the prospective modernization of the outdated Utah Copper facilities as a bargaining chip. Two months earlier, Kennecott's owner, Sohio, had announced plans to invest $400 million to modernize the mine and concentrator at Utah Copper. At the February meeting with union

100 leaders, Joklik made it clear that Kennecott's management was prepared to proceed with the modernization project and operate the new facilities regardless of the outcome of the 1986 later negotiations.

When the big table reconvened in Phoenix on May 5, local issues were first on the agenda. After three months of local bargain1ng, considerable progress had been made, but none of the Kennecott properties had wrapped up an accord. Just after the mid-May deadline, which the two sides had set, negotiators at Ray came to an agreement. Shortly thereafter, bargainers at Chino came to terms. The bargaining at Utah Copper was more difficult becausP there were more issues to negotiate and the potential savings were greater than at the other properties. At the time, a Kennecott negotiator counted all the local arrangements that had been concluded over the years at Utah Copper and found they totaled nParly 1,500 pages. The haggling at Utah Copper continued into the last half of June.

In the meantime, the parties returned to economic issues. On June 11, the unions finally offered a counter proposal that included cuts in wages and benefits but tell far short of the sav1nqs J

~ennecott also announced that it would advertise for replacement workers to continue operations in the event ot a strike.

Advert1sements in Vtah, Arizona, and New Mexico garnered over 7 , 0 applicatlons for employment. Kennecott's search for replacerrent workers and the level of response were widely covered in local n~·•spapers.

101 The company also made its position clear in a June 18 letter to all represented employees. The letter spelled out the company's position and assured employees of management's intention to bargain in good faith. The letter also acknowledged the steps the company had taken to protect its facilities and solicit employment applications so that ongoing operations could continue in the event of a strike.

Three of the five copper companies engaged in labor contract negotiations settled before Kennecott did. Newmont's Magma and Pinto Valley operations reached agreement a week before the contract expiration date, and ASARCO settled a few days later. Only Inspiration settled well after the contract expiration deadline.

The Kennecott negotiations went down to the wire. The company's final proposal was put on the table the evening of June 30, and in the early hours of July 1 the unions' Nonferrous Industry Conference consented to let the · union membership vote on Kennecott's final offer. On July 7, the Kennecott workers voted three to one to accept the offer.

Although the unions granted substantial concessions, the benefits of the pact were not all one-sided. To begin with, the cost-saving contract contributed to long-term job security by improving Kennecott's competitiveness. In addition, represented employees received a $1,000 ratification bonus, and many laid-off workers returned to the job as Utah Copper began a phased startup over the following year. In the 1986 bargain, Kennecott agreed to restart the Utah facilities and build up production to 60,000 short tons per day of ore by mid-1987, unless unforeseen circumstances, such as a decline in the Comex copper price below 55 cents per pound, made resumption of operations infeasible. Finally, all parties to the agreement avoided the cost and dislocation of a strike.

102 The 1986 labor pact was the final major step in the effort Joklik had launched in 1980 to reduce costs without major capital investment. Management determination, painstaking preparation, and an effective negotiating team, together shaped a strike-free labor settlement containing fiv~ noteworthy gains for Kennecott:

First, negotiated reductions in wages and benefits immediately cut Kennecott's average hourly labor costs by approximately 30 percent, which translated into a cost reduction of 5. 5 cents per pound of copper at full production. Moreover, Kennecott's contract provided neither regular wage increases nor profit sharing, such as the price-linked bonuses negotiated by Magma. Before the 1986 labor settlements, Kennecott's hourly employment costs were substantially higher than those of domestic competitors. Afterwards, Kennecott's costs fell below the midpoint of the range of competitors' costs.

Second, wages at the bottom of_ the pay scale were cut more than those at the top. The former top wage was only 23 percent higher than paid at the bottom of the scale, but the new pay scale set the top wage 70 percent higher than the bottom wage.

Third, elimination of COLA abolished unpredictable wage increases tied to inflation.

Fourth, local-issue bargains, which repealed many non­ productive work practices and other costly provisions, yielded substantial immediate savings. Analyses of the potential for further productivity gains, and subsequent operating experience, suggest that the 1986 resolution of local issues generated follow-on savings with a financial impact larger than those identified initially.

103 And fifth, the favorable terms of the contract were locked in for four years, one year longer than the usual three-year contract term, which was accepted by all the other copper companies engaged in 1986 bargaining.

The two strike-free labor settlements of 1983 and 1986 testify to the success of the union and company leaders who set out in 1980 to improve the climate of labor relations. After the 1986 settlement, the company and its represented employees sustained the relatively harmonious and candid relationship they had built. One positive example is the employee-centered network concept that the company fostered under the name, "Team Utah".

Don Babinchak continued Kennecott's proactive and constructive approach to labor relations after he replaced Judd Cool as Kennecott's vice president for Human Resources in October 1987. This paid off for both parties in 1990, when union representatives and the Kennecott negotiating team, led by Babinchak, concluded another strike-free labor settlem~nt. The parties reached agreement on a new three-year contract a full six weeks before the mid-year expiration of the existing contract. Except for wage rates, which were increased to keep Kennecott pay in line with wages paid locally for similar jobs, the 1990 contract effectively continued the terms negotiated four years earlier.

Good News, Bad News

The months following the landmark 1986 labor settlement brought both rejoicing and sorrow to Kennecott. On the one hand, the future of Utah Copper seemed bright indeed. The new labor agreement erased any doubts that Sohio would continue to fund the Utah modernization project, which was underway and on schedule. And Kennecott's employees could look forward to restarting operations at Utah Copper prior to completion of the modernization.

104 on the other hand, Kennecott's oil company parent, disillusioned by weak copper markets and uninterrupted losses, had for several years been weighing alternatives -that would reduce its exposure to the nonferrous minerals business. Despite improved competitiveness at all the copper properties, Sohio lost patience and began to dismantle Kennecott. As detailed in the next chapter, Kennecott management opposed the breakup, but the arguments forwarded by the copper unit did not prevail. By the end of 1986, Utah Copper was all that was left of Kennecott's historic copper business. The exhausted Nevada Mines had become a reclamation project, and Sohio had sold Ray, Chino, and KRC, as well as Ozark Lead and some other Kennecott interests.

Although others would reap the fruits of the seven-year cost­ reduction effort at Ray and Chino, Kennecott did retain the premier property in the original portfolio. And the seven-year struggle did pay off for Kennecott at Utah Copper.

After carefully planning the startup, Utah Copper began recalling workers in August 1986. They were retrained and put to work on an extensive $45-million rehabilitation of facilities, which had been idle for more than a year. The operation resumed in stages. Limited mining began in late September, and the concentrators started up in mid-December. Concentrates were stockpiled until the smelter rehabilitation was completed at the end of June 1987. The refinery started up when anodes became available in mid-July. Smelter and refinery capacity exceeded the planned ore production rate by a sufficient margin to consume the stockpiled concentrates prior to completion and startup of the modernization project in 1988.

Performance during startup exceeded expectations. All facilities started up ahead of the original schedule and production rates exceeded the plan. The outstanding performance was attributed to a combination of factors. First, maintenance problems in the

105 concentrators had been solved prior to the 1985 shutdown, and equipment availability remained high after the startup. second, careful planning, thorough preparation, and a phased startup fostered good operating practices. Third, morale and productivity of the recalled work force was remarkably high. And finally, the winter of 1986-87 was unusually dry. This was a pleasant contrast to the two cold, wet winters encountered before the shutdown in the spring of 1985.

The revived operation reported significant improvements in operating costs, as shown in Figure 19 (page 43). Full costs of copper production dropped more than 20 percent in real terms between 1984 and 1987. The reduction can be attributed to renegotiated labor rates and work practices, to improved operating methods and procedures developed by management, and to equipment renovations undertaken during the shutdown.

By 1987, the cost-reduction effort that Joklik started in 1980 had transformed Utah Copper. Over the seven-year period, full costs of copper production were cut nearly in half, in real terms, without major capital investment. Utah Copper was a lean, efficient operation when the modernized facilities started up in 1988.

106 VII. MODERNIZATION OF COPPER OPERATIONS

While resolutely cutting operating costs at existing copper production facilities, Kennecott made headway with Joklik's second cost-reduction strategy--selective investment in new plant and equipment. After years of neglect, Chino, Ray, and Utah Copper all needed large injections of capital to upgrade antiquated, high-cost facilities. In 1979, despite the obvious need for investment at its three major copper properties, Kennecott was not well positioned to begin large-scale capital spending. The company faced a number of obstacles. First, a weak balance sheet and uncertain prospects for metal prices limited the company's access to capital. Second, the essential planning was far from complete. And finally, the company was ineffectively organized to manage and control capital projects. Over the years, Kennecott had a poor record of completing and starting up projects to reach design specification on schedule and within budget.

When he took charge of Kennecott's planning and technology functions in 1979, Joklik reinforced the planning effort and reorganized the engineering function. Planners undertook a detailed analysis of Kennecott's operations and compared the company's performance with that of its competitors. This examination laid the groundwork for both the basic cost reduction program and for the formulation and justification of modernization plans.

The reformation of the engineering function was solidified in April 1980 when Joklik, by then President of KMC, hired Raman Rae to head the Engineering, Procurement, and Construction function. Rao was a seasoned professional with years of engineering experience on

107 construction projects for the mining industry. Before coming to Kennecott, Rao had been a project engineer and project manager for 16 years with the international construction firm, Bechtel Corporation. He was charged with strengthening the engineering group and building a capability to manage and control major investment projects.

Kennecott stood to gain the most from the modernization of its flagship Utah Copper property, but that was not clear at the outset. More than a year before Joklik became president of KMC, Barrow decided that Chino would be first in line for modernization. Barrow recognized the opportunity to modernize the Utah concentrators, but argued that Kennecott's limited funds could earn a better return at Chino than at Utah Copper. 32 The priority given to the modernization of Chino was not surprising because Kennecott had yet to develop a coherent strategy for the future of the Utah Copper operation.

Ray was perpetually second-in-line for investment funds. A 1979 analysis comparing the opportunities for modernizing either Chino or Ray favored the Chino option because modernizing Chino required less capital and cut Kennecott's unit costs of copper production more than modernizing Ray--even though the Ray option offered a larger capacity increase. 33 Subsequently, it became clear that Kennecott could gain more by investing at Utah Copper than at Ray. Early in his tenure at KMC, Joklik had started planning for the modernization of Ray in its turn, but before these plans could be funded, Ray was sold in the course of Sohio's strategic withdrawal .from the minerals business.

Chino Modernization

Chino, like both Utah Copper and Ray, possessed large reserves of high-quality copper ore. Operating the facilities existing in 1979

108 at full capacity, Chino could look forward to a 50-year mine life. But the plants were outdated--the Chino concentrator had been built in 1910, the smelter in 1938. Declining ore grades, declining concentrate recoveries, and declining concentrate grades were increasing costs at the mine, concentrator, and smelter faster than inflation. Increased haul distances, escalating maintenance costs, and new environmental requirements added to spiraling costs. Chino had become a high-cost u.s. producer. 34

Despite the quality of the ore reserve, antiquated facilities made it difficult to hold the line on costs at Chino. A major capital investment was required to make the operation competitive. Plans developed by the end of 1979 called for modernization that would expand production capacity at Chino by 70 percent from 65,000 to 110,000 short tons per year of copper. The project was divided into two phases: the first dealt with the mine and concentrator, the second with the smelter.

Mine and concentrator

A $280-million modernization of the mine and concentrator was approved by the Kennecott Board of Directors in January 1980. Hard pressed to fund a project of this magnitude, the corporation desperately needed a partner to share the costs. Joklik found an appropriate candidate and subsequently negotiated a deal. In May 1980, Kennecott and Mitsubishi Corporation signed a letter of intent to form a joint venture to modernize and operate Chino. The subsequently concluded agreement provided that Kennecott would give up a one-third interest in Chino, and in return, Mitsubishi would fund the first $116 million of the modernization expenditure plus one-third of the balance. Mitsubishi's contribution reduced Kennecott's capital spending on the mine and concentrator phase from $280 million to $110 million.

109 The first phase of modernization encompassed expansion of the mine, construction of a new concentrator near the mine, and installation of associated support facilities. New equipment and investment in pre-stripping increased the capacity of the mine to match the new concentrator, which was designed to treat 37,500 short tons per day of ore--about 70 percent more than the existing facility could handle. Availability of water limited the size of the expansion, which, nonetheless, reduced the projected open pit mine life from more than 50 years to about 30 years. The new facilities included a 3,000-foot belt conveyor to transport ore from the mine to the new concentrator and slurry pipelines to carry tailings and concentrate about 9 miles to the existing tailings impoundment and the smelter.

Modernization of the mine and concentrator promised to reduce Chino's unit cost of copper production by 16 cents per pound in 1978 dollars, a reduction of more than 20 percent. The expected savings came from increased productivity and improved operating efficiencies. The new facilities were designed to increase output substantially with only a small increase in the work force. This was made possible by the increased scale of mining and processing equipment. Replacing the nine-mile rail haul from the mine to the old concentrator with efficient belt conveyors and slurry pipelines also contributed to the cost savings.

The Chino project was a proving ground for Joklik's new approach to project management and control. Kennecott formed an on-site project management team to coordinate the effort and oversee the contractors. During the 1981 and 1982 construction period, tight supervision and control kept the project within schedule and budget, despite problems of low labor productivity in the construction work force. Construction was completed ahead of schedule in the summer of 1982. Acceptance testing was completed early in 1983, and afterwards the new facilities continued

110 operating on a five-day-per-week production schedule so as to match output to the existing smelter capacity.

Fiqure 28 Modernized Chino mine and concentrator in 1985. Ore haulage conveyor connecting mine (upper left) to concentrator (lower right) is visible in the center of the photograph.

The project surpassed design expectations. In 1983, concentrator throughput averaged 39,500 short tons per day of ore, five percent more than the design target. (By 1985, operating improvements had boosted throughput to 43,000 short tons per day, 15 percent higher than design capacity.) Copper recovery, concentrate grade, and labor productivity in both the mine and mill exceeded expectations. As a result, the first phase of modernization reduced real operating costs by 25 percent, five percentage points more than the targeted 20-percent reduction. 35 The outcome demonstrated that Kennecott could effectively manage and control a major construction 111 project, and this experience was put to good use in the second phase of the Chino modernization.

smelter

In approving the Chino joint venture with Mitsubishi in December 1980, Kennecott had agreed to modernize and expand the Chino smelter to handle the increased production from the modernized mine and concentrator. Construction was initially set to begin in the last half of 1981, but the project was delayed pending government approval of smelter emission regulations.

The regulatory issue was finally resolved in mid-1982, when government agencies approved an innovative regulatory approach developed by Kennecott. The approach, known as multi-point rollback (MPR), enabled a smelter to comply with ambient air standards in a cost-effective manner. Subsequently, MPR regulations were widely adopted for u.s. copper smelters, including Kennecott's Ray, Utah Copper, and Nevada Mines smelters.

Sohio acquired Kennecott before the smelter project could be started. When the regulatory roadblock was cleared in mid-1982, Sohio and British Petroleum (BP), which then owned 55 percent of Sohio, had to confront a major investment decision. The Chino smelter modification project would cost $128 million; Kennecott's two-thirds share of this investment was $85 million. This was the first major investment decision presented to Sohio management by the copper unit.

It was not an easy task for oil company management to come to terms with the demands of the newly acquired mining venture. The opening words of a briefing document, prepared by Sohio senior staff for top management, convey the bewilderment of the oil firm:

112 "The proposal to build a new smelter at the Chino mine comes at an awkward time. Not only are real copper prices at their lowest level in 50 years, but our ability to either forecast or interpret the current decline and our confidence in forecasting recovery and long-term trends are being severely tested."

Inclusion in the briefing paper of a primer on copper production methods further highlights the innocence of Sohio management. The tutorial was commended to Sohio's leaders as "a brief sketch of the technical aspects of the business, which will remind you where a smelter fits into the overall series of processes from mining to refining."36

Kennecott's argument for the Chino smelter project was a strong one. The existing smelter had the capacity to process about 60 percent of the concentrate that Chino could produce after the mine and concentrator modernization was completed. Without an expanded smelter, Chino would be forced to ship 200,000 short tons per year of concentrate elsewhere. High-cost treatment offshore was the most 1 ikely option, because U.S. copper smelting capacity was limited, and shrinking further under the pressure of increasingly stringent environmental regulations. Beyond that, it was likely that the existing Chino smelter would be shut down eventually on environmental grounds. At the least, tens of millions of dollars would be required to upgrade emission controls at the outdated plant, and even then there was no assurance that the existing technology could comply with stringent environmental regulations.

Because of the high cost of shipping and treating concentrates offshore, investment to modernize and expand the Chino smelter promised an attractive return. Taken together, the economic case, the need to process additional concentrates, environmental compliance considerations, and the conditions of the agreement with Mitsubishi made a persuasive case. Still Kennecott's Cleveland­ based parent was reluctant, and Kennecott was at first rebuffed.

113 Joklik returned to Cleveland and made the case a second time to the Sohio Board of Directors. In September 1982, after a third presentation to the BP Board of Directors, Kennecott's oil company parents finally approved the capital spending necessary to complete the modernization of the Chino property.

Fiqure 29 Modernized Chino smelter in Hurley, New Mexico, (1985 photograph) .

The smelter modernization project was completed on schedule and within budget. The new facility started up in October 1984 and reached full production in the first quarter of 1985. Design targets were met. Operating at design capacity, the new smelter was able to process the full capacity output of the Chino mine and concentrator. The smelter also achieved compliance with

114 environmental regulations by increasing sulfur capture from 62 percent to 92 percent.

Despite the challenges posed by financial constraints and a change of ownership, Kennecott carried out the Chino modernization with dispatch. A shortage of funds for the first phase of modernization was surmounted by joint venturing with Mitsubishi. Then Sohio's reluctance to fund the second phase was overcome by favorable project economics that made it difficult to abrogate the prior agreement with Mitsubishi to modernize the smelter. After completion, the new facilities surpassed the original objectives and achieved cost savings exceeding those promised when the investment was approved. In addition, Kennecott demonstrated a newfound capacity to successfully plan, manage, and complete a major construction project on time and within budget.

Utah Copper Modernization

Modernization did not proceed as rapidly at Utah Copper as it had at Chino. Joklik later explained: "At the time when the Chino modernization was justified and approved, modernization plans for Utah were in a shambles. Several runs had been taken at piecemeal efforts to plan the modernization of segments of the Utah Copper operation, without ever looking at ... [it] as an integrated production system. 1137

In mid-1980, Joklik called a halt to the piecemeal approach and organized a task force "to develop a comprehensive modernization and operating plan that will serve as a blueprint for the next 30 or 40 years of operation." The team was made up of Kennecott people from both operations and the central engineering and process technology groups. They were assisted by several engineering firms.

115 Fiqure 30 Utah Copper facilities in 1985 before modernization.

NORTH y

The team focused on mining, ore haulage, and concentrating, which together accounted for about 80 percent of production costs. Downstream processing facilities were reasonably up to date. The _Utah smelter had been partly modernized in 1977 at a cost of $300 million, and the refinery, dating from 1950, was relatively modern.

By early 1982, the general outline of the renovation was clear. At Joklik' s insistence, the task force had taken a hard look at relocating the concentrator near the mine. Initially, modernization of some combination of the three existing

116 concentrators had been favored as the economically and environmentally advantageous alternative. But on close examination, savings in ore haulage costs, the potential for metallurgical improvements at a single, all-new facility, and mastery of environmental doubts turned the balance in favor of building anew near the mine. In February 1982, the Sohio Board of Directors approved a $20-million expenditure to acquire land for a concentrator and associated facilities near the town of Copperton, about a mile from the Bingham Canyon open pit.

Relocating the concentrator close to the mine engendered substantial productivity gains in ore haulage. The existing operation depended on a labor-intensive rail system to move ore from the mine face to the distant concentrators. Short trains carried ore out of the pit to a nearby marshalling yard at Copperton, where the cars were combined into longer trains to complete the 18-mile trip to the existing concentrators. Replacing this system with belt conveyors from the mine to a new concentrator, and a slurry pipeline from the concentrator to the tailings disposal area promised a 20-percent reduction in the mine work force.

Plans for the new concentrator relied on large-scale grinding and flotation units all located within a single facility. The new design required a work force only one-third the size of the contingent at the three existing concentrators. In the new plant, finer grind and better process control than was possible in the existing facilities promised substantially improved recoveries of copper and by-product metals, thereby contributing further reductions in unit costs of copper production.

With the concept in hand at the beginning of 1982, Kennecott could have proceeded with detailed planning, engineering, and construction so as to have completed modernization of the Utah m1ne and concentrator by late 19 8 5. But there were a number of

117 considerations that stretched out the project. Central among them was the staying power of Kennecott's oil company parent, uncomfortable with a business beyond its ken. A persistent copper market depression, and problems within the oil business itself, severely tested Sohio's commitment to its copper unit.

Another source of delay was the perverse effect of the cost­ reduction effort described in the foregoing chapters. Improving productivity and cost performance at the existing operation introduced a new variable into the evaluation by continually changing the base conditions against which the investment was justified. The ultimate potential for improving existing operations was uncertain and could not be known until the cost­ reduction effort had been allowed to run its course.

The difficult economic environment placed a premium on optimizing the modernization scheme. Kennecott conducted a worldwide search for the best-proven technologies, and the company screened a wide range of technical and economic alternatives in a search for the best combination. At the heart of the matter was the trade-off between three variables: 1) mine design, balancing mine life against ore grade; 2) modernization scale, balancing capital cost against operating revenue; and 3) modernization configuration, balancing capital cost against operating cost. A proper consideration of the interaction of these three variables was delayed by the initial reluctance of Kennecott's parent to consider alternative mine designs that might improve economic return, but at the price of decreasing the size of the ore reserve. The .disinclination to reduce the published Utah ore reserve and shorten mine life was understandable considering that Sohio executives had publicly extolled the size and quality of Kennecott's copper deposits.

In January 1983, Sohio approved $25 million for additional engineering and cost studies required to develop the detailed

118 information necessary to support an investment decision. As the planning for full-scale modernization continued, Kennecott actually began work on an the first element of the modernization plan. The 1983 conversion of ore haulage in the pit from rail to trucks is described in Chapter IV, page 68. This effort was justified on its own merits, but was an essential component of the eventual modernization of mining operations. Chapter VI, page 91, describes how the 1983 labor agreement eliminated the burdensome Employment Security Plan, which had cast a shadow on labor-cost savings that were vital to the economics of the Utah modernization.

Funding in a Depressed Copper Market

Frustrated by two-and-a-half years of uninterrupted losses from the Kennecott acquisition and seeing little chance of a near-term improvement, Sohio took a hard look at its copper business in 1984. A task force drawn from the ranks of both Kennecott and Sohio was given two charges: first, to assess the long-term outlook for the copper business, then, in light of those findings, to examine the corporation's options with respect to Kennecott. The advisability of investing a large sum to modernize the Utah Copper operation was, of course, a pivotal issue for the task force.

The task force concluded that it was impossible to project long­ term copper prices with any certainty. The group settled on a wide forecast range that extended from a low of $0.65 to a high of $1.25 per pound (in 1984 dollars). Although supplH-side uncertaint1es played a role, the major contributor to the width of the forecast range was the unknown future rate of growth of copper demand. Kennecott members of the task force thought a range of $0.85 to $1.05 per pound most likely, but after months of study, oil company planners finally concluded, "Sohio cannot accurately predict the future price of copper.u38

119 Before the task force could complete its work, Kennecott offered a well-grounded recommendation for the Utah modernization. After screening a full range of options, Kennecott proposed spending $680 million ($572 million in 1984 dollars) to build facilities with a capacity of 77,000 short tons per day of ore. The plan called for a new concentrator with three grinding lines at Copperton. The -economics of the proposal were based on a mine plan that increased the ore cutoff grade from o. 3 5 percent to o. 4 5 percent copper. This option promised cash costs of $0.35 per pound, full costs after by-product credits of $0.51 per pound, and a mine life of 23 years. The investment was expected to yield at least a seven­ percent real rate of return at a copper price as low as $0.56 per pound.

The option Kennecott proposed ranked the highest of all the alternatives considered on all but one of the screening criteria-­ modernization at a capacity of 103,000 short tons per day of ore showed a higher net present value, but required a 35-percent

greater investment. In any case, Ke~necott's plan allowed for a second phase of investment that would add a fourth grinding line to the Copperton concentrator and thereby raise production capacity to 103,000 short tons per day.

The economics of Kennecott's modernization proposal were enhanced by tax concessions the company won from the Utah State Legislature. Kennecott had sustained good relations with community leaders and state and local government officials even as the company's contribution to the Utah economy shrank during the early 1980s. In .January 1984, the Utah legislature heard the case Kennecott presented for mining investment and passed a bill providing tax incentives to encourage development of Utah's minerals industry. The measure exempted sales and use taxes on materials, equipment, and supplies used in any expansion or modernization of existing facilities, or the construction of any new operations to mine or process Utah's mineral resources over the next five years.

120 This legislation was one example of the generally favorable attitude of Utah citizens and their elected representatives towards economic development. Norman H. Bangerter, governor of Utah for two consecutive four-year terms beginning in January 1985, was one of the government leaders sympathetic to Kennecott's comeback efforts. He was Speaker of the Utah House of Representatives when the legislation providing sales tax relief for mining industry construction was passed. Later, as governor, he showed understanding when Kennecott was forced to shut down Utah Copper in the spring of 1985, and he provided encouragement for the modernization and subsequent expansion of Kennecott's Utah facilities.

After years of planning and preparation, Kennecott was ready to proceed with the modernization, but the oil company parent was unsure. Without a clear idea of the direction of the copper market and with little faith that copper prices would eventually turn up again, as they always had in the past, Sohio was in a quandary. The oil company's executives had limited experience in the copper business and no basis for picking any one of the three competing alternatives that the Sohio task force identified for the Kennecott unit.

The options under consideration at the end of 1984 were: 1) exit the copper business; 2) modernize Utah Copper and sell Ray and Chino; and 3) modernize Utah Copper and retain Ray and Chino. The choice among the three turned on the outlook for future copper prices. At a long-term average price {in 1984 dollars) of less than 70 cents per pound, the first option was expected to yield the highest return for Sohio. A price between 70 cents and 80 cents pointed to the second option, and a price higher than 80 cents per pound made the third option most attractive.

Joklik argued strongly for the third option. He told Sohio management that it was short sighted to think that,

121 "Copper prices will continue in the 60 to 70 cents per pound range ... [because that] implies that 60 percent of the Free World's production will continue to be produced at a loss .... Over the long term, prices of mineral commodities ... tend to reflect the costs of production, including profits. As capacity ... deteriorates and demand slowly grows, costs of production, including profits, will become more fully reflected in copper prices.

"Disposing of Ray and Chino at bargain prices, while investing in Utah modernization, would be contradictory."

It became increasingly difficult, however, to find an understanding ear within Sohio. Despite forceful arguments and intensive efforts to persuade Sohio that it made good business sense to retain Ray and Chino, Joklik could not convince Sohio's top management to hold on to these two copper properties.

Yet Joklik's efforts on behalf of Kennecott's prime property, Utah Copper, did pay off eventually. He presented the case for modernizing Utah Copper to the Sohio Board of Directors at the end of February 1985. At the time, Torn Barrow's imminent retirement from Sohio had already been announced, and he had begun transferring his responsibility for Kennecott to Frank Mosier, then one of two executive vice presidents of Sohio. Barrow made a final pitch for Kennecott: he advised the Sohio Board of Directors, "Modernization of Utah Copper is a unique business opportunity which is unavailable to any other copper producer."

Kennecott's new overseer, Frank Mosier had his own approach to Sohio's minerals business. He presided over the dismantling of

~ennecott, which was stripped of every major asset but Utah Copper. In 1986, he engineered the sale of Ray and Chino at bargain prices. As Joklik had forecast, copper prices rose the following year and remained at levels that enabled the fortunate new owners to quickly recoup their investments.

122 Recognizing the lack of support in the Cleveland offices of Sohio, Kennecott decided to reduce the scope of the Utah Copper modernization project to keep the required investment below $400 million. In October 1985, Kennecott formally requested $398 million to fund a revised modernization scheme for Utah Copper.

The decision makers in Cleveland found Kennecott's revised proposal to be the least undesirable of a list of gloomy alternatives, which included permanent abandonment and long-term shutdown of Utah Copper. After clearing Sohio's top management and receiving the go-ahead from Sohio's majority owner, British Petroleum, the modernization project was approved by the Sohio Board of Directors on December 3, 1985. Finally, after years of planning, Kennecott could begin to replace the seriously outdated facilities at Utah Copper.

The. approval, however, came at a price. To contain capital costs, Kennecott had scrapped the original plan, which included modern flotation facilities within the new Copperton concentrator. As approved, the revised modernization scheme assumed that the existing flotation facilities at Magna and Arthur could be modified to work with a new grinding plant at Copperton. But Kennecott did not have time to prepare more than a preliminary estimate of the capital costs of this approach prior to seeking approval of the project. The last-minute shift in direction might have made sense to a hard-pressed oil company executive sitting in Cleveland and looking at the financial numbers. But Joklik found the bare-bones plan an unpalatable compromise, almost a guarantee of future operating problems. He expected that the half-way concentrator modernization would be a source of regret, and he searched for a way to do the job properly.

123 Chanqinq Plans

Joklik's 1980 decision to build a first-class professional engineering group and his subsequent support of that capability through tough economic times paid off again. Good engineering, combined with a bit of luck, opened the way to fulfill the original vision of the Utah Copper modernization. As definitive engineering progressed and detailed calculations replaced preliminary estimates, capital costs of the Utah Copper modernization were shaved by $24 million. The project also was favored by a weak construction market that cut expected contractors fees by $22 million. Finally, moderating inflation let Kennecott trim the original allowance for escalation by $14 million. By early 1986, Kennecott's engineers had credited savings of $60 million to the capital estimates for the project.

Under the approved plan, these savings were partially offset by an increase in the estimated cost of remodeling existing flotation facilities. The preliminary cost e~timates, hastily prepared in response to Sohio's 1985 mandate to slice capital costs, turned out to be overly optimistic. Detailed engineering evaluation showed that it would cost $32 million more than originally expected to modify the existing flotation and filter plant equipment to function properly with the new Copperton grinding facility. This, of course, strengthened the case for relocating flotation at the new facility.

Changes in estimated capital costs, which came out as detailed engineering progressed, gave Joklik the opening he had been looking for. He told Raman Rao and his engineers to sharpen their pencils and rework the case for putting new flotation facilities at . copperton. By September 1986, the engineers devised a plan that _would include flotation at Copperton at a projected cost just $4 million more than the $398 million approved in December 1985. By November, they had trimmed the estimated costs of the tot a 1

124 project, including flotation at Copperton, by another $8 million to $394 million--$4 million less than the amount approved. The relocation of flotation facilities to Copperton added $56 million to the original cost estimate, but this increase was more than offset by the $60 million savings found elsewhere in the project.

A further cost savings, not allocated to the modernization project but nonetheless real, was made possible by putting the tailings pipeline to dual use. To comply with environmental requirements, Kennecott was faced with construction of a separate pipeline to divert contaminated mine water to the tailings pond. If mixed with ground ore in the slurry pipeline from Copperton to the distant flotation facilities, the contaminated mine water would adversely affect the fl~tation process. But the mine discharge could be safely mixed with tailings from a flotation facility at Copperton, and both streams could be carried in a single pipeline. By avoiding the construction of a separate pipeline for contaminated mine water, the revised plan reduced total capital outlays by an additional $7 million.

The upgraded plan required approval by a new management team that had been installed in Sohio's Cleveland offices in early 1986, when BP exercised its prerogative as majority owner and dismissed both the president and chairman of Sohio. Frank Mosier, became the new president, and BP sent Robert Horton from London to take over as Sohio's new Chairman on April 1, 1986. Before the end of July 1986, another former BP executive, J. c. E. Webster, assumed oversight responsibility for the Kennecott unit.

Webster gave Joklik an opportunity to air the revised modernization plan in Cleveland. Once the facts became clear--more capability for less money--a dispassionate reviewer could reach only one conclusion. Acting on management's recommendation, Sohio's Board of Directors approved the change of plan in December 1986. Kennecott now had Sohio's support for the $394 million project that

125 Fiqure 31 Utah Copper modernization plan revised to relocate flotation at Copperton and approved December 1986.

COPPERTON area

COPPER TON CONCENTRATOR PLANT

CONCENTRATE PIPELINE

---•ABOVEGROUND tnnuuau•u UNDERGROUND

TAILINGS POND

would do the job right by building modern flotation facilities at Copperton.

Two More Chanqes of OWnership

The 1986 shakeup in Sohio' s top management was prelude to a -complete take-over by majority owner, BP. The London-based firm, .which already held a 55 percent interest in Sohio, acquired the balance of the outstanding Sohio shares in 1987. Sohio was rechristened BP America, and Kennecott became "BP Minerals 126 America," abbreviated "BPMA." (In 1983, the name, "Kennecott Minerals Company", had been shortened to "Kennecott.") Although Kennecott operated under the BPMA banner between September 1987 and July 1989, the company was still familiarly known as Kennecott.

In the 1987 reorganization, Kennecott assimilated the assets of BP's other u.s. minerals unit, Amselco Minerals Inc. Amselco contributed a 50-percent managing interest in a small Nevada gold mine, Alligator Ridge, which Kennecott operated until ore reserves were exhausted in 1990. Amselco also had a minerals exploration organization and interests in two mining projects then under construction--Ridgeway, South Carolina, and Greens Creek, Alaska.

The ownership of Kennecott changed one more time in the 1980s. BP, anxious to withdraw from the minerals business, agreed in January 1989 to sell most of its worldwide minerals business, BPMA included, to the RTZ Corporation, one of the world's largest mining companies. Like BP, RTZ is headquartered in London. Unlike BP, the main business of RTZ is mining. This was a significant advantage for Kennecott, because RTZ could be expected to understand the technical and commercial aspects of Kennecott's business. The sale was completed at the end of June 1989, at which time the U.S. minerals unit regained the name Kennecott Corporation. Under the leadership of Sir Alistair Frame, Sir Derek Birkin, and Robert Wilson, RTZ not only restored Kennecott's historic name, but subsequently supported Kennecott initiatives aimed at consolidating and building on the gains of the 1980s.

Construction and startup

The 1987 BP take-over did not interfere with progress on the Utah Copper modernization. Under the guidance of Raman Rao, Kennecott's experienced construction project team kept the modernization activities on schedule and within budget. The concentrator started

127 up ahead of schedule Fiqure 32 In-pit crusher under construction in 1988. Belt conveyor system leads from and reached the crusher to former rail tunnel. design throughput rate and targeted recoveries for copper, gold, and silver on schedule in October 19 8 8 • Hampered by an inadequate supply of quality water, the new molybdenum recovery plant did not achieve design targets initially. The completion cost for the project was $375 million, $19 million under budget.

Although designed to operate at a rate of 77,000 short tons of ore per day, the concentrator was capable of doing more. Accumulated operating experience established a base from which to optimize grind and recovery. By 1991, the concentrator achieved an _average throughput rate of 86,600 short tons per day, 13 percent above the design rate.

128 Fiqure 33 Copperton Concentrator in 1991. Ore moves by conveyor (left) to covered ore storage and then through underground tunnels to concentrator building (center).

The original plan for transition to modernized operations anticipated a phased shutdown of the existing Arthur, Magna, and Bonneville concentrators as the Copperton facility started up. But productivity and cost performance had been much better than expected after the existing concentrators resumed operation in 1987. Improved performance at the existing facilities and favorable copper prices prompted Joklik to reconsider the future of the existing operations. Delaying the closure of the Arthur flotation plant and the Magna crushing and grinding facilities by six months increased 1988 operating profits. Profits were further boosted in 1988 and beyond by continuing to operate the Bonneville crushing and grinding plant and the Magna flotation facilities, a combination christened the North Concentrator.

129 The revi sed operating .plan indicated that the North Concentrator could be operated profitably at a rate of about 30,000 short tons per day of ore. The revised plan did not require an increase in the planned mining rate. Rather, the additional throughput was obtained by reducing the effective copper cutoff grade in the mine and processing what had formerly been considered relatively high­ grade waste rock.

Finishing the Job

Since the first Fiqure 34 Bingham Canyon Mine in 1991. phase of the Utah Copper modernization was completed, Kennecott has followed through with additional steps to maximize the economic value of the Bingham Canyon orebody. The e x p a n d e d concentrator envisioned in the original plans, but initially delayed to hold capital costs down, is now a reality. In December 19 8 9, Kennecott's new parent, RT z, approved a $227 million project to expand production by adding a fourth line at the Copperton Concentrator.

130 Fiqure 35 Fourth line at Copperton Concentrator began operating in 1992. New 36-foot diameter SAG mill (top) dwarfs worker (center). Two new ball mills show in the foreground.

The fourth line expansion included installation of one of the worlds largest grinding mills. The new semi-autogenous grinding (SAG) mill is 36 feet in diameter, significantly larger than the three 34-foot diameter SAG mills already in place at Copperton. Also included in the expansion were two 20-foot diameter ball mills and 21 new flotation cells. The project was completed ahead of schedule and under budget in January 1992. This second phase of modernization increased annual copper production capacity at Utah Copper by 30,000 short tons, to 280,000 short tons.

Since the modernized facilities started up in 1988, the performance of the smelter has been the major sore spot of the integrated Utah Copper operation. Problems with the performance and availability

131 of smelting equipment, and tightening environmental requirements, reduced the effective capacity of the smelter, and by 1992, it was able to process barely 60 percent of the concentrates produced by the expanded Utah Copper operation. Kennecott's engineering and construction group, under the direction of Dennis connell since September 1990, put together a plan to eliminate the bottleneck. After receiving RTZ's approval in March 1992, Kennecott announced an $880-million project to build a new smelter and modernize the existing refinery in Utah. This third phase of the major investment in state-of-the-art facilities that Kennecott began in 1985 will complete the modernization of Utah Copper from mining through refining.

When explaining the reasons behind the $880-million project Joklik said: "There are five E's involved in this undertaking: yes, the economic impact. But also, it dramatically impacts the environment, energy use, efficiency of operation, and expansion of our abilities to process more in Utah.

"First, the economics. In addition to the long-term viability of Kennecott's Utah Copper operation, the $880- million construction project will have immediate impacts ••• 3, 300 substantial jobs that will last the three years of the building project ..•. these construction jobs will generate $340 million in Utah household earnings and will provide business in ·goods and services to 500 different Utah companies supplying the project .... In addition •.. this Kennecott investment is expected to generate $80 million in state and local government taxes. It will be one of the largest construction projects in the country.

"All this falls on the heels of the $625 million Kennecott has spent in the last six years in the expansion and modernization of the Utah copper mine itself and the concentrator. When the smelter and refinery project is complete, Kennecott will have invested well over $1.5 billion in new and modernized Utah facilities since 1985.

"Consider what happens with the environment. The new smelter will incorporate technology so advanced that it will operate as the cleanest copper smelter in the world.

132 Fiqure 3 6 Artists drawing of new Utah Copper smelter scheduled for completion in 1995.

It will capture 99.9 percent of the sulfur contained in copper concentrates .... The high degree of control built into Kennecott's new smelter will cut the sulfur emission rate to only one-twentieth of the maximum levels allowed by the State of Utah .... Suffice it to say, pollution prevention is the basic principle of the plant design.

"(T]his new design also brings additional benefits in ... energy conservation and efficiency .... water usage will be reduced ... the plant will generate 85 percent of its own energy requirements ... it will require only one­ fourth of the energy currently used to produce a ton of copper.

"The plant allows for expansion of capacity at the smelter and refinery .... After the new facilities are completed in 1995, Kennecott will be able to smelt and refine all of its copper concentrate in Utah. This not only will keep jobs in Utah, but it also will help

133 Kennecott sustain its competitive edge as one of the most efficient and lowest cost copper producers in the world.

"The $880-million project ... will complete a ten-year modernization of our production facilities. We are very proud of the innovation these investments represent. They are a dramatic demonstration that economic growth and environmental sensitivity can be achieved."

The "cleanest copper smelter in the world" is just the latest environmental advance achieved as part of Kennecott's program to completely modernize the Utah Copper operations. . Of the $62 5 million Kennecott spent to modernize the Utah facilities between 1985 and 1992, $150 million--nearly 25 percent--was spent on specific projects to improve the environment. For instance, the large volume of water required by the concentrating process is now recycled and reused rather than discharged. And replacing trains and trucks with belt conveyor systems reduces diesel fuel consumption and air emissions. In general, new mining and mineral processing technology is cleaner by design than the old facilities it replaces.

In conjunction with the modernization effort, Kennecott began a program to identify and clean up historic mining wastes. Most of these wastes were deposited before Kennecott was formed. Companies that mined and milled ores as long as 130 years ago on the Utah property Kennecott now owns did not adhere to the standards that apply today to placement of mine waste and emission controls. The early miners left situations where naturally occurring minerals and other substances might escape into the environment, but these historic wastes, because of their inert nature and inherent low toxicity, pose minimal threat to human health and the environment. Nevertheless, Kennecott has volunteered to clean up historic contamination on company property. This cornmi tment is evidenced by the $48 million Kennecott spent on such cleanup activities in 1992.

134 In 1991, Kennecott asked the federal EPA and the State of Utah to consider sanctioning the voluntary cleanup effort that Kennecott was undertaking. The agencies agreed to try to negotiate a cleanup agreement whereby Kennecott's Utah property would not be listed as a Superfund site, and Kennecott would voluntarily conduct and fully fund a cleanup to meet or exceed Superfund requirements. Such an arrangement was attractive to the public 1 the regulators 1 and Kennecott because it promised to eliminate the use of Superfund moneys 1 free the environmental agencies to focus their limited resources on more complicated and contentious sites, lower transaction costs for all parties, substantially speed the completion of the actual cleanup, and demonstrate that voluntary initiatives by business can contribute to efficient and timely resolution of environmental concerns.

As this is written in early 1993 1 negotiations towards a Consent Decree and Statement of Work have been underway for nearly two years. Technical issues related to the assessment of the problem, the selection of remedies, and the implementation of the cleanup have been resolved. Completion of the negotiations in 1992 was delayed, however 1 by unresolved legal provisions and by administrative delays encountered in obtaining the necessary approvals at the regional and national levels of the EPA. No other private party has ever attempted to negotiate such a comprehensive cleanup agreement, and the fate of these ground-breaking negotiations is now in the hands of the new Clinton Administration.

Today's approach to environmental improvement lengthens the list of innovations that grew in Bingham Canyon. The innovations that blossomed there at the beginning of the 20th century created a whole new class of copper mines, the porphyry coppers. And the Bingham Canyon operations of Utah Copper remained for many years the leading example of technological advances in copper mining. But Utah Copper began to lag behind its competitors after World war II. By 1980, the viability of the operation was in question, and

135 it took another series of innovations, and changes in management and technology, to revive the operation and give it a healthy new life. The Bingham Canyon mine and the copper processing facilities of Utah Copper are now positioned to produce copper and contribute to the economy of Utah and the nation well into the twenty-first century.

136 VIII. NEW OPPORTUNITIES IN MINERALS

In 1915, Kennecott's founders combined their interests in six copper properties to form the new corporation. Sixty-five years later, what remained of these original mineral assets still accounted for most of Kennecott's earnings. Utah Copper, Ray, and Chino--three of the holdings in the original portfolio--contributed practically all of the copper the firm produced in 1980.

Despite a long record of copper production, these three properties still had s i zeable ore reserves. Although there was enough copper in the ground to support many more years of mining, production costs were rising at an uncomfortable rate. Declining ore grades, long hauls from deepening pits, stagnant productivity, and aging facilities all helped to swell mining and processing costs and cloud the prospects for the copper operations. Another worry was Kennecott's exposure to the market fortunes of copper, the firm's dominant product. These concerns, recognition of the inherent value of Kennecott's expertise in the minerals business, and a regard for the long-term future of the company prompted Joklik to make discovery of "opportunities for investment in new natural resource projects" the third element of his 1980 strategy.

Minerals Exploration

Li ke any other enterprise, a minerals company can diversify by acquiring a going concern or by starting a new business from scratch. The second option may take longer, but it can yield a high return for the company that discovers a new minerals deposit or rediscovers a forgotten one. Such discoveries depend on a well-

137 focused exploration effort, and Jokl ik ' s 1980 strategy to diversify Kennecott's minerals business included plans to strengthe n and expand the company's minerals exploration program.

As shown in Figure 37, Fiqure 37 Kennecott expend i tures on mineral exploration. Kennecott's spending on mineral exploration Millions of dollars increased in real terms ~ ~------~------. ~ Nom i nal spending +-Inflation since 1980 after 1980. Despite the 30 economic difficulties 25 created by a depressed copper market, Kennecott 20 sustained a real spending 15 increase through 1984 and 10 was rewarded by new 5 exploration discoveries. Then, mounting financial losses, shutdown of the Utah Copper operation, and Sohio's loss of confidence in the minerals business all combined to force a sharp cutback in Kennecott's exploration budget. Real spending on exploration from 1985 through 1988 was well below the modest level of 1980. At the reduced level of spending Kennecott's exploration department was forced to retrench, and the function shrank to less than the critical mass necessary to field an effective program. Nevertheless, Kennecott did preserve the vast exploration database created over forty years and the core of expertise required to reactivate a full scale effort when adequate funding again became available. Due to Joklik' s persistence , minerals exploration was not abandoned entirely during those difficult years.

Not until 1989--after years of cost cutting, investment in modernization, and rising copper prices turned Kennecott into a money-making enterprise again--did real exploration expenditures

138 return to the modest level of 1980. When RTZ, a mining company, bought Kennecott from BP, an oil company, the climate for minerals exploration improved, and real spending on this function, vital to the future of Kennecott, increased substantially as shown in Figure 37.

Development of the 1980 Exploration Portfolio

Fielding an effective exploration program requires a long-term perspective. Only a minuscule fraction of the prospects identified will turn out to have economic value. The prizes are large, but few, and mineral explorers must be prepared to sustain the search, sometimes through long stretches of negative results. The long­ term nature of investment in minerals exploration is indicated by the benefits that Kennecott obtained after 1980 from earlier exploration discoveries.

Flambeau--The high-grade deposit of copper and gold that Kennecott found in Wisconsin is an example of how patience pays off in mineral exploration and development. Kennecott started exploring in the area in 1954. Fourteen years later, in 1968, the company's exploration arm discovered the Flambeau deposit. It took another quarter of a century to make a mine of the find. The environmental permitting process was the major source of delay. Skillings Mining Review calls Wisconsin's new mining laws under which the operation was finally permitted, "among the more stringent in the u.s.n 39 Kennecott finally began mining the deposit in the second quarter of 1993, nearly 40 years after the search began.

North Ore Shoot--In 1957, Kennecott discovered the North Ore Shoot in Bingham Canyon, Utah. This deposit is a separate, relatively high-grade copper orebody within the extensive Bingham Canyon mineral complex. It lies deep below the surface, just north of the porphyry-copper orebody Kennecott mines by open pit. In 198J,

139 completed successfully, Kennecott will begin pumping water from the 3,000-foot development shaft, which was allowed to flood when it was abandoned in 1986. Once the water is removed, underground test mining will determine the feasibility of developing this high-grade deposit as an integrated part of the Utah Copper operations. If the investigation proceeds as expected, the North Ore Shoot mine could be in full production by the late 1990s.

Discoveries Since 1980

Although returns from mineral exploration generally lag behind expenditures by five years or more, it is not always necessary to wait 40 years, as was the case with the examples cited in the previous section. Kennecott's experience during the 1980s shows how the development cycle can be compressed. Of the five precious metal deposits found by Kennecott exploration since 1980, the company has made mines of three, received a handsome payment for another, and brought the largest of the five discoveries to the point of a development decision less than ten years after the initial discovery.

Alacr~n--Kennecott has long considered Mexico an extremely attractive geologic environment for mineral exploration. In 1979, the company's Mexican exploration group recognized the potential for new silver discoveries in the old Bolanos mining district, and purchased a 49 percent working interest in a group of properties within the district. The purchase included a small silver mine which Kennecott expanded. Declining silver prices and lower than expected ore grades reduced the value of the existing operation, but the company continued to explore the Bolanos property. In 1983, exploration drilling intersected a new silver orebody, the high grade AlacrAn deposit. Subsequent development of an underground mine at Alacr~n turned the Bolaf\os venture into a profitable operation.

141 The Bol anos project was an exploration and operating success but l ess than a complete business success. At the t ime, Me xican law did not allow a foreign investor to hold a controlling interest in a Mexic an mining property. This limitation prompted Kennec ott to reconsider its entry into Mexico. Joklik later explaine d , "Kennecott, like any other private firm that risks capital, expects to be able to guide the destiny of the company's investment and to realize fully the financial benefits of success. Our position as a minority shareholder at Bolanos limited our ability to do this, and we sold our 49 percent minority interest in December 1988."40

Since then, Mexico has revised its mining laws. An improved investment climate prompted Kennecott to return to Mexico i n 199 0 and resume the search for new mineral opportunities.

Rawhide--In 1980, Kennecott's exploration group applied new geologic thinking to an old Nevada mining district. Reviewing data collected by others over the years, they recognized the potential for a large gold deposit in volcan~c rock. To test this new insight, Kennecott had to obtain the Rawhide property, which lies about 120-miles southeast of Reno, Nevada. It took three years of tough negotiations to persuade the land owner that Kennecott was the best equipped of several organizations eager to obtain the land. Soon after a lease was acquired in 1983, drilling confirmed the validity of Kennecott's geologic model.

Subsequent drilling delineated a major gold deposit. Early i n 1990, an open-pit mine and heap leaching facilities started producing gold. Kennecott holds a 51-percent interest in Rawhide and operates the property, which produced 47,000 ounces of gold fo r Kennecott's account in 1992.

Barneys Canyon--Kennecott owns and operates a second open pit go l d mine that was discovered by the company's exploration organizat i on. The Barneys canyon mine lies about four miles north of Kennecott ' s

142 Fiqure 39 Rawhide gold mine in 1991.

Bingham Canyon copper mine. The gold discovery at Barneys Canyon resulted from a careful review of Kennecott • s vast data base. Screening existing data in the early 1980s, geologists encountered a single anomalous sample. They followed up with a detailed surface investigation. The results of this study were not encouraging in the context of the geologic model usually applied to the surroundings of the Bingham Canyon porphyry copper deposit. But an alternative model developed by Kennecott provided the basis for further geologic and geochemical work. The geologic picture that emerged from this work guided the drilling program that detected the Barneys Canyon orebody in 1985.

Kennecott built open-pit-mining and heap-leaching facilities at Barneys Canyon and started gold production in the third quarter of

143 1989. The operation Fiqure 40 Barneys Canyon gold mine in 1991. produced 116,000 ounces of gold in 1992. c r i x a s T h e discovery of gold ore at Crixas in Brazil is another e x a m p 1 e o f i n n o v a t i v e interpretation of a complicated geologic setting. Another mineral company, INCO, first discovered scattered gold mineralization at Crixas, but failed to recognize the pattern of continuity implied by the samples. Looking for opportunities in Brazil and excited by the number of high grade intervals intersected by !NCO's drillholes, Kennecott quickly concluded a deal for a 50-percent interest in 1983.

It soon became apparent to Kennecott that the high grade intersections were part of a continuous bed of mineralization. Subsequent drilling outlined a gold deposit with excellent grade and tonnage potential. And projection of the new geologic model

144 resulted in the discovery of a second deposit a mile away from the first.

Kennecott's owner, Sohio, was not interested in participating in the development of the Brazilian deposit. Consequently, the company's 50-percent interest was sold in 1986 for $30 million. The gain on the project amounted to $21 million. In 1990, mining began at the Crixas property, which has an annual production capacity of about 110,000 ounces of gold.

Lihir--In March 1992, Kennecott completed the eleven volume Lihir Project Feasibility Report. This report set forth a comprehensive plan for developing and mining a huge gold deposit on Lihir Island in the Pacific island nation of Papua New Guinea (PNG). A Kennecott-led joint venture had first discovered gold within a steep-walled volcanic caldera on the east side of the island in 1982. Since then, Kennecott has delineated a geologic resource containing 27 million ounces of gold. The full extent of the Lihir gold resource has yet to be defined.

Having worked for many years exploring and developing minerals properties in Australia and PNG, Joklik understood the minerals potential of PNG. He also knew, first hand, qualified exploration geologists who had the experience and special skills to work effectively in the remote, jungle-shrouded nation. The geology of PNG was promising, and many regions of the country were virtually unexplored, but a government moratorium on mineral development had discouraged exploration through the early 1980s. Expec ting that the government would soon lift that moratorium, Kennecott and Niugini Mining Ltd., an Australian company with extensive experience in PNG , formed an exploration joint venture. The new venture quickly fielded a reconnaissance program that found gold on Lihir Island in 1982.

145 When the government moratorium was lifted in June 1993, the joint venture applied for and was granted a prospecting authority that awarded the venture an exclusive right to explore for minerals on the island. Further exploration and drilling confirmed the presence of a major new gold resource by the end of 1984. The large size of the deposit and the adjacent deep water harbor, formed when the sea breached one side of the caldera in which the deposit lay, were major positive factors. But the venture also faced a number of difficulties related both to its location and to special technical problems of mining and processing.

To begin with, PNG is a newly developing country struggling to overcome political instability, and the country has traditional land tenure system that discourages commercial investment. Lihir Island, itself, is a remote part of PNG--an undeveloped place possessing neither the infrastructure nor the skilled workers required by a major mining operation. Before mining can begin, electric power, transportation facilities, and other supporting infrastructure must be built and workers must be found and trained. Moreover, development of an up-to-date mining operation and the necessary infrastructure will be complicated because Lihir is a long way from the centers of industry where the skills, equipment, and supplies required to construct and operate a modern mine are found.

In addition to its remoteness, the Lihir deposit presents major technical challenges. Most of the gold at Lihir is contained in a refractory ore. A complex, expensive metallurgical process is required to liberate the gold from the strong chemical bonds that hold it in the rock. Digging out the rock also is a challenge because the Lihir ore lies in an active geothermal zone. Hot waters must be removed, and the rock must be cooled prior to mining. Environmental concerns add to the technological complexity of development. Although the project is distant from any major centers of population, Kennecott has taken great care to 146 Fiqure 41 Lihir Island, PNG, superimposed with artist's drawing of possible open-pit gold mining operation.

incorporate a full range of modern environmental controls and safety features into the proposed development plan.

Kennecott's proposal for development addresses the challenges of location and technology and concludes they can be overcome. Kennecott has submitted a feasibility study to the government of PNG. At the time this is written, the parties are negotiating the terms of a Special Mining Lease that must be issued by the government before the next stage of development can begin.

147 Ridgeway and Greens Creek

When BP took over Sohio in 1987, Kennecott acquired two mineral projects already under construction (see page 127). The Ridgeway and the Greens Creek projects were included among the assets of Amselco that BP transferred to Kennecott. Kennecott inherited a 52-percent interest in the Ridgeway gold property and a 53-percent interest in the Greens Creek project, along with responsibility for managing the development and subsequent operation of both ventures.

Fiqure 42 Milling facilities at Ridgeway gold mine, South Carolina.

The Ridgeway, South Carolina, project was in reasonably good order when Kennecott took it over. After resolving some outstanding environmental issues, Kennecott completed construction of the open-

148 pit mine and conventional processing plant, _ and Ridgeway began producing gold in December 1988. In 1992, Kennecott bought out the other partner and obtained a 100-percent interest in the Ridgeway operation, which produced 161,000 ounces of gold in 1992.

The Greens Creek, Alaska, project was another matter; it became a major engineering and management challenge. The polymetallic orebody at Greens Creek contained attractive concentrations of silver, lead, zinc, and gold, but it was not an easy project to develop. The deposit was remote, located in a wilderness setting on Admiralty Island, 18 miles southwest of Juneau. Construction of an underground mine and a concentrator on the island was handicapped by the primitive setting, the distance from suppliers and contractors, difficulties of transportation and communication, and the high costs of working in Alaska.

When Kennecott took on Greens Creek in late 1987, the construction project was in trouble, imperiled by technical deficienci~s, cost overruns, and inadequate management controls. At the time, Kennecott's expert design, procurement, and construction engineers were winding up the first phase of the Utah Copper modernization project. A team drawn from this experienced engineering group reworked the engineering for Greens Creek and installed proper management and cost controls. The project was put back on course and completed in the last half of 1989.

The Greens Creek project was remarkable in that it lay within the Admiralty Island National Monument, where it was required to satisfy exceptionally strict environmental guidelines. Kennecott worked closely with officials of the U.S. Forest Service, which managed the area, and with other regulatory agencies to minimize the impact of development on the pristine area and its wildlife. The project demonstrated that it is possible to develop and operate a mine responsibly in an environmentally sensitive setting.

149 Figure 43 Greens Creek mine in Alaska 's w i ~derness .

After production began in 1989, metal prices fell. Greens Creek became unprofitable, and operations were temporarily suspended in early 1993. Operations will resume when market conditions improve . In the meantime, Greens Creek is continuing work on expansion plans. The expansion project will open up new ore reserves discovered by the exploration effort Kennecott launched after acquiring the property.

In 1992, Kennecott's share of concentrate production from Greens Creek operation contained 3. 8 million ounces of silver, 17, 000 ounces of goldf 22,000 tons of zinc, and 9 , 000 tons of lead. The concentrates were sold and shipped overseas for smelting.

150 Green Mountain

In late 1989, Unocal, an oil company withdrawing from the minerals business, offered its Sweetwater Wyoming uranium mill to Kennecott. Although the mill was idle at the time, it was a first-rate, modern facility. Alone the mill had little value, but in combination with a good uranium mine, it offered Kennecott a unique opportunity to diversify into a new minerals business.

The second part of the combination was the unusually large Green Mountain Wyoming uranium deposit. The ore at Green Mountain was concentrated in widespread lenses within flat-lying sandstone beds. This geologic setting was attractive because it was potentially minable by highly mechanized underground mining techniques that could extract the ore at relatively low cost.

Kennecott quickly put together a deal. By June 1990, Kennecott negotiated a joint venture with U.S. Energy Corporation for a 50 percent interest in the Green Mountain property. Shortly thereafter, the joint venture negotiated a favorable agreement with Unocal to acquire the nearby sweetwater mill; the mill acquisition was completed in June 1992.

As this is wri~ten, in early 1993, programs are being developed to confirm and delineate the Green Mountain ore reserves, obtain the necessary permits, and market the output of the venture. The project development schedule will, of course, be influenced by the rate at which the currently depressed uranium market recovers.

Expansion into Coal

Approval of the smelter and refinery project in the Spring of 1992 heralded the beginning of the last major phase of the Utah Copper renovation. With the future of the copper business assured,

151 Kennecott was in a position to consider a major move into other mineral commodities.

Coal, a commodity that Kennecott had been investigating for some time, became a prime candidate for diversification and expansion of the Kennecott's mining business. In 1992, the company intensified the search for suitable coal properties. The examination homed in on the Powder River Basin in Wyoming and Montana. This region holds the largest coal resource in the country. The coal mined in the Basin has a low sulfur content favored by consumers, and the deposits are generally minable by efficient open-pit mining methods.

Kennecott's search culminated with two acquisitions, both announced in February 1993. The company agreed to purchase Nerco Inc. for approximately $4 70 million. Nerco owns and operates two coal mines in the Powder River Basin and has a 50 percent interest in a third. Kennecott also agreed to purchase Cordero Mining Company, which operates the Cordero Mine in the Wyoming sector of the Powder River Basin. The two acquisitions enable Kennecott to produce approximately 32 million tons per year of coal, and about 60 percent of this production is sold under long-term contracts. The company's Powder River Basin coal reserves, totaling about 1,019 million tons, are sufficient to support mine lives of roughly 30 years.

The Nerco acquisition was completed in June 1993. Kennecott obtained the Antelope and Spring Creek mines and a 50 percent interest in the Decker mine, operated by Peter Kiewit Corporation. The Nerco package also included an oil and gas business, consisting mainly of natural gas production in Louisiana and the Gulf of Mexico, and a minerals business with gold and silver mines in the Western North America. Kennecott has taken steps to shed the oil and gas business because these assets do not have a place in the company's long-term strategy. Prior the acquisition, Nerco had

152 offered all its minerals properties for sale. Kennecott says it is evaluating the bids received and may decide to sell these assets, which produced 202,000 ounces of gold and 2.9 million ounces of silver for Nerco in 1992.

The purchase of the Cordero Mine was completed in 1993. The addition of Cordero to the Nerco properties gives Kennecott approximately 16 percent of the Powder River Basin's coal production. The Cordero Mine is particular attractive in that it has the potential to expand production by nearly 30 percent with very little additional capital investment.

Kennecott Assets in 1993

Kennecott lost two major copper mining properties, a copper refinery, Ozark Lead company, and other mineral assets during the period of oil company ownership that ended in 1989. Nevertheless, Joklik sustained Kennecott's diversification effort throughout that difficult period. As a result, the company added new properties to its minerals portfolio. Some are now operating and others are awaiting development. A minerals exploration program, revitalized since 1989, promises new discoveries in the future. The diversity of Kennecott's minerals business is depicted in Figure 44, which shows the location of Kennecott's metal and coal production and major development projects in 1993.

153 Figure 44 Major operating mines and undeveloped minerals properties held by Kennecott in 1993.

• Operating Properties

• Development Project

A Undeveloped Properties

:nr ---- ... ·-·-· Bam.ey:S" ··· ·· ·· -...... ______., ___ -- .. ~ Canyon ~ Northr Ore Shoot (Gold)1 Green Mountain. • tri ? (Copper).., • (Uranium) Rambeau !%/ • Bingham Canyon (Copper/Gold Rawhide (Copper) (Gold)

0 Uhir =~(Gold)

154 IX. AN OUTLINE FOR GLOBAL COMPETITIVENESS

Kennecott is now a diversified m1n1ng company well positioned to compete globally. The favorable outlook for the firm in 1993 contrasts sharply with the grim prospects facing the company in 1980, when Frank Joklik stepped up to head the beleaguered firm. He recognized that the copper industry had entered a new era of global competition, and he responded by setting a new strategic course for Kennecott. For more than a decade, he guided the often difficult changes that transformed Kennecott from a high-cost copper producer on the edge of extinction into an efficient, productive enterprise that now ranks among the lowest-cost copper producers in the world.

Kennecott was at the forefront of the struggle that revived the u.s. copper industry. During the 1980s, Kennecott showed how an enterprise that has neglected its core business and suffered a serious competitive decline can recover and regain a position in the front ranks of a global industry. Domestic firms in other industries squeezed by foreign competition can, perhaps, learn from the Kennecott example.

Revival of Utah copper

The 1988 completion of the mine and concentrator modernization at Utah Copper was the milestone that marked Kennecott's recovery. At the beginning of the 1980s, Kennecott's high-cost copper operations were unable to compete. Ten years later, the world copper industry was coming to recognize that the former high-cost Utah operation

155 had been transformed into a contender for the title, "The Lowest Cost Major Copper Mining Operation in the World."

The comeback of Utah Copper Fiqure 45 Copper production and work force productivity at Utah Copper. is charted in Figure 45, which shows both the annual Copper Production Work Force Productivity rate of copper production (thousands of short tons) (short tons per man-year) ~ ~------~------. 1~ and work force productivity mProduction ..... Productivity at significant milestones along the path of recovery. 300 When Joklik launched the first stage of cost 200 reduction in 1980 a work force of 7,000 employees 100 produced at an annual rate

of only 31 tons of copper 0 per employee. Without major 1980 1984 1987 1989 1993 capital spending, a four year program of incremental improvements boosted productivity by 50 percent, to 47 tons of copper per man-year in 1984, when 4,300 employees produced copper at nearly the same rate as 7,000 had in 1980.

Although Utah Copper operations were relatively lean and efficient by 1984, plant and equipment in the mine and concentrator were seriously out dated and in many cases worn out from years of use. Having exhausted options for short term cost reduction and confronting depressed metal prices, Utah Copper was forced to shut down in 1985. In 1986, the company and its unions negotiated a new labor contract that opened the door to further improvements in work practices. When copper production resumed at a reduced rate in 1987, additional improvements raised productivity of the existing ,£acilities to 59 tons of copper per man year--90 percent higher

~han the level of 1980.

156 The long and arduous process of cost cutting that Utah Copper undertook in the early 1980s positioned the operation for a major investment in new technology. A $400 million modernization of the mine and concentrator was completed in 1988. The first full year of operation, 1989, saw copper production rise to 250,000 short tons. At the same time, the efficient modern plant boosted work force productivity to 110 tons of copper per man year--3~ times the work force productivity recorded in 1980.

After a decade of struggle, Utah Copper entered the 1990s in a position of strength. Kennecott continued the trend of increasing copper production and rising work force productivity by completing a $225 million expansion project in 1992. Years of steady improvement have returned Kennecott to the front ranks of the copper industry. Yet the lessons of hard times have not been forgotten by the now profitable firm. The new attitude that Joklik nurtured through the cost-cutting decade has been ingrained in the Kennecott organization.

Performance improvement and cost reduction has become a way of life for managers like Rod Davey, who took charge of the Utah Copper operation in November 1988. As Vice President and General Manager of Utah Copper, he has continued to improve operating methods in ways that result in ongoing productivity gains and cost savings.

Senior executives like Jack Bernhisel, Senior Vice President of Finance and Law, have helped to build a new corporate culture. Competitiveness and cost consciousness are now the bywords throughout the organization--in Kennecott's headquarters and operating units alike.

Another senior member of the Kennecott recovery team, Bob E. Cooper, will feature prominently in the next verse of the Kennecott saga. He became Kennecott's President and CEO after Frank Joklik retired at the first of June 1993.

157 At the time of Joklik's retirement, Kennecott was a profitable, competitive enterprise. The Bingham Canyon mine and associated mineral processing facilities at Kennecott's Utah Copper operation were producing copper at lower cost than any other major copper mining operation in the country. At the current mining rate, known ore reserves at Bingham Canyon will support low cost copper production for at least another twenty-five years. When it is completed in 1995, an $880-million project to build a new smelter and modernized refinery will further reinforce the competitive standing of this operation. The long-lived Bingham Canyon mine, Kennecott's other mineral properties, and a revitalized minerals exploration program combine to give the company a solid foundation for future profitability.

comeback of u.s. Copper

Early in 1980, Kennecott initiated and vigorously pursued drastic cost reduction actions, serious efforts to improve labor relations, and targeted investments in new technology. Kennecott's plan anticipated the coming copper market decline and showed the way for domestic copper producers to survive tough times. Some succumbed, but others followed the trail blazed by Kennecott. It was a difficult and painful path, but the industry staged a remarkable recovery. Figure 46 shows what happened. From 1970 through 1981, u.s. mine production had averaged 1.6 million short tons of copper per year. Then u.s. copper mine production dropped by 25 percent to average only 1.2 million short tons for the next five years, from 1982 through 1986. The drop was the result of an oversupply of foreign copper, not lack of domestic demand, which was nearly the same on average during the two periods.

The copper market slump forced some domestic copper mines to close permanently, but the bulk of the U.S. industry followed Kennecott's lead and fought back with stringent cost-reduction measures. The

158 success of these efforts is Piqure 46 Copper Production and illustrated by the sharp Labor Productivity at u.s. Copper Mines rise in labor productivity shown in Figure 46. In Mine Production LaborProductivftyin of Copper Mining and Milling 1981, average productivity (millions of short tons) (short tons/man-year) 1.9 ...... ------14{) of U.s. copper mining and Production milling stood at 55 short Oeft scale) 1- 120 1.7 tons of copper per man-year. 41 During the '- 100 1.5 next five years, the - 80 industry boosted labor 1.3 ... so productivity to 125 short .. tons per man year, more than 1.1 +-__,...--=r----.-...... -~-...... -__.....-,-----...... 4{) double the level prevailing 1970 1975 1980 1985 1990 in the 1970s. Output per Sources: U.S Bureau of Mines, U.S. Bureau of Labor Statistics hour in copper mining and milling rose at an average annual rate of 18 percent between 1981 and 1986. This was the highest rate of productivity growth posted during that period by any of the 146 domestic industries regularly tracked by the u.s. Bureau of Labor Statistics.

Productivity gains and other Table 4 Cash costs of U.s. copper mines operating in both 1981 and improvements pared U.S. 1987 . copper production costs in both real and nominal terms. Table 4 compares average 1981 1987 Change cash costs of copper Nominal S 99¢/lb 64¢/lb -35\ production, before deduction Real 1981 S 99¢/lb 48¢/lb -52\ of by-product credits, for a group of u.s. mines that Source: U.S. Bureau of Mines survived the market slump and operated in both 1981 and 1987. 42 These mines produced roughly 1.3 million short tons of copper in each of the years evaluated.

159 By 1987, a SO-percent reduction in real costs of u.s. copper mine production and a healthy rise of copper prices enabled u. s. mines to expand output. Figure 46 shows copper mine production c limb ing from less than 1.3 million short tons in 1986 to a new record level of over 1.8 million short tons in 1991. Figure 46 also shows average l abor productivity stabilizing at about 130 short tons per man-year during the period of relatively high copper prices the industry enjoyed after 1987.

National Competitiveness

The story of Kennecott during the 1980s has much in common with the experience of other domestic industries involved in international markets. As the U.s. dollar strengthened--roughly doubling in value against other major currencies between 1980 and early 1985-­ domestic industries saw their competitive standing erode relative to their foreign rivals. The wide-ranging impact of this competitive deterioration is seen i~ the u.s. merchandise trade deficit, which widened rapidly after 1982 and did not begin to narrow again until 1988.

Starting an aggressive cost reduction effort in 1980, Kennecott was a leader in the U.S. thrust to improve competitiveness. The underlying challenges Kennecott faced were similar to those confronting many U.S. firms. Managers and workers had become complacent during the decades of rapid economic growth following World War II. Kennecott's turnaround hinged on a major change in longstanding attitudes and practices. Major gains in productivity required both a thoroughgoing revision of management and operating practices and effectively targeted capital investment.

Kennecott showed how a threatened domestic firm can recover its competitive vitality. Other domestic producers of goods should be able to engineer similar revivals. Regular news of industria 1

160 restructuring in the early 1990s indicates that many u.s. firms have gotten the message and undertaken the difficult task of cutting costs and raising productivity to internationally competitive levels.

The experience of Kennecott and the rest of the U. S. copper industry weighs in the debate over the appropriate role of government in promoting U.S. competitiveness. Distressed by the decline in u.s. copper production, rising copper imports, and the loss of thousands of u.s. jobs during the first half of the 1980s, Utah Senator Orrin Hatch (R) called for an in-depth study of the situation. After Kennecott was forced to shut down the Utah Copper operations in 1985, Hatch and the other members of the Congressional Board that oversees the Office of Technology Assessment (OTA) requested OTA to " •.. address the entire spectrum of the (copper] industry .•• [to] provide recommendations which can be implemented by both government and industry entities in revitalizing our domestic copper industry."43

The OTA study was initiated near the bottom of the copper industry slump and took about three years to complete. The report, issued by OTA in September 1988, explained what had happened in the meantime: "During the course of OTA's analysis, the U.S. copper industry began its phenomenal recovery from the ravages of 1981- 84." The OTA document described the conditions facing the domestic and foreign copper producers in the early 1980s--the global recession in copper, historic low copper prices, oversupply of copper, and massive U.S. copper facility shutdowns. It traced the steps taken by the domestic copper industry to renew itself. And it concluded that "the revitalized u.s. copper industry can compete in all but the worst foreseeable markets."

In the remarkable recovery of Kennecott and other domestic copper producers, there is a lesson for the nation and for other

161 industries beleaguered by foreign competition. OTA Director, John H. Gibbons, wrote into the Foreword of the September 1988 report: "Notably, the industry's turnaround came entirely from its own efforts; the Federal government rendered little assistance."

In the absence of U.S. government support, the domestic copper industry faced its problems, made difficult decisions, and took the painful steps that eventually produced a vigorous turnaround. Difficult times brought new leaders, like Frank Joklik, to the fore. The desperate plight of the domestic copper industry gave them compelling grounds to argue for change. They were able to convert the difficult situation into a lever that overturned longstanding complacency and lifted the industry out of its slump. The story of the copper industry's transformation, revitalization, and recovery during the 198Qs is a telling example of how the marketplace, left to its own devices, can effectively shape an efficient, competitive national economy.

162 NOTES

1. Large scale open-pit m1n1ng of the Ray orebody began in 1949, and block caving operations were completely phased-out by 1955. 2. Thomas R. Navin; Copper Mining & Management; University of Arizona Press, Tucson, AZ (1978); p. 262.

3. The proceeds from the Peabody sale had a face value of $1.2 billion but the interest rates paid by the notes were significantly lower than the going rate of interest at the time. Kennecott's evaluation of the transaction, estimated the present value of the proceeds at only $970 million. 4. The official Kennecott position was articulated in a special four page pamphlet: "Plans and Goals for the Future, Report to the Stockholders on the Views of Management and the Board of Directors"; Kennecott; April 1978. 5. Thomas R. Navin , Copper Mining & Management ; University of Arizona Press, Tucson, AZ (1978); p. 195. 6. E.H. Belanger, V.P. Finance, Kennecott Copper Corp.; presentation to the Kennecott Executive Management Committee; Port Chester, N.Y.; July 26-27, 1979. 7. G. F. Joklik; "I

8. G. F. Joklik; "Summary, 1980-1985 Strategic Plan"; presentation to Kennecott Copper Corp. Executive Management Committee; White Plains, N.Y.; April 21, 1980. 9. G. F. Joklik; "Operating Cost Reduction"; letter to the general managers--R.W. 1nghart, Nevada Mines; H.A. Ensign, Baltimore Refinery; W.H . Jensen, Utah Copper; D.A. Kinneberg, Chino; H.A. Kruger, ozark Lead; C.K. Vance, Ray; March 18, 1990.

10. G. F. Joklik; "Operating Cost Reduction"; letter to the general managers; May 12, 1980.

11. G. F. Joklik, et. al.; "I

163 12. J. E. Petersen; letter to G. F. Joklik; June 30, 1980.

13. G. F. Joklik; "Cost Reduction"; presentation to Kennecott Executive Management Committee; Stamford, Connecticut; August 12, 1980. 14. G. F. Joklik; "KMC Operations--Cost Reduction"; letter to G. P. Bakken; February 25, 1981.

15. G. F. Joklik; "Cost Reduction - 1982"; letter to selected KMC vice presidents, et. al.; January 22, 1982.

16. G. F. Joklik; letter to the general managers of KMC's six operating units; February 22, 1982.

17. I. G. Pickering; "Cost Reductions"; letter to G. F. Joklik; March 18, 1982.

18. G. F. Joklik; presentations to the KMC Operating Committee; December 20, 1982, January 26, 1983, and March 23, 1983.

19. G. F. Joklik; presentation to Operating Committee; August 24, 1983.

20. G. F. Joklik; presentation to Operating Committee; September 21, 1983; and Operating Plan presentation; November 2, 1983.

21. G. F. Joklik; Operating Committee presentation; January 26, 1983; and Budget Review Committee presentation; April 13, 1983.

22. G. F. Joklik; presentation to Operating Committee; January 25, 1984. 23. See 12 usc Section 3908. 24. An ongoing forum for government-to-government talks on copper issues did later come into being, although in a form more formal, bureaucratic, and structured than Kennecott had originally envisioned. In January 1992, the major copper-producing and consuming countries of the world, including the United States, agreed in Geneva to establish an International Copper Study Group. The Group was established to promote better understanding of what is happening in the international copper market by increasing the availability of information on copper production, consumption, stocks, and end uses.

25. See, for example, "The Death of Mining"; Business Week; Dec. 17, 1984.

26. J. R. Cool; "The 1980 Kennecott Labor Settlement"; presentation to the 1981 Romney Spring Meeting.

164 27. G. F. Joklik; presentation at Sohio Management Meeting; Scottsdale, AZ; February 7-10, 1982.

28. G. F. Joklik; "Meeting with Labor Unions, Los Angeles, March 11, 1982"; letter toT. D. Barrow; March 12, 1982.

29. Robert H. Woody; Salt Lake Tribune; December 12, 1982.

30. J. R. Cool; "1982 Strategy with Copper Unions"; confidential memorandum to G. F. Joklik; March 8, 1982.

31. J. R. Cool; "Copper Bargaining"; presentation at Romney Spring Meeting; March 26, 1984.

32. Thomas D. Barrow; presentation to Security Analysts; February 7-10, 1979.

33. G. F. Joklik; Resource Plan Presentation; July 1979.

34. G. F. Joklik; "Chino Modernization: Mine/Concentrator Project"; presentation to the Kennecott Board of Directors; Nov 16, 1979.

35. G. F. Joklik; "Strategy Presentation to Sohio Board of Directors"; Salt Lake City; March 21, 1984. 36. D. J. Atton; letter to A. w. Whitehouse, T. D. Barrow, J. R. Miller, G. R. Brown, and A. H. Ford; June 25, 1982.

37. G. F. Joklik; "Business Group Review"; presentation to the Sohio Board of Directors; Feb 27, 1985.

38. E. A. Goldstein; "Bingham Canyon Investment Alternatives and Sohio Options for the Copper Business"; Sohio Corporate Planning Review Note; Dec 12, 1984.

39. "Flambeau Mining Co. to Commence Copper/Gold Production at Ladysmith in North Central Wisconsin after 25 Years": Skillings Mining Review; Aug 1, 1992; p 4.

4 0. G. F. Jokl ik; "Investment in Mexican Mining: a Kennecott Perspective"; presented to the Mexican Mining Association in Acapulco, Mexico; October 17, 1991.

41. Productivity through the mining and milling stages of production is expressed in terms of the contained copper ultimately recovered at the refining stage. Note: the productivity values shown in Figure 45 and Figure 46 are not directly comparable. The Kennecott numbers include manpower from mining through refining, but the u.s. industry numbers only apply to the mining and milling stages.

165 I 11111/lll/llllliiliiliilllll/llll/l/l I~ 3 1114 03543 5819 ~II'

42. Porter,K.E. and Paul R. Thomas; "International Competitiveness of U.S. Copper Production, 1981-87"; in Mineral Issues--1989, Competitiveness and Regulation; U.S. Bureau of Mines; March 1989.

4 3 . u.s. congress, Off ice of Technology Assessment; Copper: Technology and Competitiveness; OTA-E-367; Washington, DC: u.s Government Printing Office, September 1988; p.6.

166