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.