Midwest Copper Mining During Volatile Times

Copper production continues to see strong growth, confirming the long-anticipated supply-side build-out that has underpinned our projection of a fundamental shift to surplus in the market. February data (the latest available) show global production up 6.0% year over year, the strongest rate of growth since mid-2005. However, London Metal Exchange (LME) prices for copper have pulled back below $7,200/metric ton. This retreat has been a bit of a surprise and appears linked to softer US housing data and reports of inventory building in China. July Chilean mine production data also showed robust year-over-year growth (U.S. Industry Quarterly Review: Manufacturing & Mining, 2018). Copper is essentially a commodity product, affected by global supply and demand.

Midwest Copper Mining (MCM) is a relatively small player in the global copper industry. MCM is located in northeastern Minnesota, in the town of Kopperstadt (which means Copper City in German). Historically, in spite of being considered small by mining company standards, MCM has been able to offer their copper at a reduced price for a variety of reasons. MCM has some of the best mining engineers in the world, educated at the many high quality engineering programs throughout Minnesota and Michigan, many of which focus on metallurgy and mining. These engineers have developed patented processes for extracting and refining copper, using specialized machinery. Also, MCM has developed, through experience, knowledge-intensive processes that are passed down from one employee to the next through tacit knowledge, that is, based on watching someone else and then practicing the process. The combination of their equipment and their experienced employees reduces both the waste and the pollution related to copper mining. Customers who can co-locate next to MCM enjoy even lower prices and overall costs, since co-location reduces inventory stockpiling, as well as delivery costs, but more importantly, allows the firms to use the copper in a more efficient manner, since it eliminates the need for a final hardening process. Many Minnesota manufacturers (such as 3M, Medtronic and St. Jude) require copper for their products, and have been willing to locate small processing facilities next to the MCM plant in Kopperstadt. MCM prides itself on meeting customer needs by producing the highest grade of copper at the lowest costs, even though it serves a fairly small market area.

The town of Kopperstadt was founded as a company mining town, typical of many of the towns in northern Minnesota, known for its high grade and plentiful supply of iron ore and other minerals. The area also boasts some of the cleanest water in the world, and is more plentiful than in many other parts of the U.S. The culture of the town is reflected in the MCM culture it has a strong ethical climate, creating family-friendly policies, and caring about the needs of all stakeholders, reflecting the culture of its surrounding community. The Kopperstadt Chamber of Commerce sponsors festivals throughout the year, celebrating the accomplishments of its businesses and population. Awards are given to the most civic-minded community groups, and to scout troops and other student groups for their contribution to environmentally-focused projects. Forty percent of the population of Kopperstadt works directly for MCM, twenty percent work for the businesses that supply equipment to MCM or for the customers of MCM, twenty percent work for non-mining businesses (grocery stores, hardware stores, etc), and twenty percent work for the local hospital or schools.

Charles Swanson, the CEO of MCM is worried about the future. Currently, demand exceeded capacity, allowing industry incumbants to enjoy fairly robust profits. International demand is increasing; Chinese demand rose nine percent last year. However, at the same time, locally based and multinational copper mining operations are increasing capacity, and starting to reduce prices and fees associated with international trade. In the previous year, for example, Zambia, one of the top copper producers in Africa, waived their value-added tax on copper exports. This allowed Zambian firms to be more price-competitive, which spurred local growth in the mining industry (Wall Street Journal, 2014). Profits were starting to erode because MCM could not reach any greater capacity or economies of scale at their only mine, in Kopperstadt. The board of directors for the publicly held MCM Corporation was pressuring Swanson to take action. Swanson knew he could raise prices to remain profitable, but that was a short term solution. He predicted that if they did not do something, in two to four years they would no longer be profitable. Swanson called in two of his key employees to brainstorm the issues; Carlos Diaz, his chief engineer, who was trained in the U.S., but had worked for the Chilean firm Codelco, which is the worlds single biggest copper producer. He also invited Mubita Banda to the meeting, who was the COO and in charge of the operation of the Kopperstadt facility. His training was in Britain, but he worked most of his professional life at the Swiss-owned Glencore facility in Zambia. As they pondered the possibilities, the three of them talked about the difficulties of expanding their operation.

Charles: Our current copper deposit can only sustain our current capacity. Increasing the capacity here in Kopperstadt would require a duplication of equipment and would drastically reduce the life of the mine.

Carlos: We could ramp up production here while looking for other copper deposits in northern Minnesota, and then gradually close this facility as other facilities come online. The new copper deposits are likely to be far enough away from Kopperstadt that we would have to create another facility, so we would have to know that the deposit was large enough to make it worth it.

Charles: Our currently co-located customers would probably not build another facility next to another mine. If we opened a mine closer to other copper customers, maybe not in Minnesota, perhaps there are other firms we could entice to co-locate. They might be willing to co-locate, based on the higher quality and lower prices we could guarantee, since we remove some of our costs when customers co-locate.

Carlos: We would have to be certain that our current quality of our copper could be matched elsewhere. The grade of copper in other deposits we have found so far cannot make use of our specialized machinery without significant modifications.

Mubita: Not to mention the time it would take to train in the operational staff. Our production people work with a mentor for six months before they can adequately operate efficiently without quality issues. They have to be operating the actual machinery they will be using in order for this to be effective.

Carlos: Speaking of quality, another issue is that in Kopperstadt, we create minimal pollution because we have tuned our equipment based on our specific water supply both the temperature and the quality of the water we can pump out of the ground here. There is no guarantee we could perform with so little pollution elsewhere.

Charles: We would have to allow a significant amount of time for the analysis of the environmental impact statement before we committed to a sizable investment.

Mubita: I am also concerned about the morale of the operations staff. As we look into all these options, people will, no doubt, get nervous about what is going to happen to them, their jobs, and their future. Since most of them are dependent on this firm for their livelihood, we have to assure them that growth elsewhere does not imply a reduction here, and we will have to use some of our staff to train in employees at a remote site, which will disrupt families.

Charles: Well, that is a fairly complete list of the issues. Now lets move on to options and come up with a recommendation.

QUESTION

Identify all factors in the general environment that could influence MCMs future, highlighting those that are particularly important, urgent or potentially impactful (that is, conduct a PESTEL analysis).

Describe how all industry factors that could influence the future of the organization, highlighting those that are particularly important, urgent or potentially impactful (that is, conduct a Five Forces analysis).