Cat’s Bucyrus buyout: Two years on

Everyone knows what happens when you buy a house at the top of the market.

You sometimes bite off more than you can chew.

So what happens when you buy another mining machinery manufacturer at the top of the market?

Caterpillar found this out first hand when it acquired Bucyrus for US$8 billion in 2010, and completed it the following year as the mining boom reached its heights.

But unlike a house, integrating 1000s of workers and distributors make the task slightly more difficult – so how has Cat bedded down the Bucyrus buy following the peak of the mining boom and the abrupt downturn?

And importantly how have its Australian distributors incorporated these changes?

 

The past

The acquisition is well known.

One of the largest mergers of companies in the world.

In fact the Bucyrus acquisition is also the largest acquisition in Caterpillar's history and is larger than every other one put together.

Speaking to Australian Mining following the move in 2011, the company explained that the timing was right to make a move.

"We had been aiming to dramatically expand our product range to become 'the single source solution', and had been looking at the ways in which we could do that, but these plans had been put on hold while we all suffered from the global downturn," Tony Johnson, Caterpillar Resources Division's marketing manager, explained.

"As we came out of the global financial crisis, we were better placed than most as we had a recession plan in place, a 'trough plan'. This allowed us to survive the recession in a fairly healthy position.

"Having looked at Bucyrus before, and not seen it as a viable option then, our new relatively strengthened position in the market allowed us to make the move."

Caterpillar's Resources Group president Steve Wunning stated that "this acquisition was all about growth and new opportunities, broadening our range of surface and underground mining products.

At the time they stressed that a major part of the two companies coming together was effectively sorting out the dealer network, and who would now be selling what.

Caterpillar told Australian Mining that is has increased its focus on the distribution and dealer network.

An early way in which it sought to address this was by expanding its set network regions, growing from five 'super regions' up to 15 "to provide greater support for our dealers and to drill down on customers’ demand," Johnson explained. 

Clearly there were big plans ready to be rolled out, and effective returns pegged on the horizon.

But the short, sharp end of the mining boom put an end to all of that.

Suddenly plans that were firm looking into the future were no longer such, and the future looked very uncertain for the world's mining industry, especially Australia's.

 

Dealing with the present

So with the downturn biting and massive layoffs for companies through out mining what did Cat do?

It didn't take its eye off the ball in bringing the two companies together, and neither did its dealers.

At a recent Caterpillar event in Brisbane, held at the tail-end of AIMEX, Cat explained the current situation, how it weathered the downturn, what is has planned for the future, and how the dealers will be a part of this, with Hastings Deering providing a unique dealer perspective.

Australian dealer Hastings Deering (which is the Caterpillar dealer for Queensland, the Northern Territory, Papua New Guinea, New Caledonia and the Solomon Islands) was actually the first in the world to get the selling rights for Bucyrus equipment, with WesTrac, which supplies for NSW, Western Australia, and the ACT signing up in April last year.

The dealer for Victoria and Tasmania, William Adams, and Cavpower, which supplies South Australia are currently in the works, while the major dealer for Indonesia – PT Trakindo Utama, is expected to be on board by the end of the year.

These dealers all now have to communicate to the market that what was Bucyrus is now Caterpillar.

But according to Andrew Ransley, Caterpillar Global Mining's general manager for Asia Pacific, the brand change was the easy part, and the current major step it is going through is streamlining all the services, categorising the new multitude of parts, and providing the support have been the most challenging.

"Product support has been the most difficult part so far, 1.2 million part numbers, standardising warranties," Ransley explained.

Overall the company has increased parts by 20 per cent, and "changing all the parts numbers is an enormous task, so we have built warehouses to centralise distribution and smooth the problem".

According to Ransley they have created nine new parts centres globally, doubled the Melbourne distribution centre, and have just broke ground in Queensland for a new distribution centre to deal with the issue.

"For instance we need to cross reference 18 000 hoses for equipment to provide the levels of support that the customers expect".

And it is providing that customer support that has driven the manufacturer, with Ransley stating that "we've also had to learn a lot about draglines".

In-house training has been a major part of this learning experience, with Cat holding "Big Iron University", which is aimed at getting its staff up to date with both the new changes and the new equipment.

This learning, combined with the changing demands for more efficient machinery, has already shown through, Cat says, with new technology being developed as a result.

It is now focusing internally on more technology integration, safety innovations, and increasing the lifecycle of machines while reducing the cost and fuel consumption which has led to innovations such as fully LNG vehicles on site.

"We can even run rope shovels off generators now; it's all about trying to reduce the cycle cost for all operators."

 

On the ground

So how are the aforementioned dealers adapting to these new challenges?

Hastings Deering had a unique insight, as one of Cat's 200 dealers that cover more than 1000 locations; it leapt onto the new distribution opportunity.

Adrian Carney, Hastings' executive general manger -mining, explained "we were already one of the world's largest Caterpillar dealers, operating in 140 centres across ten countries, so for us it simply a bigger sandpit to play in with new equipment".

Since it purchased the distribution rights for the Bucyrus for US$350 million it has increased its scope of work and even put together the pink longwall shearer installed at Rio Tinto's new Kestrel North coal mine.

The business is also expanding from its heritage listed site in Archerfield, Queensland, where it employs around 500 people, and also acts as a registered training organisation, which it says helps to train an average of 100 people annually to the 'Cat Standard'.

In fact due to the size of the boom and the fairly restrictive size of the hangers Hastings has bought additional land at Williamsburg for assembly of the larger pieces of capital equipment and continual operation, as its current facility is located near residential housing which restricts operating hours.

However despite the growth, the company did accede that the levels of equipment passing through its doors are half of what they were a year ago, even with the heavy level of capital equipment being assembled and transported for BMA's Caval Ridge coal mine.

While there Australian Mining saw a number of Cat 793s being prepared for the mine, with a fleet of 14 all up expected to pass through its doors.

But it isn't just large equipment that the facility has focused on.

Hastings SOS testing centre at Archerfield is one of the highest quality in the world – this was highlighted by the fact that out of 17 high level particulate counters available in the world, this facility had four.

On a tour through the facility they explained to Australian Mining that its customers from around the country, and overseas, send their oils, fluids, coolant, diesel, hydraulic oil and the like to be monitored for minute changes in the fluids.

These minute changes, such as excessive particles, higher than average microscopic bits of metal, contaminants or chemical changes in the sample then the lab is able to advise the right course of action for the client.

"What we're trying to do is uncover what is going on in the machinery and provide predictive maintenance advice," Hastings said.

"For instance, 40 to 60 per cent of all engine failure is coolant related, so by testing what the mechanism's fluids are like we can see what is wearing and how, and are able to pick up very particular types of wear."

By regularly monitoring "we are able to build up a history of maintenance to get a better idea of what's 'normal' and to understand when failure will occur, as we have that baseline for predictive maintenance".

 

The China issue

Not all of the company's focus has been on making the two Cat and Bucyrus businesses into a streamlined entity.

In late 2011 it also paid US$887 million to get a greater footprint in China's mining industry, purchasing ERA Mining Machinery.

At the time it was a 33 per cent premium on ERA's most recent share price.

ERA itself was a coal mining equipment manufacturer specialising in hydraulic roof supports, and Cat’s takeover represented a bet mining growth in China would continue strengthen.

According to The Wall Street Journal Caterpillar had been losing market share in China, which represents nearly half of world demand for construction equipment.

In 2010 Cat had seven per cent of China’s excavator market, trailling behind rivals Komatsu and Sany, which accounted for 15 and nine per cent respectively.

Prior to the ERA acquisition Caterpillar construction equipment group president Richard Lavin said the company had “undershot” the market in China and needed to catch up.

However unlike the Bucyrus buy, this was not smooth sailing.

Earlier this year Caterpillar carried out a series of internal investigations after claims of misconduct at ERA.

The mining machinery manufacturer stated that it "has uncovered deliberate, multi-year, co-ordinated accounting misconduct concealed" at the recently acquired ERA Mining Machinery company's subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing, in China.

"Caterpillar’s investigation determined several Siwei senior managers engaged in deliberate misconduct beginning several years prior to Caterpillar’s acquisition of Siwei," it said.

It went on to stress that "the misconduct at issue commenced at Siwei well in advance of Caterpillar’s acquisition. We believe it was perpetrated without the knowledge of any Caterpillar employee who did not come over to Caterpillar as part of the Siwei acquisition".

Following the investigation Cat removed several senior managers at the company, installing its own new leadership team.

 “The actions carried out by these individuals are offensive and completely unacceptable," Caterpillar's CEO Doug Oberhelman said.

"This conduct does not represent, in any way, shape or form, the way Caterpillar does business or how we expect our employees to work, which is spelled out in Caterpillar’s Worldwide Code of Conduct.

“Once our investigation confirmed that misconduct had taken place at Siwei, we moved quickly and decisively to hold the responsible leaders directly accountable for the wrongdoing. Accountability is a critical way that we measure leaders at Caterpillar, and it is my expectation that leaders set an example and are accountable for their actions and results.”

Despite the hit of $580 million, or more than 65 per cent of the acquisition cost of ERA, Caterpillar says it has not changed its view on working in China.

This was reiterated during the Cat event, with Andrew Ransley, Caterpillar Global Mining's general manager for Asia Pacific stating that it has tried to not let the incident affect its desire for the product line.

Added to this is the fact that 70 per cent of the world's longwall business is in China "so it's smart to stay there," Ransley said.

 

Power play

But it isn't all about the capital equipment.

Much of Caterpillar's focus has been on the development of its new technology and stepping more into the remote control and automation space, not only to increase productivity on site, but also to increase safety.

Its MineStar program is one of its main focuses as it develops in the coming years.

The program itself is a five pronged system – Detect; Health; Terrain; Command; and Fleet, which interweave with one another to provide a stable footing for increased automation, efficiency, and safety on site.

Speaking at the Caterpillar presentation in Brisbane, Carl Hendricks explained that the company is already seeing MineStar "making a cultural change when implemented" and that "this is helping to drive out process waste with efficiency", a move that is direly needed for the Australian mining industry, which is one of the least productive sectors in Australia.

IBISWorld chairman Phil Ruthven has previously stated that mining "desperately needs transformation as it is one of the most inefficient industries right now". 

Ruthven explained that mining's productivity has dropped over the last ten years, and seen "a 9.8 per cent dip in productivity from 2001 through to 2011". 

However as technology changes how mining does business it will make a major impact on Australia as "there is a willingness in Australia to buy new technology" that improves productivity.

Fleet

The Fleet system was labelled the "building block" of the whole MineStar system.

"It allows users to track material and the machines in real time, and we've seen between 10 and 15 per cent productivity increases already in sites that have implemented it," Hendricks said.

The system provides total information down to the metre on machine movements, operational details such as speed, material moved per hour, the times to delivery, and overall loader performance.

By being web-based it allows for wider access to the network from the cloud, especially for offsite or non-control personnel.

Hendricks added that Cat is also looking to release the Remote Foreman Terminal (in the last quarter of this year), which provides more in depth information on the vehicles operation and even shows the distance between trucks and shovels, and can come in either a tablet or laptop form, and is built to handle the mine site.

"The RFT gives multi-vehicle performance averages over a shift, in real time, and provides the production information by hour/material/machine and can also show for tonnage at the operator's current performance by comparing it to their previous hour.

"Importantly, there are no communication problems with non-Caterpillar gear," he added.

Detect

Detect is one of the most important aspects of the system as a whole, as proximity detection and collision avoidance becomes more crucial on site.

It provides surface object detection and proximity, tracks personnel near equipment such as longwall machinery, and most importantly it also deals with driver fatigue management.

In regards to object detection it utilises multiple cameras to detect and register movement around trucks.

Most large vehicles have eight cameras, and provide the driver with a greater awareness of what is happening around their vehicle, as 80 to 90 per cent of fatal accidents involving mining trucks occurred while at low speed or stationary.

For underground operations it uses locator tags on personnel, so that if tagged personnel get too near equipment then longwall machinery will automatically halt operation.

Cat has also partnered with Seeing Machines to provide non-tethered fatigue management systems which monitor drivers' eye movement and head direction in real time to prevent microsleeps or distraction events.

In May this year the company signed a massive strategic agreement with Caterpillar to roll out the technology, known as the Driver State System (DSS).

At the time Cat said "the alliance with Seeing Machines is a natural progression of Caterpillar Global Mining's work to mitigate fatigue issues in mining activities".

It is reportedly working on 20 mine sites across 1500 vehicles.

During the Caterpillar presentation in Brisbane Cat demonstrated the technology to Australian Mining, explaining that it uses a dash mounted camera to track the driver's eye and facial movement and head positioning to not only track drowsiness and microsleeps but also to ensure they remain focused on driving and aren't distracted during operation.

It uses in cabin mitigation techniques "such as an audio alert and seat vibration, which would wake the dead," they told Australian Mining.

The information gathered from the real time monitoring can then be extrapolated into data sets to provide a greater understanding and analysis of fatigue issues on mine sites so that knowing how it is happening "mines can help to engineering out fatigue in the industry".

Terrain

Terrain is the most straight-forward of all the Cat MineStar programs.

This aspects focuses predominantly on machine control and guidance systems, particularly for drills, and is "the leading guidance system in the market," according to Hendricks.

He explained that where it has been implemented the operators have seen an increase in productivity of between 20 and 30 per cent.

Cat's David Jensen explained that it uses a high precision GPS, particularly for drilling systems and also provides loading guidance for vehicles’ optimal levels and has a pre-set under- and over-load indicator for different makes of machinery.

"It really is the core for a lot of the products for surface mining," Jensen added.

Health

In regards to ensuring equipment keeps rolling, Health is the most important section of the system.

It provides real time machine health, using information from more than 200 sensors in VIMS, and gives its operators advanced condition monitoring of their equipment.

Cat said that it helps miners "move to a more predictive machine maintenance and monitoring model".

It is also proposing a remote support centre of excellence in Brisbane to help with further monitoring.

Command

Cat's Command system is what we know as the fully autonomous or remote control truck.

It says the driving factor was safety, particularly in underground mines, by removing the operator from the machine.

By setting up electronic barriers it keeps the vehicle within a known certain area, and shuts it down if the remote control operator moves it out of its area of mining.

This is only available for hard rock LHD operations at the moment although Cat is working on a separate teleremote system for underground longwall miners.

On trucks it uses a combination of cameras, internal networks to keep them moving as it already seen in the Pilbara.

There are already eight mines using the system for underground operations in Australia, while in Indonesia it is helping to pull workers out of the underground Freeport Grasberg mine, and bringing them to the surface.

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