How can miners overcome the spend and slash internal investment cycle?
The mining industry is capital intensive, investment heavy, and delivers return on investment through decades-long life-of-mine plans. Given this, one would expect stability and predictability, but the opposite is true – miners often lurch from boom and spend, to slash and save, while mine outputs often disappoint against plans and guidance.
The fortunes of mining and mineral companies inevitably largely follow the commodity price cycle. This is a long-established reality, yet between executives and their shareholders, there seems to be a perpetual expectation of over-performance, which inevitably drives a short-term focus and becomes the very opposite of a good mining strategy.
There are, as always, companies in the sector that take the volatile nature of such changes in their stride, but in my experience, there are as many who seem to act as though the downturn is a complete surprise and react in the short term with a narrow focus.
The impact of project disruptions
When things are good, mining companies invest in technology, better practices, and equipment. However, the challenge is that given the complex nature of technology and ore bodies, these investments require a long-term view. Yet often we find a project stopped, or critical maintenance postponed, as executives bow to the needs of the market to deliver profit performance.
For instance, a large mining company starting a major transformation project to rebuild a refining process, or deliver a mechanical optimization, might easily approve a budget of £100 million to start the initiative, only to stop the project in a downturn, when its very nature is to sustain the business through the cycle. Then the same project is re-awakened when the cycle improves – but now they have spent more (maybe £150,000) and taken longer, while delaying the benefits and often putting critical processes at risk.
What we must remember is that given the sheer scale of mining volume and revenue, marginal improvements have enormous impacts. A cost improvement of one-to-three percent adds a lot of additional benefit – but it must be seen through to completion – and not linked to the price margin, which will fluctuate wildly.
This is not just limited to cost. Because of the way commodity markets work, many miners still work with a ‘mine it and they will buy it’ ethos. This is no longer the case, and there are some real examples where clever players have got closer to customers and identified ways of adding value through ore mix, service, or stability of supply. Again, this might only add one or two percent to their prices, but this is a benefit against competition regardless of the actual price, and also locks in value-adding supply agreements when demand is scarce.
Managing expectations
It is worth adding that all of this highlights another problem mining companies must navigate – investors! All investors want the management of businesses they invest in to deliver above-average performance, causing many mining companies to have financial forecasts for investors that are often unrealistic and in contrast to their internal mining forecasts!
Investors are happy when the commodity price is high, with the profits masking any inefficiencies within the business and problems in the mines. When the price
falls, the veil is lifted, bringing a conflict between decisions to deliver profits or focus on long-term operational reliability.
This is not just a performance risk but can translate to a very real impact on safety and effective mine planning – especially as over-production demands are driven all the way to the proverbial coalface, the place you most want stable and safe operations.
The key as always is patience and confidence. Good miners understand the life of their mine and manage this for continuous and consistent benefit, while investing in improvements as technology and application deliver new and improved methods of mining. They protect these plans through the cycle, both in terms of money and culture.
Key takeaways to achieve continuous value
This sounds altruistic, but in our experience, there are some practical steps miners can take to deliver continuous value, through the boom and the bust of the commodity cycle. These include:
- Separating the incremental benefit of critical projects from the overall performance of the business. This is best done by measuring competitive advantage as a driver of ROI, compared to overall profitability being linked to commodity pricing.
- Creating a culture of consistent, reliable delivery from their operations. Analysts and investors can translate predictable mine output into value through the cycle – but overpromising output to compensate for poor margins leads to trouble.
- Look for value-adding incremental margin opportunities in price and service, even if the percentages are small or the realization model appears complex. The reality is that small changes translate to big gains.
- Move from annual planning to rolling planning and use a process like Integrated Business Planning to provide leadership with a continuous transparent reality, as well as visibility of the impact of critical initiatives to support performance.
Monte Maritz is a partner at business transformation specialists, Oliver Wight. Based in South Africa, Monte works with senior leadership teams at local, regional, and global companies to implement change programs. Oliver Wight is a world leader in IBP consulting (Integrated Business Planning). With a focus on transferring knowledge to clients through coaching, mentoring, and workshops, the organization’s approach differs from other consultancy firms.