Gold has been hit hard over the last few months with the price falling to its lowest price point in more than two years. We’ve seen gold prices partially recover since then, but still sit below the $1,500 per ounce. Gold miners are now faced with squeezed margins and an uncertain outlook.
Current market conditions and commodity prices are leading to cost reduction efforts, delays in discretionary capital expenditures and exploration projects and active cash management within the sector.
The key question mining companies need to address right now is how to balance between cost reduction activities and maintaining enterprise value, long term strategy and competitive advantage. Companies must act now to protect margins and to reduce exposure to current and future cost increases. This will allow them to ride out the downturn and be profitable in the current market conditions while benefiting from future commodity price booms.
According to EY’s report, Business risks facing mining and metals 2013-2014, margin protection and productivity improvement was the second biggest business risk facing miners — jumping from fourth to second in just a year. Given the decade of higher prices, this risk was not even on the radar of mining and metals companies as little as six years ago. But today, they need to protect margins and reduce exposure to current and future cost increases. Focusing on internal cost reduction initiatives is priority for many but a number of companies are also considering divestment and other transaction opportunities to increase their access to capital.
For example, the plunge in gold prices has forced high-cost producers or those with single assets to seek partners to mitigate a potential cash crunch. On the other end of the spectrum, miners under pressure to rein in capital spending are considering spin off of assets rather than chasing acquisitions. Many miners are looking to turn assets that do not fit their portfolio into cash, and then using that cash to fund other developments.
At the end of the day it’s about reducing cost while at the same time generating cash. Companies should consider the following initiatives to weather ongoing uncertainty:
Reducing operating costs
- Review investments that will drive operational improvements
- Prioritize operational improvements that address high cost operations
- Focus on high grade assets
- Prioritize improvements within the supply chain
- Look at strategic sourcing and consolidate spending
- Cancel or reduce supplier costs
- Look at potential partners to share in infrastructure investments
- Consider business process improvement
- Evaluate alternate low-cost delivery models for back-office functions
Active cash management / cash generation
- Optimize inventory
- Increase working capital management
- Implement debt reduction strategies
- Consider divestments of non-strategic or non-core assets
Understanding what cost reductions need to be focused on, how quickly they can be implemented, what the payback period is, and how long they can be sustained are all part of a well-managed framework that can respond to changing conditions. Companies that address the current market conditions and drop in gold prices by adopting a margin protection and productivity improvement program will be best positioned to survive in the near term, and better placed to thrive when the price of gold begins to rise again, as it inevitably will.