Agility in a volatile market can change the game
The mining sector right now is a lot like a sports match. As the game unfolds, changes in mindset and the agility of the players impact the outcome of the game. Right now, mining companies are up against a few tough opponents: fluctuations in commodity prices, as well as demand. In order to face that challenge head-on and maintain a strong balance sheet, companies need to be agile and know when to change course, or change focus.
In light of this, in EY’s new report, “Navigating volatility: do you change your business or the way your business works?,” we’ve identified six things companies ought to consider to more effectively manage costs, release cash and position balance sheets for future growth.
Reduce Costs: Understanding what cost reductions need to be made and how quickly they can be developed seems obvious. The challenge is figuring out where to find ones that make a difference. Well-executed analytics can quickly identify opportunities for cost reduction, prioritize them and develop quantitative estimates of the value of cost reduction. They can also show the long-term impact of smaller cost cuts.
Find new cash: Mining companies that are focused on working capital can typically achieve savings of 30% or more. There are plenty of opportunities to release cash: processes and systems across the supply chain, particularly with regard to spare parts inventories, are the single biggest area for gains to be made. Working capital can also be released by using the supply chain as a source of finance. Further still, money can be found by reconfiguring logistics and supply chains to make them more agile. As for new areas to save, the pace of reform for procurement and innovation isn’t moving as fast as it needs to, and should be a prime target.
Increase productivity: Most of the obvious opportunities to increase productivity were likely addressed long ago. In order to take it to the next level, companies should have a long-term plan with leaders that communicate with people at every level of the organization. That can help optimize assets and ensure focus areas are driving the right actions. Once again, data analytics comes into play here. Quality information allows for effective decision-making before equipment failures and bottlenecking occurs.
Make your capital work better for business: It’s a no-brainer that you want to get as much value as you can from your assets. That begins with maintaining equipment. Consider conditioned- based maintenance rather than calendar-based, and you could realize up to 25% in savings. Additionally, focusing on completing the right projects, and doing them well, can help deliver the desired results. If you can defer a portion of capital investment into the future, it could create value for investors and reduce their capital risk exposure.
Regularly assess your portfolio strategy: Companies that actively and dynamically manage their portfolio of assets report better longer-term results than those with a buy-and-hold strategy. This is incredibly difficult in the high-volatility market that we’re currently experiencing, but it can be done. Portfolio management may include diversification, divestments, but most of all should include clear and regular communication with shareholders.
Reconsider financing options: When the markets are as volatile as they are now, balance sheet flexibility is crucial. Companies need to manage their debt levels as best they can by pushing out the maturity of debt, or considering alternatives like mergers and joint ventures. These efforts, in turn, can also provide the financial leverage needed to negotiate debt terms with lenders.
Pricing volatility will likely remain elevated in the short term. But just as an experienced athlete can change gears at a moment’s notice, mining executives have the power to increase their own agility, and stay in the game. Companies that make decisions for the long term will likely end up with more satisfied shareholders. If all else fail, stand back and look at the entire playing field – business optimization is happening in other sectors that aren’t as volatile, and can inspire those who can’t take risks with new ideas.
Bruce Sprague,is EY’s Canadian Mining & Metals Leader.