As the mining industry emerges from the Global Financial Crisis (GFC), many companies are already outlining plans for moderate to aggressive growth over the short to medium term. While production volumes will need to grow to meet an expected upswing in commodities demand, one of the largest opportunities for shareholder value creation is operating and capital cost reduction.
While all mining companies pursued cost reduction initiatives during the GFC, it is generally recognized that the majority of these strategies were reactionary and did not address the root cause: the inflated cost structures of existing production assets.
Specifically, we have found that most mining sector cost reduction attempts fail as a result of a lack of a strong foundation, continually dipping into the same well, failing to address cost management and control, and an inability to measure results.
To be successful, cost reduction and operational improvement efforts must focus on waste and outcomes rather than inputs. The most successful sustainable cost reduction initiatives in the mining sector have also had a significant impact on top-line revenues. In effect, mine site "cost reduction" is really mine site "margin improvement".
A cyclical approach to cost reduction leads to far more sustainable results than the traditional top-down, slash and burn and boil the ocean approaches. Key design principals of successful cyclical cost reduction programs include:
The virtuous cycle of sustainable cost reduction is a process that typically takes several years to embed and requires the day-to-day mentality of all staff to be firmly focused on continuous improvement and cost consciousness … Mining executives need to take immediate actions to move their companies towards the goal of cost efficient operations as the industry re-emerges from the economic downturn. [They must] establish an environment for cost reduction; agree on cost ownership; challenge the financial plan; look for contract leakage; gauge performance by measuring results; rigorously control spending; and stabilize cost controls.
In the mining industry, spending capital effectively is a critical lever for improving shareholder returns. It is imperative that the business need and detailed design of mining projects be rigorously challenged early in the project development life cycle, particularly during the scoping, pre-feasibility and feasibility project phases.
Asset intensive industries such as mining have three levers at their disposal to effectively manager their capital spending:
From our experience there is almost always significant potential for improvement in the capital productivity of mining investment projects through the optimization of these levers. We have observed that this value is most likely to be realized when capital projects are comprehensively reviewed and challenged in a systematic manner by multi-disciplinary teams with fresh eyes, a sound commercial grounding and a strong belief that incremental value can be extracted from the proposed solution.
As demand side fundamentals take hold, it is expected that capital cost pressures will again become one of the key impediments to maximizing returns from growth projects. Further, unlike the previous upward cycle it is critical that mining companies better insulate themselves from potential market downturns by reducing the capital intensity of their proposed investments. A rigorous focus on business needs, project scope and detailed process and engineering designs during the early phases of these projects is the key to investment flexibility and improving the productivity of capital and shareholder returns.
"Sustainable Cost Reduction in the Mining Sector" is available for reading or download at PwC.com/en_CA/ca/mining/publications/cost-reduction-mining-sector-2010-11-30-en.pdf.