Miners need to focus on balance sheets to survive, EY says

Mining companies need to focus on strengthening their balance sheets and generating cash if they are to survive current market instability, EY states in its latest report.

In its latest report, Navigating Volatility: Do you change your business or the way your business works, EY predicts the current period of market instability to remain for some time, stating “the longer-term economic outlook is volatile, leading to the possibility of substantial revisions to long-term metal price forecasts and making it hard for mining and metals companies to plan for the future”.

The study lists six key areas resources companies can focus upon to manage this current period of instability, mainly cost reduction; working capital; productivity; capital effectiveness; portfolio strategy; and financing.

Commenting on the report, EY Global Mining & Metals advisory leader Paul Mitchell stated, “Volatility will be a challenge for the mining and metals sector for the foreseeable future and BREXIT has brought additional uncertainty to this, with questions on how it may impact an already slow growth global economy. Locally, the Australian Federal election has potentially provided further uncertainty.”

“Our analysis is clear that mining companies need a different mindset in this environment if they want to maintain a strong balance sheet and develop plans for long-term profitability,” Mitchell said.

“Too many companies have viewed cost reduction measures and productivity initiatives as a once-off, when what they need to be doing is embedding continuous improvement in their DNA.”

He called on miners to reconfigure the way they approach their existing productivity, and turn to other industries to learn from their innovations.

This was echoed by Dassault Systemes Asia Pacific South region leader for Natural Resources business transformation, Adrian Hale.

“By looking to other industries, the mining industry can incorporate new applications into existing technology for improved productivity. More advanced simulation and 3D technology, as well as big data and the interoperability of systems, must be used at each stage of the mining cycle to improve productivity and output levels. Bold moves are needed to propel the industry forward,” he said.

“To understand where mining can look for innovation, it is useful to examine what has led to successful transformations in other industries; take, for example, Toyota – it became the world’s largest and most successful producer of automobiles by becoming an agile business – one that rapidly adjusts itself in light of changing demand and economic conditions.”

For a long time industry heads have said mining could learn more about productivity and efficiency by studying the manufacturing industry.

Unsurprisingly, BHP chairman Jac Nasser – a former president of automotive manufacturer Ford – advocates mining study the manufacturing industry for efficiency measures.

“Although there are as many differences between the automotive and mining sectors as there are similarities, forward thinking mining can likely make unanticipated productivity gains by taking lessons from this example – including reforming industrial relations, co-opting suppliers into the cost equation in an effort to extract efficiency, and shifting from traditional command-and-control hierarchies into a world of matrix or networked structures where human ingenuity is not overly hampered by rigid processes,” Deloitte said.

Even Rio Tinto’s former head of technology and innovation Greg Lilleyman said, “There may well be technologies from manufacturing, food processing, oil and gas or aerospace which are ripe for application [in the mining industry].”

Mitchell went on to say miners have remiss in not using these other industries as an example for improving their own productivity.

“Mining companies have generally been too slow to consider how they can apply best practice processes from other sectors. Consumer products companies have historically had lower margins so capital and cost efficiency has always been a focus – there are examples of some companies who have embedded process improvements that have enabled year-on-year savings of US$1.2b over the past three years,” he said.

“Miners can no longer rely on conventional wisdom and expertise from within the sector; they must cast the net wider and seek outsiders’ experience to get that next productivity and efficiency boost.”

The EY report also states the existing supply chain is ripe for innovation, and an area where both cost and productivity gains can be made.

The NIEIR’s executive director, Dr Peter Brain, has previously told Australian Mining of the importance of supply chain control, and the repositioning of this segment of the sector.

“What the leaders will do is invest heavily in new technology to integrate the front, middle and back office; much more remote control from remote operations, and looking across the entire supply chain, integrating not just simply pit-to-port, but pit-to-customer.”

Mitchell added that the current implementation of Big Data across the industry will also drive change.

 

 

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