EY Cash in the ground

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Unlocking cash in the mining sector

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Against a backdrop of price and currency volatility, the mining sector’s overall cash-to-cash (C2C) position has improved by 2%. However, these results were not sufficient to cancel out the 3% deterioration in C2C over the previous two years.

It remains unclear how much of the improvement is due to changes in commodity prices or changes in currency. A comparison of the results between and within commodity groups shows they were far from uniform - only three out of ten commodity groups (and 46% of companies analyzed) reported a lower C2C.

A clear shift in the sector

Miners have increased their focus on freeing up cash to meet commitments made to shareholders around share buybacks and increased dividend policies. This has forced a far greater focus on cash generation and improving working capital management.  For example, we saw Rio Tinto announce they had released $1.1b of cash during 2014 through reduced inventory levels and improved management of receivables.

Improving working capital management

The improved working capital performance has been driven by improved performance in both receivables and payables (DSO down 5% and DPO up 2%), partly offset by a poor showing in inventory (DIO up 3%). The inventory and payables differential (DIO – DPO) was up marginally at 11 days.

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The average C2C for the mining sector

EY - Unlocking cash in the mining sector

The average C2C for the mining sector was 38 days (on a sales-weighted basis). Companies within each commodity group also show wide variations in working capital performance:

  • Iron ore displays the lowest level (C2C of 23 days)
  • Platinum shows the highest level (C2C of 82 days)
  • Copper, gold, aluminium and zinc stand in the middle (ranging from C2C of 39 to 52 days)

Going forward, we expect the working capital results to reveal even wider divergences in performance between commodity groups and individual companies based on the performance of the respective commodity prices.

Reductions in capex programs (with some choosing to be more selective) will be another contributory factor, especially with miners taking a much more forensic look at sustenance capital, and the resulting impact in inventory spares.

EY - WC metrics by commodities group

Looking forward to 2016

We still see a number of critical challenges that many of the miners will need to address to release cash from working capital, including:

  • Cultural change such that all employees who can influence working capital understand what they can do to better manage cash across inventory, receivables and payables
  • Reconfigure supply chains to better control and manage the purchase and deployment of inventory spares
  • Better insights from IT systems on the operational drivers of working capital, not just the financial outcomes

Miners that have taken an enterprise-led approach, combined with a bottom-up change management program focused on the front line, have released cash flows totaling tens of billions of US dollars. Given that the aggregate levels of working capital in the sector amount to over US$200b, there remains plenty of opportunity to release further cash.

1 “Miners slim down on working capital,” Sydney Morning Herald, 23 February 2015.

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