Cost control in the South African mining industry
Our study, ‘Cost control and margin protection in the South African mining and metals industry,’ ranks the top cost control and margin protection priorities for South African mining and metals companies. Since commodity prices have cooled off there is significant pressure on margins and the sustainability of higher cost mining operations.
There are many, often complex, reasons for rampant cost increases. These issues are not unique to the South African mining industry, but they do reflect the maturity of the industry.
The study is based on research and interviews conducted by EY between May 2013 and August 2013 with senior executives from a number of mining and metals companies operating in South Africa. Executives were interviewed and asked to prioritise their top cost control and margin protection priorities.
The top ten cost control and margin protection priorities identified are:
- Cost of labour and labour productivity – During the past year, mining companies were faced with difficult operating environments and significant declines in their enterprise values.
- Escalating electricity and fuel prices – Historically, one of South Africa’s key competitive advantages was the availability of sufficient low-cost electricity.
- Managing transportation and logistical costs – Accessibility and availability of transportation and logistical infrastructure remain a significant challenge for the South African mining sector despite firm commitments from the South African Government to allocate resources to capital investment programs aimed at the transformation of the economy.
- Effective management of capital – Across the mining industry there is increased pressure to deliver value to shareholders in both the short and long-term. This means that companies not only have to ensure that they are generating optimal value from their current projects, but also that they invest in future projects that will create sustainable value for their investors.
- Supply chain and procurement practices – One of the clear impacts of the long-running commodities boom has been that resource deposits long classified as marginal or uneconomical have either become viable or have remained viable for longer.
- Commodity price and currency volatility – South Africa continues to feel the effects of the global economic market, evidenced in the recent fall in the rand against the US dollar, which has declined approximately 20% against the greenback since the start of 2013.
- Corporate, administrative and overhead costs – During the past few years, corporate offices have been upsized to deal with the focus on growth and expansion ambitions.
- Safety, health and environmental costs – Through of a combination of legislation, company policies and commitments to a safe and environmentally friendly working environment, safety, health and environment (SHE) is being taken more seriously than ever before.
- Cost of being a socially responsible corporate citizen – Being a socially responsible corporate citizen means taking responsibility for your impact on the environment, employees and your host community.
- Exploring, discovering and replacing reserves and resources – Given the current lower metal prices, skeptical investors and the uncertainty of sufficient returns, investor interest in exploration projects has decreased.
The report discusses these priorities and approaches to controlling costs and protecting or improving margins.