Miners leaving cash in the ground with poor working capital
Monday 9th February 2015 - A new EY report shows that mining companies are missing out on “easy money” because of poor working capital management.
Released today, Cash in the ground: working capital management in the mining sector is an analysis of the working capital performance of 80 of the largest mining companies globally.
The report shows that despite improving working capital from 2007 to 2011, working capital management has declined since 2011.
EY Global Mining & Metals Advisory Leader Paul Mitchell says:
“As a sector, the mining industry performs fairly poorly in managing working capital — they are leaving ‘cash in the ground’. Most mining companies could probably reduce working capital 25%-50% inside 18 months if they tried.”
Mitchell says waning profits, dividend commitments and ongoing pressure for share buybacks mean companies now have more incentive to reclaim “lost capital.”
“In a time of declining margins, a lower draw on working capital can be the competitive difference between success and failure,” says Mitchell.
Analysis in the report shows cash-to-cash (a measure of the cash conversion cycle) in the mining sector in 2013 was 39 days — up from 38 days in 2011 and well short of the 29 days in the oil and gas sector in 2013.
When assessed by commodity group, only three — aluminum, zinc and copper companies — improved working capital performance between 2011 and 2013.
Mitchell says: “For each commodity there have been major variations in both the level and degree of change in cash-to-cash between individual companies — that has to do with structural and operational differences and factors like pricing practices, exposure to commodity trading and volatility in mineral prices.”
In 2013, cash-to-cash for iron ore and for coal companies were both 25 days, while platinum and nickel posted the worst cash-to-cash results of more than 95 days. Those in between included aluminium (37 days), gold (48 days) and copper (51 days).
Mitchell says: “While innate operational factors and differences in the complexity of processes for some commodities consume more working capital, companies would benefit from comparing their own performance to that of peers and other commodities.”
“In many ways this, along with low productivity, is a legacy of the super-cycle ‘production at any cost’ attitude that prevailed for a number of years.”
Mitchell says improving processes and changing the culture from the CEO and CFO down are the two single biggest factors to improve working capital.
“Using measures that focus on working capital performance will prioritise the wide range of initiatives that will improve that performance and change behaviors accordingly,” he says.
“We expect the 2014 results to show some companies are already embracing substantial and sustainable operational and structural changes to improving working capital.”
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