Working capital key to unlocking ‘cash’ for mining companies

Friday 18 December 2015

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A sharper focus on improving working capital performance across the mining sector has had mixed results so far, according to a new EY report.

Make working capital work for you. Unlocking ‘cash’ in the mining sector, analyses the working capital performance of 80 of the largest mining companies globally, and is a follow-up to EY’s report, Cash in the ground: working capital management in the mining sector.

The latest analysis shows a small improvement in the sector-wide average working capital performance from 2013 to 2014. However, the sector average masks significant differences between commodities and companies within commodity groupings.

The findings show cash-to-cash (a measure of the cash conversion cycle) in the mining sector in 2014 was 38 days, down from 39 days in 2013 – a reduction of just one day. On a commodity basis, the average cash-to-cash measure was lowest for iron ore companies in 2014 at 23 days and highest for platinum at 82 days. Copper, gold, aluminum and zinc were in the middle range from 39 days to 52 days.

Only three out of the ten commodity groups analysed, and 46% of the companies, reported a lower cash-to-cash position in 2014 compared to 2013.

Wayne Boulton, report co-author and EY Oceania Mining & Metals Advisory Leader, says:

“Our analysis reveals wide variations between companies within each commodity group, showing that while some miners have been very successful in freeing up extra cash through working capital, others haven’t made anywhere near the same gains yet. Mining companies who have focused on working capital have typically seen reductions of 30% or more. For larger mining companies this can mean reclaiming hundreds of millions of dollars of capital back into the business.

“While innate operational factors and differences in the complexity of processes account for some differences between commodities, this shows some companies are effectively sitting on cash because of less effective working capital management.”

Supply chain a rich vein for working capital improvement

Key areas where working capital has been released include: supplier payment terms; reconfiguring logistics and supply chains; changing maintenance strategies; and reviewing customer trade terms.

Boulton says: “Processes and systems across supply chain management, particularly in regard to spare parts inventories, is the single biggest area for gains to be made, but also the most difficult.

“Supply chain management processes have not changed fast enough, with some still seemingly working on a ‘production-at-any-cost’ basis that companies operated on during the peak of the mining boom. For example, we have seen remote mine sites with significant levels of inventory spares, all bought in the past 12 months. If production slows, those spares can be stuck in remote locations, hard to sell and expensive to move.

“During the boom, when scarcity and demand meant a single truck tire was worth more than a high-end sports car and miners simply couldn’t afford delays, it made sense to have a pile of spare truck tires. It doesn’t make sense today.”

Cultural change needed

Boulton expects more divergence in the working capital performance between commodities and individual companies to be evident in the next year as the differences in commodity price changes, reductions in capex programs and the full impact of working capital improvement programs already undertaken come through.

Boulton says: “Even those who have achieved significant improvements still face a number of critical challenges if they want to squeeze more out of working capital. The next wave of improvements will likely come from cultural change and data analysis.

“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 as this continues to be an opportunity to deliver more. And few, if any, mining companies are using the vast amounts of data they have from their IT systems to gain better insights on the operational drivers of working capital.”

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Notes to Editors

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About the report

EY’s Make working capital work for you. Unlocking ‘cash’ in the mining sector report is based on a review of the working capital performance of 80 of the largest mining companies globally, covering 10 different minerals. The insights are derived from an analysis of publicly available data.