Mining companies must act to better manage volatility: EY report

Thursday, 7 July 2016

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  • BREXIT adds uncertainty to already volatile sector
  • Miners should learn from other sectors on business optimisation

Mining companies must move faster to generate cash and strengthen their balance sheets if they are to successfully navigate ongoing volatility, says EY Global Mining & Metals Advisory Leader Paul Mitchell.

Mitchell’s comments follow the release of EY’s latest report, Navigating volatility: do you change your business or the way your business works?, which identifies six key areas mining and metals companies should focus on to strengthen their business and manage ongoing volatility – cost reduction, working capital, productivity, capital effectiveness, portfolio strategy, and financing.

“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,” says Mitchell.

“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.

“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.”

Mitchell says mining companies need to challenge themselves on best practice in order to find the next 10-20% of productivity savings, and they must learn from other sectors, particularly manufacturing, airlines and industrial products.

“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 says.

“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.”

Despite some improvements across the sector, the report notes that working capital is another area that remains ripe for improvement, with aggregate levels of working capital in the sector of more than US$200b. It points to processes and systems across the supply chain as the biggest area for miners to make gains.

Releasing cash from working capital will require cultural change and data analytics. Both areas also have a critical role to play in improving productivity – particularly when obvious opportunities across operations have already been addressed.

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Notes to Editors

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