Between 2009 and 2012, mining companies increased their capital spending from $58 billion to more than $120 billion. Yet, return on capital, having peaked
in 2006 at 23 per cent, dwindled during this period, falling to less than eight per cent by 2012. This decline can be attributed to a range of factors,
including lower commodity prices, record capital spending, project cost overruns and a focus on growth. Unfortunately, the outcome is many mining companies
have been left with large writedowns, increased debt-to-equity ratios, and lowered returns.
To improve their margins, miners have embarked on numerous cost-cutting strategies, including project cancellations, reduced exploration budgets, deferred
capital expenditures and staff layoffs. These actions may be effective in the short term but they do not fix the underlying problems facing the business
Rather than relying on quick fixes, management should focus on effectively organizing their companies to reverse the decline of their margins and position
themselves to capture the inevitable uptick in future demand. Cutting costs can be much better achieved through a systematic evaluation of a company’s
business strategy, operational plan and operating environment, which are the underlying forces that determine its margins.
A good business strategy is the foundation of any profitable organization, yet it is widely overlooked in the mining industry because management is often
too focused on dealing with short-term problems. Developing an effective strategy begins with a rigorous review of a range of value drivers, such as grade
and strip ratio, as well as price, costs and productivity. All of these variables may shift slightly or radically over time.
An effective strategy will predict several scenarios, providing managers with insights on operational changes and enabling them to explore options for
achieving margin and growth goals. For example, at the simplest level, if grades are declining while all other drivers remain constant, then some variable
must be adjusted to maintain margins. It is management’s job to determine whether a variable can be tweaked to maintain margins or if a deeper examination
of the company’s operating model is in order.
Even when a company has a business strategy in place, management often falters when it comes to translating it into an operational plan. Ideally, managers
should be able to understand with a level of certainty what the company will face in the next six months. However, many operate with a six-week horizon.
For most mines this is simply not enough time to make changes to achieve margin goals.
To make accurate projections for a comprehensive operational plan, a high level of detail about financial, operational and geological data is required.
When combined with other known data, such as productivity, costs, pricing, sales contracts and budgets, mining engineers can perform situational modelling.
Through modelling, engineers can adjust a wide range of variables and simulate forecasts with a high degree of accuracy, thus gaining the necessary insight
to make informed production decisions. Unfortunately, few mining companies have accurate operational and cost data. As a result, it is impossible to
determine the factors that are causing variation, which is ultimately the most crucial element of reducing costs.
On a day-to-day basis, the operating environment is constantly impacted by numerous factors that can bog down operations managers with details and prevent
them from making solid production decisions. Processes like drilling, blasting, loading, hauling, crushing, grinding and floatation are all subject to
variation. This situation is worsened when it is combined with unreliable assets, which are the foundation of the operating environment and one of the main
sources of variation in overall production throughput.
Too often, managers make decisions without keeping the bigger picture in mind. Instead of addressing variation, companies will implement a range of
inefficient strategies such as increasing inventory through the production chain, raising capital expenditures by acquiring more assets, and relying on
costly last-minute airfreight for repairs.
Implementing asset monitoring technology is a key process that companies can put in place to control the operating environment. Predictive modelling can
reduce asset failure rates and increase reliability. Another step toward better processes is designing an effective asset life cycle. When technology is
combined with rigorous operational planning, mines can prioritize activities, which helps them minimize variation and achieve margin objectives.
To improve margins, taking the long view is not only smart but essential to the industry’s future. A mining company is a complex and unique matrix of
moving pieces. Without proper attention to every working element, it will inevitably drift off course into decline.
Thomas Struttmann is the CEO of Struttmann Consulting. He brings more than 30 years of industry experience leading projects, supporting M&A due diligence, and providing expertise on asset management and capital planning for top Fortune 500 companies.