In a climate of volatile commodity prices and shifting demand fundamentals, mining companies are entering a period of structural change. To rectify cost overruns, improve capital efficiency and rebuild investor relationships, companies need to sharpen their focus on productivity, sustainable cost management and enhanced shareholder value. Phil Hopwood, Deloitte Global Mining Leader
The Gloves are off
Mining companies are no strangers to volatility, but this past year delivered a string of serious blows. As China puts the brakes on its ultra-high growth rates, key commodities such as iron ore and coal threaten to tip into over-supply. Despite weaker commodity prices, costs continue to escalate and many governments are still demanding a growing piece of the pie. As a result, share prices, revenues and profits are falling, and debt levels are rising, with gold miners particularly devastated.
In response to pummelling, mining companies are re-committing to cost efficiency in more obvious and vocal ways. This is crucial. Unfortunately, it’s not enough. Shareholder activism is on the rise. Boards are bringing in new management, with several major companies already seeing CEO transitions. Communities are mounting protests that, in some cases, are resulting in project delays and halts. Regulators are enforcing more stringent legislative compliance. The industry has even been subject to investigations around price fixing.
It’s not a pendulum swing, it’s a seismic shift
As these changes gain momentum, it’s becoming clear that they herald nothing less than a seismic shift. To be fair, this is not the first time the mining industry has faced recalibration. It’s just the first time in recent memory, which means few management teams retain the skills to respond effectively. And companies that don’t respond appropriately risk not just their profitability, but their long-term survival as well.
Breaking out of traditional responses is neither easy nor intuitive. For decades, the industry has typically waited out market swings, with the assurance that commodity prices would eventually rebound. They will again this time, too. Some industry analysts even anticipate more robust recovery by the second half of 2014. But which companies, and which management teams, will be knocked out of the ring before we get there?
Radical shifts call for radical change
To assure the viability of your own organization, you may need to make structural changes rather than simply moving around the margins. This involves, among other things, engaging in sustainable cost reduction, relentlessly focusing on productivity and returns on shareholder value, “right-sizing” capital projects, taking advantage of modular construction and embracing new forms of innovation. It requires new approaches for dealing with local communities, governments and regulatory bodies. It may even require a new mindset – one that’s open to the possibility that past methods may not yield the most promising future results.
Our 2014 (6th) edition of Tracking the Trends looks at all these issues and more. In addition to highlighting and organizing key industry indicators by order of current importance, Deloitte’s global mining professionals once again share a range of responses companies can adopt to stay ahead of the curve. As ever, we welcome your comments and input and hope this analysis will help drive long-term value for your organization.
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If you have any questions, you may contact Abrie Olivier (Deloitte Consulting Mining Leader – Africa) at firstname.lastname@example.org