The FINANCIAL — Mining companies must move faster to generate cash and strengthen their balance sheets if they are to successfully navigate ongoing volatility, says EY’s latest report launched on July 5.
Navigating volatility: do you change your business or the way your business works? identifies six key areas that mining and metals companies should focus on to strengthen their businesses and manage ongoing volatility: cost reduction, working capital, productivity, capital effectiveness, portfolio strategy and financing.
Paul Mitchell, EY Global Mining & Metals Advisory Leader, says:
“Volatility will be a challenge for the mining and metals industry for the foreseeable future, and the UK’s referendum to exit the EU has only added to short-term uncertainty. Although the impact on mining will be less than other sectors, prices for industrial metals, like copper and zinc, have fallen in the wake of the referendum result. Meanwhile, gold is rallying as a safe haven.
“Mining and metals companies seeking to maintain a strong balance sheet and develop plans for long-term profitability must adapt a different mindset in order to manage volatility. Too many have viewed cost reduction measures and productivity initiatives as a one-off, when what they need to do is embed continuous improvement in their DNA. They need to challenge themselves to find the next 10% to 20% of productivity savings.”
Despite some improvements across the sector, the report finds that working capital is another area that remains ripe for improvement, with aggregate levels 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.
Mitchell says: “Mining companies recognize that managing cash to improve the balance sheet is critical. Companies already focused on this area have achieved improvements of 30% or more. That translates into big dollar amounts for the larger players.”
Releasing cash from working capital will require cultural change and better use of data analytics. Both areas also have a critical role to play in improving productivity — particularly when obvious opportunities across operations have already been addressed.
Mitchell says: “Extracting greater value from existing assets can drive productivity and help mining and metals companies manage risk in today’s cost-constrained market. We know that the generous commodity price conditions of the past won’t soon return to the industry.”
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