The FINANCIAL — “Cash is king” once again in the global mining and metals sector, as ongoing volatility pushes cash optimization, capital access and productivity to the top of the EY Top 10 business risks in mining and metals, 2016-2017 report.
Cash optimization replaces “switch to growth” — which fell to sixth position — at the top of the risk ranking this year amid prolonged sector volatility. Meanwhile, capital access and productivity risks held their positions in the top three year-over-year, according to EY.
Miguel Zweig, EY Global Mining & Metals Leader, says:
“Mining and metals companies are prioritizing cash generation and preservation in the wake of moderate global growth, dampened demand for commodities and a lower-for-longer price outlook this year. Maintaining strong balance sheets and facilitating long-term profitability requires companies work proactively to address sector risks. Those that do will be in the best position to pursue growth when commodity prices finally begin their upswing.”
Capital access moves to second in risks ranking
Traditional forms of debt and equity aren’t readily available in today’s mining and metals market. Capital raised in the sector was down by 5% quarter-over-quarter in Q2 2016 and 28% year-over-year to US$60b in Q2 2016. In the short term, access to capital will remain difficult, meaning that alternative sources of finance and ways of raising capital will be crucial to business growth going forward.
In 2015, there were 11 major streaming deals worth US$4.2b, up from US$2.2b two years earlier. In 2016, two streaming deals worth US$940m and US$500m have been announced.
Zweig says: “Appetite for growth remains subdued in the mining and metals sector. However, those that are looking to do deals face the reality that capital may not be available to them. Debt markets are expected to improve more rapidly than equity markets, which remain out of reach in the medium- to long-term. Alternative sources of finance will be crucial this year.”
Productivity remains top operational challenge
Productivity declined significantly during the sector boom as companies adopted a “volume-at- any-cost” mindset. This approach resulted in a singular focus on the mine and created an integration gap between the mine and production plant, maintenance and supply chain.
Zweig says: “Miners put complexity back into the business during the boom cycle and now face a substantial integration gap to solve. Productivity is undoubtedly the greatest operational challenge in the sector, but it’s also one of the biggest opportunities.
“Companies have made progress to improve labor productivity, but have hardly scratched the surface on asset productivity. The focus needs to be on building a productive, cost-effective end-to-end value chain. Adopting a process model and digital approach will be key enablers to addressing the productivity risk.”
Discussion about this post