Meeting today's financial challenges in the mining industry

"Uncertainty" is nothing new to the mining industry. However, with the financial crisis that hit in 2008, the word took on a new meaning for miners who were adversely affected by declining commodity prices and tight credit. Industry executives are well aware of market challenges as a result of the meltdown, but mere awareness is not enough to address the problem squarely. They need to have a better understanding of specific challenges, learn from them, and take strategic action both to survive and thrive in an evolving economic environment.
 

Studies and surveys conducted by Ernst & Young explore what executives are learning, how new knowledge is tapped to address challenges and prepare for the anticipated recovery. The key learnings are categorized in five areas: maintaining liquidity, enhancing risk management, squeezing costs, managing the core, and positioning for growth.
 

Maintaining liquidity
 

Prior to the crisis, there was an abundance of new capital in the mining industry because of readily available, quickly raised debt or equity. When the crisis hit and demand slackened, access to capital became limited.
 

To address the liquidity concern, a major consideration is to ensure that capital structure is flexible to adjust to drastic changes in circumstances. Managing working capital and cash flow at all times, though not appreciated in the past, has proven to be critical at present. With renewed focus on core business, a key consideration is to reevaluate assets and divest the non-core. Another viable action to maintain liquidity is seek alternative funding sources.
 

Enhancing risk management
 

By very nature, the mining industry is exposed to greater risks compared to other industries. In the recent mining boom, miners focused their resources to check insufficient capacity but missed out on addressing the lack of comprehensive testing for downside scenarios involving volatility, changes in costs and revenue triggers.
 

One of the changes to include in risk management programs is to conduct scenario planning for identified relevant risks and to develop feasible responses. As the risk appetite was a factor in the severity of the crisis’s toll on miners, another change is to tighten the risk appetite and include risk management in strategic decision making. Miners need to quickly respond to volatility and adequately stress-test business models, keeping in mind the potential speed and magnitude of changes to economic factors.
 

Given that reputation is key to success, it is essential for miners to invest in corporate social responsibility and stakeholder management, and to meet spending requirements to monitor the risk of losing the right to explore.
 

Squeezing costs
 

The mining industry is a capital-intensive sector, thus maximum use of assets is a prerequisite. The recent mining boom drove commodity prices to all-time highs as miners aimed to increase production at any cost.
 

As costs needed to be managed and controlled at all times, miners have learned to closely monitor cost base even if reported earnings are good. Squeezing costs also means that miners must understand what areas to cut, how fast they can be implemented, what the payback period is, and how long they can be sustained. Due to the urgency of the cost issue, mining companies must act now to minimize exposure to current and future cost increases and to consider the long-term effect of cost-cutting activities on enterprise value.
 

Managing the core
 

Due to the recent volatility in commodity prices and the limits on access to capital, the mining industry is reevaluating and redesigning its business to adjust to the new environment.
 

To deliver good results amid market unpredictability, fewer miners are now concerned on pursuing broad growth opportunities and are instead emphasizing on adding value diversification in funding, customers, geographies and commodities. Managing the core also implies focusing on core skills and expertise and effectively outsourcing non-core activities. In the process, miners have to ensure that outsourcing suppliers have sufficient capacity to handle higher volumes in an upturn.
 

Positioning for growth
 

Business environment uncertainty can provide opportunities as well as challenges.
 

There are clear opportunities in mergers and acquisitions as market prices would eventually return to equilibrium. In addition, adopting strategic opportunities in the downturn can help miners diversify exposure to customers, markets and regions. In a related matter, miners can use the downturn to secure and develop a talent pool as skills shortage was one of the greatest challenges encountered during the boom.
 

Lastly, miners are taking smart steps to ensure that they are preserving liquidity, heightening risk management, reducing costs, managing the core business and exploiting opportunities for growth. These conditions require executives to demonstrate ingenuity, have the courage to make difficult decisions, and exhibit prudence to apply key learnings from change brought about by the crisis, ultimately guiding their companies to success.
 

Jaime F. del Rosario is an assurance partner and mining Industry Head of SGV & Co. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.