Navigating volatility: do you change your business or the way your business works? 1 .... of non tan ar term ner o a e c
Navigating volatility: do you change your business or the way your business works?
The better the question. The better the answer. The better the world works.
Introduction Volatility has been an ongoing challenge for companies seeking to maintain a strong balance sheet and develop plans for longterm profita t a c a enge t at management nee to ea t for ome t me Fluctuations in commodity prices have become more rapid and frequent as commodity demand has become increasingly npre cta e e onger term econom c o t oo a o o at e leading to the possibility of substantial revisions to long-term metal price forecasts and making it hard for mining and metals compan e to p an for t e f t re
e mpact of na an emerg ng mar et eman a o ffic t to n er tan or pre ct o a pr ce ct ate an t ere limited pricing or demand visibility, management is struggling to p an operat on an cape
Quarterly commodity price fluctuations, 1980–2016 80
60
40
% change
20
0
-20
-60
1980 Q2 1981 Q1 1981 Q4 1982 Q3 1983 Q2 1984 Q1 1984 Q4 1985 Q3 1986 Q2 1987 Q1 1987 Q4 1988 Q3 1989 Q2 1990 Q1 1990 Q4 1991 Q3 1992 Q2 1993 Q1 1993 Q4 1994 Q3 1995 Q2 1996 Q1 1996 Q4 1997 Q3 1998 Q2 1999 Q1 1999 Q4 2000 Q3 2001 Q2 2002 Q1 2002 Q4 2003 Q3 2004 Q2 2005 Q1 2005 Q4 2006 Q3 2007 Q2 2008 Q1 2008 Q4 2009 Q3 2010 Q2 2011 Q1 2011 Q4 2012 Q3 2013 Q2 2014 Q1 2014 Q4 2015 Q3 2016 Q2
-40
World coal price
World copper price
World gold price
World iron price
Source: Oxford Economics, EY analysis
o fac tate ne r a an gro t ne trateg an n e tment ec on nee to e re e e an a te a the long-term economic outlook and the associated long-range ne foreca t e g meta energ pr ce rate are p ate
an ar e c ange n ong term foreca t of part c ar importance to senior management and corporate strategists, as n e tment ec on nee to e ma e an ne trateg et c t at t e factor n t e ar a t n o t oo
e fo o ng grap trate o copper pr ce an arter long-term consensus price forecasts have changed since
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| Navigating volatility: do you change your business or the way your business works?
Copper
Copper price
(real, 31 March 2016; US$/lb)
5.00
4.00
3.00
2.00
1.00
0.00 2000
2005
2010
2015
2020
Time (date) Consensus forecast at past forecast date (narrow solid lines)
Historic spot price opper pot pr ce an o rce
on en
arter con en conom c
foreca t from
Long-term forecast at past forecast date
an ar
ana
e e to cce to e ag e t re re a c ange n m n et an more mportant a ng a pro ct e e manage an co t effect e en to en a e c a n r or t m n ng compan e a e pe ent f t e fo o ng foc area
that companies should consider in order to more effectively manage costs, release cash and position balance sheets for f t re gro t
Six levers
Cost reduction
Working capital
Productivity
a gat ng o at t
Capital effectiveness
o o c ange o r
Portfolio strategy
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Financing
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1 Cost reduction
Creating sustainable and long-term value
r ng t e m n ng oom m ner a co t e ca ate n ome ca e o er c a f e energ an peop e n t a g er commodity prices masked these costs, but as prices have fallen, t e e em e e g er co t a e een mpact ng ottom ne As prices declined, miners started eliminating costs from all areas of the business, including reducing capital expenditure and a or ere are o e er t a ot of opport n t e to remo e costs from the business, and miners need to maintain a focus on ng a ong term ta na e co t a e
Cost reduction measures need to be sustainable and cost reduction activities should not contribute to value erosion.
n er tan ng at co t re ct on nee to e ma e o c t e can e e e ope at t e pa ac per o an o ong t e can e ta ne e ear t e e of ana t c can e p m ner to etter mea re an manage co t By conducting both qualitative and quantitative analysis, miners can quickly identify opportunities for cost reduction, prioritize them and develop quantitative estimates of t e a e of co t re ct on ngne to c a enge t e mo e t at emerge r ng t e oom t me e ent a t o tt tre e ne e co fin t em e e e en more nera e to rap mar et mo ement ompan e nee to ma nta n foc to protect marg n an to re ce e po re to c rrent an potent a f t re co t ncrea e e a e a rea o er e some miners being more inventive in their approach to cost reduction, including in the fo o ng area
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General expenses
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Low-cost country sourcing
1. General expenses t mportant t at e er act t n t e ne c a enge as the “long tail” of smaller costs is often overlooked in tra t ona co t c tt ng approac e en ma co t o e p r e eca e com ne t e are often gn ficant n n m er or e amp e c a eng ng t e nee for tra e and instead considering increasing the use of WebEx and te epre ence for meet ng can a e m on e a e a o een one company place its safety equipment in vending machines acce e taff car a o ng for a etter t n efore e approac approac a acco nte for e era m on dollars in annual savings and has resulted in safety equipment
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4
Procurement
age c t a m c a at ome te an m ner have also set up suggestion boxes for employee ideas in their organ at on at orte c e eta ro p one mp e ea to rep ace po a e p a t c nac o e t re a e one a a e a o t o far accor ng to ef ec t e e o er 1 2. Low-cost country sourcing ner o con er o co t co ntr o rc ng of rect an indirect materials such as maintenance repair and operating pp e g en t at t ome emerg ng mar et t ere is an increasing range of goods available that are of equal
a
3
Offshoring/ outsourcing
on t e oap m n ng firm p nc penn e a pr acce e a
| Navigating volatility: do you change your business or the way your business works?
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Reuters News,
a t t at c eaper pr ce ecent contract for one m n ng company have seen a 50% price reduction on track pads and pr ce re ct on on tr c tra en compare to t e or g na on ore pp er n a t on re c ng re ance on original equipment manufacturers, miners can achieve more compet t e pr c ng a ng a roa er pp a e
ncrea e a tomat on n t e ng proce ena e f rt er con o at on of operat ona proc rement act t e an m ner t a e g to c on ore ng per onne o p rc a e te pec fic goo an er ce t tt e e erage acro geograp ca reg on o e o have offshored or consolidated their services have still a o e a o f nct on to pop p on ore an at te e e often taffe t e pen e contractor ff ore f nct on are often t arge ere an opport n t to a opt a re e mo e ere a e act t t at a not een a tomate centra e off ore a o ng greater visibility and further consolidation of common goods and er ce e e f nct on can t en e com ne t ome ean n co ntr pport po o t o rce a re re
3. Offshoring/outsourcing an m ner a e off ore pport f nct on c a finance proc rement an man re o rce to o co t co ntr e ere are t o roa e er mo e e t er e erag ng a capt e are er ce center t at o ne and operated by the parent company or outsourcing to a t r part er ce pro er
trateg c proc rement
From Australia or North America every role offshored generates savings in the range of US$40,000–50,000 per ro e n a t on to a or ar trage er ce pro er are offer ng to pro ct t o er t e fe of a fi e ear contract t o rc ng a mo e e on t e t p ca pport f nct on t man tec n ca area no e ng e ere from off ore e e ne er area nc e ma ntenance c e ng e m c geo og ca ata ana eng neer ng an tec n ca drafting, spare parts catalog management and strategic o rc ng
The generous conditions of the past no longer reflect market reality today. In the boom times, miners were the price takers and now they need to be the price makers.
an m ner a e a a trong foc on cance ng e t ng contract an renegot at ng ne arrangement en t this focus, it is evident that letting go of the old mindset and proc rement trateg e t at ere t aga n t a ac rop of supply shortages has not been easy or quick enough for ome a ment term for e amp e are t too genero in some markets, and alternative supplier strategies are not e ng aggre e p r e foc o cont n e t m c greater pee an more c p ne aro n outcomes in set time frames and accountability for the n t t t on of ne arrangement c of t act t co e o t o rce an m ner t carry large strategic procurement organizations that could be more aggressively challenged in an era of greater supply an ncrea e a tomat on c
4. Procurement ner a e a a trong foc on proc rement n t e a t t ree to fi e ear o e er t e pace of reform a not een fast enough, and there are still a number of areas they can con o ate an tran form to ac e e far greater a e t also time to consider next-generation procurement technology, ere t e ne ca e trong e e e e t ere are c opport n t e n t ree ma n area a fo o a
tomat on an con o at on of operat ona proc rement an m ner a e pent con era e t me an n e tment on tem tran format on o e er t e are et to f n t t te an rea e enefit of t e mp e a tomate o t on t at are rea a a a e n t e r e t ng tem For example “hands-on” purchasing still remains very g t man m ner tt ng on free te t p rc a e or er e ra ng of man a p rc a e or er c re re e era tep n t e p rc a ng proce carr e a gn ficant pro ct t mpact t a o ea to non comp ance t contracte tem an can a o mpact a o n entor p a er operate o t e contracte cata og an of mater a ere are a n m er of mp e o co t o t on to ft man a purchasing to “hands-off” channels that can easily be e ec te t a a e ne ca e
a gat ng o at t
e t tage nno at on an proc rement er ce o t e t me to aggre e e p ore nno at on that can further streamline procurement activities and enable greater visibility and control of spend to access t e a oc ate enefit c a ncrea e e erage an ng po er re ct on n ma er c pen re ct on n cope creep an more contro o er er ce an con t ng e pen t re Availability of smart technology and mobility solutions can further accelerate the automation of many basic ordering, ng an proc rement act t e g ta o t on aro n automatic replenishment and guided buying are becoming more rea a a a e g t at on of nformat on a o creates the right environment to explore other areas, such a mart ontract ng to re ce t e t me ta en to contract and to automate the contract and vendor management proce e ner a e een a are t at ome of t e r arge contract operat ona an n area c a are not perform ng accor ng to or g na term t gn ficant a e o t t t e moment c t at on are a re e by forensic audit services to identify issues such as overcharging, duplicate invoicing, and purchase order and n o ce ergence tomate o t on com ne t t e right managed service can deliver the ability to reference contracte pr c ng at term at t e po nt of tran act on
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2 Working capital Unlocking cash in the sector
Mining companies focused on working capital have typically achieved reductions of 30% or more. For larger mining companies, this can mean reclaiming hundreds of millions of dollars of capital back into the business. n o r recent report Making working capital work for you. Unlocking ‘cash’ in the mining sector, e ana e t e or ng capital performance of 80 of the largest mining companies go a ana o e t at man m ner a t not act e foc e on or ng cap ta a a e er to mpro e ca o re ce co t an mpro e are o er ret rn ar et e pectat on of or ng cap ta a e een fte fo o ng t e cce of or ng cap ta program at an o nto
ton
•
o nto a rea e a o t re ct on n or ng cap ta nce an re ce ca to ca from to a n o ar t at e t e p n or ng cap ta nnece ar a o ar t at e e t er p t to or n gro t or g e ac to o r are o er a o nto r nc 2
•
ton on trac to rea e re ct on of or ng cap ta t a ng n an a f rt er 3 e t mate for Based on the half year results, it is also e t mate t at t e compan a re ce from to 4 a n t e fir t mont of
ere ne recogn t on t at manag ng ca a ance eet cr t ca an are o er rene e foc n t area
o nto ttp e t acce e
to mpro e t e e e pect ng a
ear e t tran cr pt o nto e r ot nto com oc ment o nto na t re entat on e on p f pr
te e r ar
e pp c a n a r c e n for or ng cap ta mpro ement e trateg e ere n or ng cap ta a een cce f released include: •
ng pp c a n a a o rce of finance t a n m er of global miners extending supplier payment terms by using tailored strategies by supplier category or geography, and by improving the controls over early supplier payments and use of non tan ar term ner o a e cce f app e this strategy have had strong controls in place to ensure that payments to government, regulators and indigenous groups are not impacted and that changes to trading terms are carefully and clearly communicated to both internal ta e o er an pp er
•
ng pp c a n financ ng n tr ment ere financ a a e to e a pa ment e ena ng ear er pa ment to pp er n ome ca e ea ng ne e can e accelerated payment to negotiate further price reductions in a t on to acco nt pa a e enefit
•
econfig r ng og t c an pp c a n to ma e t em eaner an more ag e an a o ng ar ng of n entor pare acro m n ng operat on pp c a n management processes have not changed fast enough — some are still operat ng on a pro ct on at an co t a or e amp e t ere are man remote m ne te t gn ficant e e of n entor pare a o g t n t e pa t mont f pro ct on o t o e pare can e t c n remote ocat on e ng ar to e an e pen e to mo e r ng t e oom t eman carc t an no e a ante t ma e sense to have a pile of spare truck tyres, but that scenario oe n t ma e en e n to a en ronment
Processes and systems across the supply chain, particularly with regard to spare parts inventories, are the single biggest area for gains to be made.
ear
o t operat ng performance t e e t of o r n e tment program an a targete re ct on of or ng cap ta pporte free ca of on ton e te ttp p ton o com me a p oc ment n e tor ne p ton nter mre t fort e a f earen e ecem er p f a en e r ar acce e pr e
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| Navigating volatility: do you change your business or the way your business works?
•
mpro ng p ann ng ng an n entor management proce e o t at or ng cap ta e e are et re at e to ne act t an per o ca re e e
•
ang ng a et ma ntenance trateg e to mo e a a from fe cycle to condition- or risk-based models results in better quality nformat on a o t part cr t ca t an rea o n e oo ena ng a more targete n e tment n n entor
•
•
a ng a c o er oo at c tomer tra e term or er proce ng and delivery scheduling so that longer-term orders are proce e at t e eg nn ng of t e mont an etter of re t or er are c e e for t e en of t e mont e c ng or n progre toc p e t at a e een et a e e to gra e or a t
tor ca
The next wave of improvements will require cultural change and data analysis. We still see a number of critical improvements that many of t e m ner nee to carr o t n or er to re ea e ca from or ng cap ta nc ng •
t ra c ange c t at a emp o ee o can n ence or ng cap ta n er tan at t e can o to etter manage cash across inventory, receivables and payables
•
econfig rat on of pp c a n to etter contro an manage the purchase and deployment of inventory spares
• Better insights from systems and data on the operational r er of or ng cap ta not t t e financ a o tcome rom o r e per ence or ng ca a fo o
t t ego a
er fie m ner t ere are a n m er of e ement to get r g t to
c
re ea e
How to quickly release cash
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Establish a global steering committee with representation across functions and business units — reporting to leadership
Obtain a clear mandate with clear sponsorship and communicated to the whole business
Apply dedicated resourcing (internal and external) for the program management office
Robust governance
6 Set targets
Issue a mandate
Global Dedicated working capital PMO reduction Analyze the levers Create a cash culture
Data analytics
Central control
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Quickly analyze all of the working capital levers and identify if an opportunity exists
r ana an e per ence n t e ector confirm t at m ner o a e ta en an enterpr e e approac com ne t a bottom-up change management program focused on the front ne a e re ea e ca o tota ng ten of on of
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Set working capital reduction targets that are signed off and monitored by leadership
Establish working capital dashboards that use transactional data to monitor and make decisions
Increase visibility of the program and control from the center to gain momentum, e.g., through a cash war room
Apply a strong focus on sustainable change management at the front line, as they control the levers
o ar en t at t e aggregate e e of or ng cap ta n t e sector amount to more than US$200b, there remain plenty of opport n t e to f rt er re ea e ca
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3 Productivity
A transformational end-to-end approach will have significant impact Productivity remains the number one operational challenge n t e m n ng ector t man t tr gg ng to ma e an mpact a n to ate a e een rea e a tact ca ort term solutions, but to really achieve sustainable gains, the focus needs to e on t e ong term n o r e per ence mo t of t e o o opportunities across operations have already been addressed — t fin ng t e ne t of pro ct t a ng t at can e ffic t an comp e We believe a relentless focus on the elimination of loss at all levels is needed for the ne t a e of ta na e pro ct t mpro ement en e efine o e efine t a an gap et een t e ac e e o tp t an t e potent a pro ct t of an a et or a tem of a et t nc e e ement of re a t a a a t t at on rate an a t et er t e o ect e a rap p ft n pro ct t or a ong term ta na e c ange t e pr nc p e rema n t e ame e e e e t at compan e nee to em e ta na e loss elimination practices through employee engagement and an integrated end-to-end approac for ong term ta na e mpro ement n pro ct t
A systematic and integrated end-to-end approach to productivity will drive significant improvements via asset rationalization, labor productivity, material consumption and cash deferrals.
The key to achieving long-term sustainable productivity improvement
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Focus on the assets — an end-to-end view
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Relentless pursuit of loss
1. Focus on the assets: an end-to-end view We believe that to achieve the next level of productivity improvement, mining companies need to move beyond point solutions, and adopt an end-to-end solution to transform the ne ac e ement of t e ne from t e re o rce in the ground to the product being delivered to the client, nee to e opt m e not on t o n t a part of a ne tem e a e t t e t e ac of t opt m at on a an ntegrat on gap n o r recent report Productivity in mining: now comes the hard part a n m er of t e e ec t e e r e e g g te t gap an t e r e re to c o e t e component of this change is to ensure companies understand the potential of their equipment, or its overall equipment effect ene rat er t an e t e more tra t ona approac of mea r ng aga n t p an
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Focus on leadership and culture
We heard many anecdotes from survey participants a o t t e ac of comm n cat on et een t e f nct ona epartment an o a o menta t a crept nto t e management of m n ng compan e na an mapp ng of comm n cat on net or re earc er at t e n er t of een an o o e ere t e e pro em a e ecome at ome m ne n one t at a arge m ne operat on an ma ntenance emp o ee ere a e to nom nate peop e o t e reg ar n o e n pro em o ng en t e e connect on ere t rne nto net or map t o e t at er tt e comm n cat on e te et een t e e f nct on n ome o e of m ne tec n ca pro em c a ater management no rect connect on et een t e f nct on a fo n c re ea e a en operat ona r for t e ne
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Ensuring integration is a key challenge for improving pro ct t an re re an approac t at rea o nt e e o an a opt an en to en per pect e pt m ng an operat on no re re a more comp e a ance of fo r core men on afet co t pro ct t an cen e to operate ma en p t operat on n e t ng more n ena ng capabilities to drive system reliability to drive productivity to e er are o er a e
“How wonderful would it be if the drilling operator knew that by drilling the right hole size and the blaster knew that by blasting it right so it’s not oversized, that there will be no downstream impacts. That by not doing it right it can impact the shovel operator and the truck driver. The challenge is trying to get them to understand how they all fit in.” Survey participant To achieve end-to-end focus, mining companies need to consider: • An integrated governance structure across productivity initiatives • Optimal asset utilization via loss elimination analysis and practices • Data analytics to provide quality information to support effective decision-making and productivity gains — the ncrea e n a a a t of comp tat ona po er an ag t com ne t t e o er ng of t e n t co t of tec no og mean t at m ner can no e pre ct e ana t c to ent f ere e pment fa re or p ant ott enec ng e to occ r an react efore pro ct on mpacte foc on a et performance toget er t ot er targete area c a fuel analytics has enabled some miners to achieve an overall re ct on of p to n ope pen • Engaging the whole workforce — ensuring targets drive the right behaviors o t m n ng compan e a e a rea a opte an en to en approac for ac office f nct on c a finance or procurement, but not for service functions like asset management or core f nct on e m nera proce ng et e e e e t at using a process model to achieve and sustain an end-to-end approac ere t e tr e ena er of pro ct t ga n can e ac e e
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2. Relentless pursuit of loss o nee to e tran parent n er too an acte pon n o r e per ence rea on for o fa n er fo r ma or categor e a fo o • Reliability
eg e
• Utilization
eg
• Throughput • Quality
pment an mater a
a or
pp
o e
pp an ntegrat on o e
e g pa oa an rate o e
e g ore
a t an ore to a te o e
ere e ence of gn ficant pro ct t mpro ement an value creation through the adoption of a manufacturing mindet c ange t e foc from tra t ona pro ct t effort to establishing the capability and environment to enhance mater a o an e pment effect ene pporte by productivity metrics, in particular the use of OEE to drive t ro g p t ro ct on pt me can c e ncrea e p to 5%, and revenue enhancements can typically be delivered in t e range of t o t gn ficant n e tment ro g ta e an pre cta e operat on pro ct t particularly around operations and maintenance activities, is a o ncrea e perat on o pen e t me firefig t ng creating opportunities to support continuous improvement effort a re t t approac a o tran ate to mpro e safety, better forecasting and advanced integrated activity p ann ng an ector o t e of t e m n ng ector a e een e treme successful in eliminating loss by embedding manufacturing e ce ence acro t e organ at on rocter am e for e amp e ea ng t pace t ro g t e r ntegrate or tem from c t a ma e man fact r ng operat on a compet t e a antage e a et of operational reliability-centered methods, tools and advanced analytics to identify and eliminate losses in operations and create a pre cta e an ta e operat ng en ronment approach has proven highly successful in eliminating loss, and a ena e t em to ac e e o a ng of o er t e pa t t ree ear 5
Productivity improvement is the role of everyone in the organization — embodied by ‘relentless pursuit of loss’ and it can have a significant impact on transforming the performance and capability of the business.
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3. Focus on leadership and culture ro ct t an e on t e agen a an nee a o t on to e re o e e pro ct t o rne re re a c ange of m n et ena ng an empo er ng operat on to p r e o e ea er p p a an mportant ro e n ma ng t appen e cr t ca ro e peop e p a n t e pro ct t transformation cannot be overstated — productivity mpro ement t e ro e of e er one n t e organ at on e ent e p r t of o e en r ng ero arm can tran form t e ne ent re ere are t ree e area m ner can foc on to a integration and in turn improve productivity:
re
1. Engagement fe t ea er p an gn ficant investment in culture and capability are critical to reach t e ne t e e of pro ct t ro ct t mpro ement is the role of everyone in the organization — embodied by re ent e p r t of o an t can a e a gn ficant impact on transforming the performance and capability of t e ne e ng peop e at mportant empo er ng peop e nee to n er tan t e mportance of improved productivity and the role they can play in ac e ng t e ntegrat on c a enge can e met ea on by increasing connectivity, emphasizing the importance of comm n cat on an fo ter ng an en to en e acro t e organ at on 2. Measurement and reward: What gets measured gets done — mining companies have the opportunity to measure an re ar t e act on of t e r taff to mpro e pro ct t an t e a peop e go a o t e er ng t ro ct t improvement through loss elimination is further driven re e ant an t me team metr c n ng compan e
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should therefore gauge their teams on true measures of productivity such as heightened output, improved safety an o e m nat on t e a mportant to recogn e an re ar team an ea er o co a orate e acro business units, keep other groups informed and involved an rea o n t e o 3. Ongoing talent management — managing talent post the per c c e a ma or con erat on for m n ng compan e e ar for ta ent a not en e t eca e a or mar et con t on a e ea e ere a greater nee t an e er efore for tem t n er o can manage comp e t an ee mpro ement acro t e o e a e c a n n a t on to emerg ng ta ent r ng ng ne a of t n ng reta n ng t e e en or an e per ence ta ent e a e compet t e a antage e a e the right skills to realize productivity gains considering t e ere n t e ector pre oom an t erefore a e t e e per ence of a eaner more effic ent operat ng mo e c t re an m n et are n t e n e po t on of e ng a e to r e an ea en to en o t on an tran form a ne na a t at f nct ona genera manager cannot a re t to tr ntegrate t e ent re ea er p team nee to e engage et e ne o ect e ma not a e c ange a refre or re e of t e operat ona trateg can e an e ce ent too n not only changing the focus of the business, but also in initiating a c ange n c t re ne operat ona trateg a great a to r e a common en e of p rpo e an n t t n a ea er p team and focus it on resolving the critical issue of integration to tran form ng a ne
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4 Capital effectiveness Making your existing assets work harder
A program built on the back of good asset management f n amenta or a a p atform to r e pro ct t an manage r Extracting more value from existing assets presents an opportunity to improve a et management capa t can e p to r e pro ct t an manage r a co t con tra ne en ronment
n
Key areas miners can consider for ensuring capital effectiveness
1
Advanced asset management — productivity at the right cost
2
Sustaining capital — many are cutting, but should they?
1. Advanced asset management
3
Capital productivity — not a one-off exercise
2. Sustaining capital
et management e ce ence re re a fine a ance et een pro ct t co t an r e tra t ona foc of mpro ng equipment availability has not translated into increased t ro g p t or pro ct t a en ar a e ma ntenance t e pre om nant c e ng met o t often a tef an co t pro t e n t e c rrent en ronment mo ng from ca en ar to con t on a e ma ntenance e a e een some companies achieve a 15%–25% reduction in maintenance co t etr c nee to e a e on to a o a te to e ent fie mea re an a re e e a e o er e compan e ac e ng a ncrea e n re en e t no a t ona cap ta en ng metr c ng ntegrate data like advanced scheduling (to improve maintenance and pro ct on c e e an pre ct e ana t c to pro e a ance arn ng of e pment fa re a et a e can e mpro e to t e f en to en fe c c e
n man compan e ta n ng cap ta a ffer rat er t an a proce t at effect e manage a et r en cr t ca r Accountability for sustaining capital can often fall through the crac et een operat on ma ntenance an pro ect ncent e an are often m a gne an o not n a et management performance t financ a an ne o tcome t t e r e to o er co t man compan e a e c t ac an e pr or t e ta n ng cap ta e pen t re a a t e ort term effect of re c ng t e eman for ca e t e o era mpact e o er me m to ong term pro ct t As decisions about asset and equipment replacement become more time-critical, traditional approaches of site-based lists, t t t on an pet pro ect re t n poor cap ta a ocat on an neffect e management of r
a gat ng o at t
o o c ange o r
ne
or t e a
o r
ne
or
10
e o con er etter pract ce to e t e a opt on of a top o n approac to create cr ter a to e app e to t e e t ng asset base that covers: • Identification a et con t on an econom c rep acement a portfo o of opport n t e an re ce rpr e en equipment fails in service • Prioritization — a consistent risk-based prioritization method n e to financ a co t ncrea e t e effect ene of ta n ng cap ta pro ect • Execution ntegrat ng t pro mpro e cap ta effect ene of
ct on an ma ntenance ta n ng cap ta pro ect
3. Capital productivity ro ct t of n e te cap ta a e e for acro t e g o a m n ng ector n a recent report Opportunities to enhance capital productivity e ana e mega pro ect n t e ector an fo n t at co t o err n an e a ere t e norm t an a erage get o err n of a tagger ng e per pect e are e ent a to t rn around this trend and deliver to boards and investors the pre cta t an confi ence t e re re ner can re ea e ca t ro g greater n er tan ng of cap ta portfo o an management of n a pro ect ffect e
e of cap ta
e r en
• Focusing on the right projects re e ng pro ect they meet the current investment criteria
o t at
• Focusing on doing the right projects well e e e e t at a forma e cap ta pro ct t approac at pre fea t fea t an con tr ct on tage ena e m ner to e er t n cope an at t e o e t co t • Ensuring information flows et een t e e t o processes to create an iterative loop • Comparing competing project designs on the basis of capital risk exposure. Development strategies such as tag ng a o ncrementa cap ta to e n e te en t e ne con t on are pport e an t e en con t on are ffic t e a t to efer a port on of capital investment into the future can create value for n e tor an re ce t e r cap ta r e po re
11 | Navigating volatility: do you change your business or the way your business works?
5 Portfolio strategy
Capital allocation and portfolio strategy are critically linked
Empirical research suggests that companies that actively and dynamically manage their portfolio of assets achieve better longer-term returns t an compan e t a an o trateg e e ence o t at an effic ent portfo o of assets can be achieved by holding assets t n t e portfo o t fferent r ret rn an correlation to achieve better return for the same e e of r or o er e e of r for t e ame rate of ret rn 6 or t e m n ng ector t cap ta ec on p a e o er c a ong per o of t me an profita t o ntr n ca n e to broader macroeconomic factors, effectively managing portfolios an ncre ffic t ta ma e e en ar er t t e e g tene e e of o at t c rrent e ng e per ence on o at on an er ficat on r ng t e per c c e a eft man corporate t n e portfo o an management more a are t an e er of t e nee to manage portfo o or ome e a e een t eg n to p a o t c a ton e tment of o t an ot ng o mer can an reeport c o an anno nc ng gn ficant portfo o rea gnment ortfo o management rema n a e pr or t n con tr ct ng an opt m m portfo o ome of t e factor t at m ner nee to con er are a fo o • Making a decision to be diversified or a single commodity operation: e e e e more compan e tart oo ng outside their existing commodity focus or leveraging existing
a e on t e arr
ar o t
operat on to e p ore ot er opport n t e ere t e can leverage proprietary operational skills, technology or nfra tr ct re e ng a e to create nerg e t at are n e a cr t ca factor n ta ng a ea of t e pac an en r ng ret rn are ma nta ne
e
• Ensuring country risk is properly factored into asset valuations: eograp ca er ficat on e er ta mportant a commo t er ficat on an nee to e n er too acro t e portfo o eta e mo e ng ma o t at co ntr r affect t e t pe of target pro ect e g arge cap ta n e tment ma er e ent a pro ect n e tment for a portfo o an t e preferre o ner p tr ct re • Establishing a single basis of risk and return comparison for capital investments regar e of et er t an e pan on pro ect an opport n t or n ee a cap ta ra e t ro g e o n of nfra tr ct re or m n ng propert e an ncre ffic t an t me con m ng e erc e t essential in understanding the relative impact on risk and ret rn of t e portfo o of compet ng cap ta ec on • Recognize impact of long-range forecast uncertainty on strategic business decisions. e po t for c ange to ong range rate an meta energ pr ce foreca t o er t me o e re ecte n t e ec on ma ng proce ro ect e gn financ ng an o ner p c o ce an portfo o ec on can all be structured to maintain optionality and manage an m t gate r for t e n e tor en ea ng t foreca t ncerta nt n e tment ec on n g t an t e a t of information supporting a business decision can be improved by e p c t recogn ng o pro ect an portfo o ec on ma ar acro a range of ne en ronment
o e
a gat ng o at t
o o c ange o r
ne
or t e a
o r
ne
or
12
• Focus on optimizing the performance of the assets that are kept through portfolio improvement and cost control measures
Optimizing the portfolio
r e cr t ca •
Optimizing each project
t at cap ta a ocat on an portfo o trateg are n e a re t m n ng compan e nee to
omp ete reg ar an r goro portfo o re e to eterm ne t e g e t perform ng n e tment pro ect an ent f ere to focus capital
• Understand the embedded optionality and capital intensity of n a pro ect a e eterm nant n ec ng at a et form t e opt ma portfo o to ac e e gro t a p rat on •
•
13
am ne n er ng a t e a oc ate t a et to protect against unforeseen risks that may have been previously underestimated or remain beyond their control t o t an financ a m t n e amp e o e non operate o nt ent re ee t at pro ect pre o con ere core ma ecome e t te for e tment f gro t opport n t e are m te an o not fit t t e ne trateg c rect on of t e compan
a gat ng o at t
o o c ange o r
ne
or t e a
o r
e a e een a gn ficant e e of e tment among er fie pro cer t cap ta procee t p ca e ng e to pa o n e t or ret rne to are o er a ca or n pec e an of t e e e tment a e foc e on g er co t m ne or m ne t m te ong term gro t a corporate oo to po t on t em e e a far o n t e co t c r e a po e e eep f t re e pan on opt ona t t n e t ng a et rat er t an a ng to oo at ne or opt on e are a o ee ng a n m er of corporate ta ng a e on at commo t e t e portfo o o foc on an per ap more mportant at commo t e t e to e t ne ta nterp a t reg ona er ficat on a t e e tment trateg certa n a ter t e co ntr r of t e portfolio and that in turn is creating an investment requirement to re e g t t e portfo o from e t er a co ntr r per pect e or nto ne commo t e n t t t ona are o er re pect goo management team t at e er goo re t e on t care f t at n a er fie portfo o or a ng e commo t e a e e er an cre t ong a o comm n cate t e o rne o are on an o r act on ma e en e t e cont n e to fo o o tan ng t n t e c rrent en ronment not an opt on for man
ne
or
6 Financing
Balance sheet flexibility is key during this period of volatility e t ere a gn ficant e e of e t acro t e ector an e erage g on t e ac of o er earn ng a arge proport on of debt is covenant lite and many corporates have taken action to p o t mat r t e an re ce er c ng co t e a oc ate tre t erefore per ap o er t an m g t ot er e e e pecte n c ffic t mar et con t on g financ a e erage c ear nt ta na e n t e ong term an f o at e mar et per t t t mate cr ta e forma n o enc t at on a e t t ome a off n t e ma or t of t at on ere are o e er ome mar et t at a e een t ar t t e coa ector e ng t e mo t prom nent a t grapp e t t e mpact of re at e g o ar enom nate co t a e n a er epre e coa pr c ng en ronment a ance eet e t rema n cr t ca r ng t per o of o at t an o oe t e a oc ate r g t ng of e t e e to t e n er ng profita t of operat on
Leverage is at an all-time high, but this doesn’t necessarily indicate widespread financial distress across the sector.
Changes in industry net debt, EBITDA and implied multiple 400,000
3.0
350,000
2.5 2.0
US$m
250,000 200,000
1.5
150,000
1.0
100,000 0.5
50,000
EBITDA (LHS) ote
e e fig re are a e on a amp e of ap ta
Net debt (LHS)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0.0 2000
0
o rce
Net debt/EBITDA (x)
300,000
Net debt/EBITDA (RHS)
te m n ng compan e from a a a e nformat on pro
e
ap ta
ana
f co r e a ance eet e ar o form man of c
t n t t a ca e of pa ng o n e t t can ta e a e een p t n p ace acro t e ector n recent ear
• Pushing out the maturity of debt, and removing covenants to make the instrument more flexible. p ca t a een one a refinanc ng t t ere an ncrea ng ngne from en er to c renegot at on of e t term n or er to pro e t e n er ng operat on t ncrea e e t • Business combinations, such as mergers or joint ventures, executed via share issuance rather than cash. m ng c a trateg e e ec te t ma e po e to mpro e t e e erage of t e re t ng ne com nat on c can n t rn ea to a more e e a ance eet or n ee t e financ a e erage to negot ate e t term t en er
a gat ng o at t
Corporates will continue to look at different ways to release capital in order to pay down debt.
o o c ange o r
ne
or t e a
o r
ne
or
14
• Taking debt off balance sheet via trade finance and other asset-backed transactions. • Mothballing, closing or divesting negative cash flow operations. Such operations may be producing assets that are no onger profita e an are negat e mpact ng earn ng or e e opment a et t at are p ac ng a r en on ca o While these strategies have been developed by a number of corporate to mpro e a ance eet e t t e ma n pr or t acro t e ector a een to pa o n e t a cap ta re ea e n a number of forms such as: • Cuts in dividends across the sector have been widespread, nc ng t e ma or er fie r en t e nee to ft from a progressive dividend policy to one that is linked to earn ng • Via streaming deals, c a e ecome ncrea ng common for pro c ng t er a et e g encore cce f tream ng ea for copper o t of t e r o t mer can m ne that command higher embedded valuations than have typically een een n t e tream ng ector for e e opment a et • Divestments of stand-alone businesses, c a per ap een t e mo t gn ficant trateg emp o e acro t e ector n or er to ra e cap ta for e t ret rement or e amp e ng o American has announced a very sizable divestment strategy as t oo to refoc on a ma er n m er of core commo t e e e pect f rt er e tment nform t e m t er an ma or er fie m ner t ro g • Entering into joint-venture agreements or selling minority stakes a a mean of re c ng cap ta o t a t o t comprom ng f t re gro t an commo t e po re
gn ficant ea t at meet t e e cr ter a nc e arr c o a e of a ar to ntofaga ta an encore e tment of t agr c t re ne to ana an pen on 7 f n • Acquiring traded debt at significant discounts to par, c represent an opportunity to reduce balance sheet liabilities, an cr c a re ape e t mat r t profi e to mpro e near term t a e ent a o mpro e cre t metr c an re ce e t er c ng e pen e amp e include buybacks undertaken by Anglo American, Fortescue eta ro p an e anta e o rce 8 ompan e are ncrea ng oo ng at re c ng t e cap ta t e p n nfra tr ct re c t p ca generate a o er ret rn on capital than mining assets, albeit in current market conditions t at not nece ar p a ng o t e fea t of re ea ng capital from infrastructure assets depends on the underlying commerc a re at on p et een t e nfra tr ct re an t e m ne p ca re n ng an e ement of contro o er e re re n or er for t e a et to come off a ance eet c ma mean making the commercial relationship multi-user rather than e c e r g ng t e e fference ma et a gment a ance eet trengt t re ea ng cap ta to e ep o e n core m n ng act t e With pricing volatility likely to remain elevated in the short term at least, companies that are able to maximize both trading liquidity an a ance eet trengt e opt ma p ace to cap ta e on an e ent a c c ca mpro ement e a o e a e to capture opportunities that present themselves through others’ tre c ot er e o not e financea e
Mike Henry — President Operations, Minerals Australia, BHP Billiton “The most surprising part of the new job has been how much opportunity is left out there” to keep bringing down costs and boosting productivity, including in iron ore, where he’s confident that BHP can go below its target for US$15 a tonne cash costs.9
arr c nno nce a e of ercent of a ar e artner p t ntofaga ta c e ne encore e agr c t re ta e for acce e ne ner ne pr
ac o n on ne
15 | Navigating volatility: do you change your business or the way your business works?
to oot e e t fear
ne ormat on of arr c com acce e n ft com ft.com, accessed
ron ore man a rea t The Australian Financial Review,
Where to go from here Our advice to companies operating in an uncertain environment: •
on er a e er e a e c e n t t one a t e are a mportant an o concurrently
paper not e ea t t
• Break free of pro-cyclical, short-term behavior and instead consider the impact of your actions on long-term productivity an f t re gro t •
oo to ot er ector for ea of
ne
opt m at on
• Don’t forget the importance of people as success requires leadership and tone from the top — lead by example and others fo o • •
a
con
er t e react on of
on t m t o r t n ng to
are o er an
at po
ta e o er
e
Authors of the report
Paul Mitchell o a n ng eta or ea er e pa m tc e a e com
Lee Downham o a n ng eta ran act on ea er e o n am e com
a gat ng o at t
o o c ange o r
ne
or t e a
o r
ne
or
16
How EY’s Global Mining & Metals Network can help your business With increasingly positive sentiment in the sector, miners are focused on restoring balance sheet strength and liquidity n preparat on for gro t e ector e opport n t t pro ct t t o g man a e ma e pro ct t mpro ement t e cr t ca ne t a e of ga n nee a trong foc on o e m nat on t g ta e ng a e ena er a gn ficant e per ence n a t ng compan e to e a ate an mp ement trateg c n t at e t eep ector no e ge to pport o on finance n t at e c a portfo o opt m at on and capital planning, and through to operational improvement program c a pro ct t an g ta ena ement
mg e
eg
r e com
Africa Wickus Botha c
ot a
a e com
Brazil Afonso Sartorio afon o artor o
r e com
Canada m ac ean m
mac ean ca e com
Chile ar a a era ontrera mar a a era contrera c e com
Oceania cott r m e a e com
United Kingdom & Ireland ee o n am o n am
e com
United States Bob Stall e com
Service line contacts EY Global Advisory Leader a tc e m tc e
a e com
EY Global Assurance Leader e e ano
peter mar e
ae e
Commonwealth of Independent States Boris Yatsenko or
at en o r e com
France, Luxembourg, Maghreb, MENA r t an on c r t an m on fr e com Japan n re
o e
an re co e India n an
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EY Global IFRS Leader race ar ng trace
ar ng a e com
EY Global Tax Leader n re an nter an re
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or
About EY EY is a global leader in assurance, tax, transaction and advisory er ce e n g t an a t er ce e e er e p tr t an conf ence n t e cap ta mar et an n econom e t e or o er e e e op o t tan ng ea er o team to e er on o r prom e to a of o r ta e o er n o o ng e p a a cr t ca ro e n ng a etter or ng or for o r peop e for o r c ent an for o r comm n t e EY refers to the global organization, and may refer to one or more, of t e mem er f rm of rn t o ng o a m te eac of c a eparate ega ent t rn t o ng o a m te a compan m te g arantee oe not pro e er ce to c ent or more nformat on a o t o r organ at on p ea e t e com
m te e er e
one mater a a een prepare for genera nformat ona p rpo e on an not nten e to e re e pon a acco nt ng ta or ot er profe ona a ce ea e refer to o r a or for pec f c a ce
cott gr m e
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