The vote in favour of the United Kingdom leaving the European Union in late June sent shockwaves through markets across the globe as people scrambled to understand the ramifications. 

In the immediate aftermath of the Brexit, the British Pound slumped to a 30-year low, while the Australian market – trading on a Friday as the result came to a head – closed 3.8 per cent lower.
But it wasn’t just stocks impacted by the astounding decision. Come Monday morning, the spot prices of copper, lead, zinc, tin, nickel and aluminium on the London Metals Exchange had lost ground. Metal Bulletin iron ore had lost around 2.5 per cent.

Brexit is just one amongst a number of examples in recent times where political events and economic circumstances abroad have heavily impacted on commodity markets. A new report from Ernst & Young (EY) entitled Navigating volatility: do you change your business or the way your business works? encourages miners to accept market volatility as a factor here to stay, and work and think smarter to ensure they can successfully navigate the obstacles of years to come.

With great exposure comes great uncertainty

Fluctuations in commodity prices have increased in their regularity in recent years, with the market becoming more difficult than ever to predict, and therefore plan for.
EY Global Mining and Metals Advisory Leader Paul Mitchell told National Mining Chronicle the situation was different to that faced by companies in years gone by.

“If you go back 20 years and look at real commodity prices it was a nice sort of even pattern and we had a peak every seven years, then we’d have a trough but it was never that bad – it was like a wave,” he said.

“Now it’s like a dog’s teeth – it’s up and down every couple of weeks depending on what the factors are.”

According to Mr Mitchell, the availability of information around global events, combined with their complexity is generating a less certain environment for miners.

“We’ve become more global, and we just know all these things that are happening,” he said.

“The information is there, so a broader group of people can make assessments. And then there’s the level of events – it’s not a simple world anymore where there was the east and the west, and we get worried about the other at certain times depending on certain things, but usually we went along on a reasonable basis – now geopolitical events are so much more diverse.”

Another factor clouding the judgement of miners is China, which continues to grow but not at the rates which led to Australian mineral prosperity during the boom.

“No-one has particularly taken over that rapid growth we saw during the boom,” Mr Mitchell said.

Culture, DNA in the crosshairs

According to EY, the best preparation for a volatile commodity climate is agility – not typically a trait the mining industry is renowned for but one which the professional services firm says will be critical to prosperity moving forward.

Mr Mitchell said it would take a change in the way mining executives think about problems to get the industry to where it needed to be longer term.

“I think culture change is one of the main things,” he said. “One of the things we notice as we work with mining companies is that they look for solutions within the industry, rather than saying ‘where is the best solution for that?’, or ‘who’s understood tough times before and knows what we’ve got to do?’.

“Our encouragement is to look outside mining. They know what the mining solutions are, they’ve pretty much done those, and our view is that there’s more to go because you can find additional things to implement.”

To assist companies in tackling volatility, EY has identified six areas for companies to consider to more effectively manage costs, release cash and position balance sheets for future growth.

Cost reduction

The ‘produce at all costs’ mentality of the boom is long- gone, and most in the industry have implemented some form of cost reduction strategy over the past few years.

However, EY said there was plenty more opportunity to further the gains of recent times for longer-term benefit by challenging and changing the models of business which emerged during the boom. Exploring areas like general expenses, looking abroad for maintenance repair and operating supplies, outsourcing and offshoring and further exploring innovation in the area of procurement can deliver further reduction.

Mr Mitchell said it was especially crucial that long-term cost reduction was taken seriously by mining hierarchy.

Working capital

Mining companies can realise significant savings with?a focus on working capital, particularly looking at the supply chain, where a number of strategies have proven successful in the industry so far.

But while improvements have been made in this space there is still more room to move, according to EY. The?firm recommends better education to staff so they understand the impact they can have over working capital performance and how they can manage cash across inventory, receivables and payables, reconfiguration of supply chains to better control and manage inventory, and better insight from systems on the operational drivers of working capital, rather than just financial outcomes.

Productivity

Mr Mitchell agreed that mining companies tended to get a bit comfortable when things were going well, and said this was an aspect of the industry’s culture that needed to change.

“That’s one of the key points we raise when we’re talking to execs – it’s not the right time to be taking the pressure off, you’ve got to keep going,” he said.

In a bid to encourage continual and long-term productivity improvement, EY encourages companies to focus on three key areas – an end-to-end view of assets, the relentless pursuit of loss and leadership and culture. While the most obvious opportunities to improve productivity may have been addressed, the next phase looks less simple and require more focus.

Capital Effectiveness

According to EY, a program built on the back of good asset fundamentals can help to drive productivity and manage risks when costs are constrained. The firm recommends advanced asset management, where the fine balance between productivity, cost and risk is found. One example identified is a shift from industry standard machine maintenance on a calendar basis to a condition basis – a move EY said had achieved maintenance cost savings of 15-25 per cent in some miners it had worked with.

Sustaining capital is another key area to target when chasing capital effectiveness. Rather than implementing sustaining capital as a buffer, it is recommended miners, creating criteria to be applied to the asset base which ensures sustaining capital is efficiently set aside.

Portfolio Strategy

It is important to ensure your portfolio of assets is dynamically managed, rather than operating to a buy- and-hold strategy, to achieve better long-term returns. EY encouraged miners to make a decision on whether they’ll be diversified or focused on a single commodity, properly consider the country risk of their assets, establish a single basis of risk and return comparison for capital investment, and recognise the impact of long-range forecast uncertainty on strategic business decisions when making decisions around portfolios.

Financing

Financial leverage is high in the mining industry at present – sitting at levels unsustainable in the long term if volatile market conditions persist. EY considers balance sheet flexibility critical at present with volatility the way it is.

Flexibility can be found a number of ways – pushing?out the maturity of debt and removing covenants to make instruments more flexible; executing business combinations by share issuance rather than cash; taking debt off the balance sheet through trade finance or other asset-backed transactions; and mothballing, closing or divesting negative cash flow operations.