Having ridden out one of the resources sector’s most notable downturns, growth is back on the agenda as miners enjoy rising cash flows and higher commodity prices, but companies have so far taken a cautious approach.

Business analysts are labelling it an important time for companies to invest wisely after many years of conserving capital and restoring balance sheets.

According to a report from Ernst & Young (EY), the decisions around how miners spend their hard-earned dollars today will be critical for future success.

The 2019 report, titled Does tomorrow’s success depend on being bold today? noted the sector had traditionally operated on a ‘buy’, ‘build’ and ‘return’ approach to capital allocation, but needed to diversify its strategy in the face of rapidly changing technologies.

Citing innovation as the new pillar to this three-pronged policy, the report noted where investment in digital capabilities and automation could place businesses a step ahead of competitors.

EY Global Mining and Metals Transaction Advisory Leader Lee Downham said companies had to look into advancing mining techniques that could enable existing reserves to be extracted more economically.

“There is a lot of focus on making mines more agile, flexible and automated so you can mine to the market instead of what’s been done historically, which is marketing what you mine,” he said.

“Operators need to be more responsive to what the demand pools are in the market rather than simply generating supply and hoping the market can absorb that.”

During early periods of the last mining investment boom, Mr Downham said industry had not thought carefully enough about where it put its money.

“A lot of the capital decisions made early in the most recent cycle were not necessarily value accretive,” he said. “The allocation strategies were not quite working and capital was not being spent as it should be.

“Lessons from that are being digested and I think industry is going through what looks like the next cycle with a much more focused and disciplined approach to capital allocation.”

With the effects of the last downturn still very much in the minds of boards and investors, PricewaterhouseCooper Mining Leader Chris Dodd agreed people were taking a relatively risk-averse approach this time round.

“That’s not completely a bad thing or good thing; it means we are less likely to repeat mistakes of the past where we just threw money at stuff,” he said.

“Western Australia is a good example, where the sector was spending 30-40 per cent more than it should have on any given input, whether that was wages or equipment hire.”

Mr Dodd said one of the challenges of capital allocation was to be able to take a step back and make a sound commercial decision without personal bias.

“The big players are in their own universe with how they go about capital allocation, but even at the bigger end of town, capital allocation is still about human-led decisions,” he said.

“If you have been involved in project X for a few years, you are going to feel pretty strongly project X should continue.

“Because they’ve invested so much personal time and energy into a project, people  nd it hard to be objective on whether to go ahead.”

Maximising your portfolio

According to EY’s Top 10 business risks facing mining and metals in 2019-20, a balanced portfolio is the key to providing market-leading shareholder returns.

In order to truly transform portfolios the report said the mining and metals sector must look across all strands of capital allocation to gain a competitive advantage.

But this does not necessarily mean investing in a range of commodities, according to Mr Downham.

He said there were a lot of considerations to take into account if you wanted to diversify your commodity portfolio and often they did not stack up for the mid-tier companies.

“You have to have the right customers, infrastructure and trading relationships to get the right deals and better margins, so venturing into a new commodity is not necessarily going to drive value,” he said.

In the current environment, Mr Dodd said investors were more interested in listed companies that only focused on one metal or commodity.

“Investors want to be able to choose to diversify their own portfolios,” he said. “Whereas, for example, if you’re a copper-lithium player, you don’t give investors that choice.

“Market pressure is leading companies towards focusing on just one commodity and doing that well.

“For example quite a few gold players are trying to become bigger in one space rather than diversify into others. That’s probably a shift in recent times. It’s the market saying we want to do our own diversification.”

Mr Dodd said more importantly the sector had to think carefully about how it could develop new-world technologies and apply them in a mining environment.

“The world has moved so much that you have to think about how you could use these technologies,” he said. “We are probably guilty as an industry of doing things the way we did them last time.

“There aren’t digital solutions to all the physical tasks, but can we use these digital technologies better? The industry moves a lot of product we don’t want in mining; most of it is dirt. The dividends would be astronomical if any technological advancements could change how that works.”

Image: Lee Downham.