Australia’s miners notably reduced their average days working capital in the 2016 financial year by paying their creditors later, according to a report from advisory firm McGrathNicol.
The report, which highlights the working capital cycles across nine Australian industries, revealed the nation’s miners sat alongside transport & distribution as the biggest improvers when it came to lowering DWC – the measure of the days it takes to convert working capital to cash.
Average DWC across the 22 mining companies assessed in the McGrathNicol Advisory report improved by 5.9 days in FY2016 to 45.8 days – one of the largest reductions recorded for the period.
It’s welcome news for an industry which has in recent times experienced a sustained period of low commodity prices, and was one achieved in large by expanding payment cycles to suppliers.
While reducing their revenue collection timeframes by an average of 1.4 days to 25.7 days, the miners included in the report pushed their payment cycles out by an average 3.6 days on the previous year’s results to 68.2 days – collecting revenue quicker while simultaneously taking longer to pay their suppliers.
Report author and McGrathNicol Advisory Partner Jason Ireland told National Mining Chronicle the mining industry sample stacked up differently when compared with other areas of Australian business.
“This is a sector where, because of the size of many of the operators and because of recent history, many participants use mining services businesses to provide supply and they pay them slowly,” he said. “The miners often make sure they receive their money before they pay their contractors.”
“The result is unusual because in all other sectors that achieved an improvement in days working capital bar one, the improvement was predominantly achieved by collecting more quickly.
“Mining and resources did collect more quickly – I made a comment in the report that this is one of the fastest collecting sectors and they still made an improvement by 1.4 days, which is excellent – but they made their biggest improvement by slowing down payments to creditors.”
While it may look as though any working capital problems miners are dealing with are simply being transferred to their creditors, Mr Ireland said companies were playing within the parameters of what they’d done previously and what the industry allowed them to do.
“This is not new – if you have a look at 2015 it’s not a fundamental change,” he said.
“In 2015 they took 27 days to collect and paid at 64 – it’s more a tweak than a reversal of the whole process.
“It appears to me that this is just a fact of the mining and resources sector, that they enjoy being able to collect quickly and also take their time to pay people.
“The key for suppliers to the sector is to make sure they have all of their internal processes working as well as possible so their own inefficiencies do not contribute to the time it takes to get paid”
In a somewhat welcome sign for suppliers, there does appear to be parameters on what miners can achieve by extending their payment cycles. Backlash at a proposal by Rio Tinto to double its payment terms from 45 to 90 days in April 2016 resulted in significant public pressure and a backflip by the multinational in addition to a promise to negotiate new arrangements to “maintain the competitive of our business and our future ability to develop assets”.
Rio had extended its payment terms from 30 to 45 days the previous year. BHP Billiton doubled its contractual payment terms to 60 days in August, after the data was collated but a move forewarned in November 2015.
While Mr Ireland conceded there was only so far payment they could be pushed, he said it was good practice to try and manage working capital cycles.
Lessons to learn
While the averages suggest mining has a good grasp of its DWC cycles, Mr Ireland said the diversity of results indicated a sector where there were lessons to be learned from industry peers.
“There are big differences within the mining industry between the best and worst performers,” he said.
“Maybe some in the mining industry could look at the working capital cycle of other operators in their industry and try learn from them.”
Whitehaven Coal recorded the largest improvement, reducing its DWC by a staggering 40.3 days from 65.1
in FY15 to 24.8 days in FY16 on the back of strong performance and record production.
At the other end of the scale was Evolution Mining, whose DWC grew 21.3 days from 17.4 days to 38.7 days during an acquisition-heavy, transformative year.
Evolution’s result was driven by an increase in inventory days to 70.9 days in FY16, up from 47.4 the previous year.
The majors performed in contrast with one another; Rio Tinto recorded a 10.8-day reduction in DWC to 30.4 days on the back of lengthening the time it took to pay creditors by 5.7 days to 33.6 combined with improvements in both collections and inventory days, while BHP’s DWC grew 5.1 days to 20.3 days due to a 42.5-day reduction in payments days.
However, Mr Ireland said the figures were not always comparable as a result of different accounting treatments, inventory management structures, policies and other influencing factors.
Room for improvement
While mining was among the better performers in improving working capital over FY16, Mr Ireland said there was potentially further room for improvement in inventory.
On average, the miners surveyed increased their days inventory by 1.1 days to 100.4 days over the 12-month period.
“The largest number in the net working capital calculation is the cash tied up in inventory,” Mr Ireland said.
“If you look at the DSO (days it takes to collect revenue) you might wonder if they could really collect much more quickly than that,” he said.
“Then you might question whether their creditors will withstand much more of an increase in how long it takes to get paid? Maybe, maybe not.
“Then you look at DIO – the biggest element of working capital – that’s where there’s potential improvement, I think.”
Addressing inventory isn’t the easiest task, but Mr Ireland said companies which took a strong inward focus to what they were doing with their processes would be better placed to improve on their figures.
“There’s upside in taking a good look at an internal view and saying ‘we’ve held this level of inventory forever – why? Is there a new model for us to look at?’
“It’s interesting that it ticked up a little bit this year, but it’s clearly an area of the working capital cycle where there seems to be room for improvement.”