Volatility seems a mild word to apply to what has been happening in the mining sector over the past year. Deloitte recently released a new report showing that given the continued uncertainties facing the mining sector, the winners will be the companies that learn to manage volatility more effectively by adopting an integrated, forward-looking approach, which defines responses to a range of anticipated futures.
"In an industry as notoriously cyclical as mining, more than ever before, organizations must have sufficiently flexible strategies to weather both market upswings and downswings," says Glenn Ives, North American Mining Leader, Deloitte. "Achieving this flexibility requires advance planning for various potential risks and scenarios. Without this approach, many companies are bound to experience project delays, talent shortages, and spiralling costs as demand recovers-that could ultimately result in an endless series of boom and bust cycles."
According to the Deloitte report, "Tracking the Trends 2010: A look at 10 of the top issues mining companies will face," mining industry activity has often been disproportionately influenced by short-term outlooks. When commodity prices were hitting record highs two years ago, optimism was expressed with almost giddy expansion as companies rushed to develop and build even marginal, and often technically complex, assets.
The result was a precipitous increase in costs for raw materials, energy, equipment, supplies and labour. When commodity prices subsequently dropped in the wake of the downturn, and saddled with committed capital expenses at suddenly uneconomical prices, mining companies turned cost containment into a mantra. They began cutting across the board, shedding non-core (and in some cases) high-quality assets, halting production, scaling back workforces and putting deals on hold.
Now, commodity prices are rebounding again. By August 2009, base metal prices had already returned to profitable mid-cycle levels, recovering at a faster pace than most industry participants predicted. From a low of US$1.25/lb last fall, copper climbed to over US$3/lb. In October 2009, gold surged to a near-term high of US$1,200 per ounce and silver is demonstrating similar buoyancy.
"These moves seem to indicate that despite recent declines, long-term demand remains set to rise and could potentially outstrip supply once more," says Ives. "In response, too conservative a view can hamper organizational ability to capitalize on the opportunities, but at the same time, companies need to manage their risks more effectively and consider very carefully whether demand fundamentals can sustain prices at these levels."
The report explains that as the market rebounds, mining companies must resist the urge to place fundamental challenges on the backburner, and instead seek to manage an array of issues, including commodity price uncertainty, regulatory risks, sustainable development, attracting top talent, acquiring scarce capital and exploring longer-term strategies for growth.
"The past 12 months have reinforced the importance of taking a 'stronger for longer' view in the mining industry," explains Tony Zoghby, Global Mining Leader, Deloitte Touche Tohmatsu (South Africa). "To survive ongoing volatility, companies need to enhance their operational excellence and plan for varying potential scenarios. Putting band-aids over endemic issues will not make them disappear. Instead, organizations must take active steps to strengthen their business fundamentals."
Critical roadmap If a company's strategic planning isn't sufficiently flexible to accommodate a range of potential scenarios, the future of their business may be at risk. Given the uncertainties facing the mining sector, the time is ripe for organizations to assess the entire industry landscape, both domestically and globally, to understand the implications of today's challenges on their business, with the ultimate goal being to develop a wide range of strategic options that they can choose to pursue if specific trigger events come to pass. By mastering the area of uncertainty management by planning for various possible scenarios and risks, companies can also align their executive team to move towards clearly defined long-term objectives.
"Mining companies already understand the value of contingency planning for major incidents, such as health and safety," says Ives. "Strategic flexibility simply extends the concept of scenario planning to operational issues. By envisioning multiple scenarios, this process can help companies maximize their success no matter what the future holds."
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