Cutting costs won’t guarantee longevity: report

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 11 Sep 2015   Posted by admin


Focusing on productivity may not be enough to survive the iron ore price slump, a Boston Consulting Group report warned.

Focusing on productivity may not be enough to survive the iron ore price slump, a Boston Consulting Group report warned.

By Courtney Pearson

September 11, 2015

MINING companies need to do more than work on productivity and cost-cutting to ride out the mining slump, according to a new report by the Boston Consulting Group (BCG).

The Value creation in mining 2015: Beyond basic productivity report found that existing productivity programs were “running out of steam” as mining companies continued to tighten margins without returning any value.

“As the supply of ‘low hanging fruit’ is exhausted…it has become increasingly necessary to go beyond traditional approaches to productivity improvement,” the report stated.

The report examined total shareholder returns for 101 mining companies between 2010 and 2014, including AngloGold Ashanti, Newcrest Mining and OZ Minerals. The median total shareholder return was minus 18 per cent for each year, contrasting with the previous period  between 2000 and 2009 when the mining boom fuelled profit growth.

Value creation in mining 2015 found that industry EBITDA margins fell from 42 per cent in 2010 and 2011, to 33 per cent in 2013, with the downward trend continuing in 2014.

BCG partner and report co-author Alexander Koch said that companies needed to pursue profitable growth, either through organic means or via acquisition, =in addition to looking for opportunities to realise efficiency in physical assets and achieving effective management and employee excellence.

“Mining companies need to think about growth differently – ultimately, productivity is not a strategy,” he said.

“Companies must embrace new technologies to decrease costs, while replacing depleting resources and driving long-term profitable growth, either within the existing portfolio or through mergers and acquisitions.”

Many resources companies had cut overhead costs or focused on higher grade zones within existing operations, while others moved towards a productivity agenda focused on “the highest-value activities, avoiding short-sighted decisions and deploying technology to rapidly identify and realise value opportunities”, the report stated.

Even the industry’s biggest players, including Rio Tinto and BHP Billiton, have felt the effects of price decline, as the industry continued to cut costs in areas such as staffing.

“More than ever, mining companies need to take a smart, end-to-end approach to productivity – one that goes beyond easy wins,” the report stated.

The report found that companies operating in Australia performed well between 2010 and 2013, but that market resilience dropped in 2014 when iron ore prices halved.