Continuous Improvement Digs Mining Companies Out of Financial Problems

For an industry well-versed in extracting valuables from dirt, the mining sector has experienced a mountain of trouble unearthing solutions for its many interrelated financial woes:

High debt leverage
Research from Ernst and Young showed net debt in mining fell 17 percent in 2016. Debt leverage, however, hit a record high of 46 percent that same year, according to a PricewaterhouseCoopers study.

Credit downgrades
Last year Moody’s reviewed 55 mining companies across the globe for ratings downgrades, including 11 U.S.-based organizations, citing “a fundamental shift that will place an unprecedented level of stress on mining companies,” according to Moody’s Senior Vice President Carol Cowan.

Shareholder demands
Total shareholder returns in mining plummeted over the last five years due in part to low commodity prices, according to Deloitte. Tired of subpar performance, investors have pushed companies to develop robust long-term strategies for contending with two of the industry’s toughest challenges ahead: environmental regulations and resource scarcity.

Relieving these concerns once and for all will require the development of bold continuous improvement plans. Where should mining companies focus their CI strategies to get the most out of their mines, equipment and other capital-intensive, revenue-generating assets?

Organized and transparent opex
PwC reported that operational expenditures across the top 40 mining companies fell by a cumulative $83 billion between 2014 and 2015. Mines today are still operating on shoestring budgets, but production has only grown, effectively lowering costs per tonne. The longer these businesses maintain contracted opex while pushing productivity to the upper limit, the better off they will be financially.

However, such a cost-efficient dynamic adds significant risk to mining operations. Companies should combat this increased exposure by compartmentalizing operations and strengthening data visibility and accessibility into the most expensive segments. CI initiatives should isolate indicators that signal impending rises in costs in order to subvert them.

Enterprise asset management tailored to mining
Asset divestment is one way to reclaim capital and alleviate debt levels. In the past few years, mining companies have sold off underperforming or nonessential mines and equipment bought over the previous decade when times were more fortunate.

Shedding assets alone will not rectify financial troubles. With fewer assets immediately available to operators, fewer sites from which to derive minerals, and higher demands on productivity from the market, mining companies need to create comprehensive EAM systems – based on a sound Management Operating System and proactive maintenance – that maximize output and ensure uptime.

Furthermore, those systems must include CI components that preemptively address and diminish the specific challenges mining companies face when establishing EAM. Since EAM’s inception, mining companies have always struggled to adopt true EAM or modernize the partial strategies they already have in place. A study conducted by asset management consultants Grahame Fogel and Stefan Terblanche shed light on why EAM in mining fails to mature. Reasons include but are not limited to the following:

  • Inability to perform root cause analysis
  • Misalignment of organizational requirements and asset performance
  • Lack of EAM literacy and accountability modeling
  • EAM stakeholders given no cross-functional authority
  • Overinvestment in innovations rather than integration into operations

As mining companies deploy EAM practices to mitigate financial stressors, they must be ready to target these areas by developing CI processes that sustain benefits and augment them over time.

Safety training and hazard reporting
Safety training serves both obvious and subtle economic purposes for mining companies. According to a study authored by two researchers from the National Institute for Occupational Safety and Health, direct costs incurred from occupational injuries – workers’ compensation, legal fees, property damage, operational losses, etc. – constitute only one-third of total costs sustained by the employer when accidents happen.

As an industry, mining has made incredible strides in making operations safer. The Centers for Disease Control and Prevention reported that nonfatal lost-time injuries declined by more than 43 percent between 2006 and 2015 to an annual injury rate of 1.7 per 100 full-time employees.

Still, reactive direct and indirect costs associated with injuries represent billions in potential savings to those who incorporate CI into, not only their training modules, but also their hazard reporting schema. When an operator or manager sees something unsafe happening, remediation speed matters, as does efficacy of actions taken. Combined, these two elements ultimately bolster operational uptime by dictating and optimizing how operators must act in the face of danger.

USC Consulting Group partners with mining companies to resolve dilemmas and build long-lasting strategies for financial success. Speak with our operations management consultants today to learn more.