Mining companies must embrace innovation to ensure their future viability, says the new Deloitte Canada report, Tracking the Trends 2014.
Deloitte advises mining companies will continue to be confronted with cost inflation, falling commodity prices, supply-demand imbalances and decreased productivity levels. "While long-term fundaments remain strong, the report suggests mining firms are ill advised to simply wait out the market swing."
"Radical shifts call for radical change," says Deloitte, which involves "engaging in sustainable cost reduction, relentlessly focusing on productivity and returns on shareholder value, ‘right-sizing’ capital projects, taking advantage of modular construction and embracing new forms of innovation."
It also requires mining companies to use new approaches for dealing with local communities, governments and regulatory bodies, the report advises.
The mounting costs of doing business topped Deloitte’s list of mining trends for the third year in a row. "Rather than one-off cost cutting measures, mining firms need to implement sustainable cost management programs that improve efficiency, productivity and shareholder returns across their operations," said Deloitte’s Americas Mining Leader, Glenn Ives.
However, as mining companies cut costs, they are uncovering hidden costs, the report suggests. "Mining lower-grade deposits give rise to a host of hidden costs," said Deloitte. "With 75% of new base metals discoveries hidden at depths in excess of 300 meters, this practice is pushing up strip ratios—reducing the economic sustainability of mining lower grades."
As mining companies announced substantial workforce cutbacks in reactive cost cutting, Deloitte noted, "They are shrinking the talent pool, reducing executive compensation and limiting funding approvals to only the highest quality project in mining-friendly geographies."
"Companies that slash the workforce now may find themselves scrambling to recruit new teams as the market recovers," the report warned.
"To bring costs down more sustainably, mining companies must go beyond tweaking their current cost structures. Instead, they must re-evaluate their operating models to ensure they have the management and reporting systems necessary to build a cost management culture," said Deloitte.
Some strategies to consider include pursuing operational excellence, potentially changing internal mining cultures to drive continual improvement. Improving efficiencies through technology may allow companies to get an automated visual of their mining operations from pit to port, enabling the company to identify inefficiencies, track productivity, streamline process and re-plan based on actual performance and conditions.
Using analytics, companies can uncover true cost drives through measuring indicators such as energy consumption per ton, or measuring the mineral content of each shovel load to determine whether it is below cut-offs grades, the report asserts.
While mining companies often ask supplier for often unsustainable cost concessions, "it makes better sense to build partnerships with those suppliers who have delivered demonstrable value," said Deloitte. By sharing demand forecast data, "organizations can optimize contractor manag4ement, procurement, and commercial arrangements across the supply chain."
To get capital costs under control, mining companies are going to quick-start modular plants and projects that can be expanded as industry markets improve.
Meanwhile, the continuing commodity price decline “is causing widespread industry performance dips,” said the report. “Marginal mines are struggling to remain viable, stock prices are taking a beating and industry impairment charges are escalating dramatically.”
"The resulting pullback in exploration budgets only threatens to widen the gulf between demand and supply and could ultimately tip the industry back into another heated production cycle, causing costs to careen even further out of control," Deloitte warned.
The report recommends that mining companies also crackdown in corruption, improve environmental compliance, and upgrade their systems to support sufficient reporting detail. Miners should also open a dialogue with governments by coordinating local infrastructure projects, engaging citizens and negotiating with all levels of government.
"In short it is time for the mining companies to change the way they do business," the report asserted.
"Ultimately, organizations that succeed into the future will be those that invite external perspectives, use data-driven insight to inform their decisions and abandon the locked-in paradigms to which the industry has adhered in recent years," said Deloitte.
"As mining companies work to attract more visionary leaders, the creativity and forward thinking that characterize innovation and progress will cease to be industry anomalies become the norm," said the report.