September 23, 2017

Survival of the fittest in a battered mining sector

The slump in commodity prices over the past year has jolted the mining industry out of its comfort zone. The industry is in a different place right now, where everything is under scrutiny. The fittest and most well-managed companies will be those that survive.

So where are the opportunities and how do companies in the mining industry rise above harsh times that have affected them? Mike Simms and Olivier Barbeau offer some advice.

Cutting costs and saving money

Most companies are in survival mode, with the threat of liquidation hovering over some of the smaller and medium-size mining companies in particular.

Before taking such a major step, it’s vital to check whether enough has been done to cut costs in a way that will not have a long-term negative effect on the business.

Survival checklist

  1. In the current climate, there may be obvious operational patterns which are an option for mining companies, both big and small. These include split or short shifts and not working 24/7.
  2. Using new technology could also help to reduce employment. While sensitive to job cuts, engaging technology in the short-term may be necessary for the long-term survival of the business.
  3. Some companies may have to consider restructuring their debt and look at other ways of raising money. Short-term measures, like external financing, may be a necessary option for some.
  4. Companies should also consider whether it’s viable to lease out their equipment to bring in some extra cash. Capital projects may need to be put on ice, while retrenching employees may be an inevitable last option for companies.
  5. Cutting costs need not be negative. Being innovative and creative and thinking of new ways of doing things could spark fresh plans. Changing the approach of the way you do things can lead to better systems in future.

Consider investing in renewable energy

With insecure energy supply in some African countries, finding ways to secure your energy supply by investing in your own base-load power plant or shifting to renewable energy may be more viable than ever. Technology that can reduce costs, particularly in energy and water, is well worth looking into.

Increasingly, companies are exploring the opportunity of using renewable energy, particularly solar and wind, where prices have dropped and are starting to look very competitive compared to conventional coal-fired electricity.

Diversify your assets if you can

Moore Stephens foresees more mergers and acquisitions in the next 12 months.

The larger mining companies and groups are likely to be the winners here. There is still money in the market looking to find a home. Companies are looking at distressed businesses as potential acquisitions. Bringing in other parties at a discounted rate may help companies to survive.

For those in a position to do so, a joint venture could be a good way to diversify into several metals or other companies. Equally those that are struggling may find a way out in joint ventures.

In an industry currently facing more risks and regulation, there’s a need to tread more carefully and be astute about managing the risk. But timing could win out. Companies need to be flexible to adapt to what’s happening in the world, as well as react swiftly when opportunities arise.

Get communities on board

In the current volatile economic climate, it’s vital to be sensitive and respectful to the communities in which mining companies work. The communities in which companies operate will be there long after the rocky times have subsided. A distressed mining environment can become even more distressed if there’s tension.

The whole community is integral in developing a sustainable mine or operation. This is one of the important lessons the industry has learnt from South Africa’s experiences on the platinum belt. Keeping up with corporate social responsibility initiatives and other ways of giving back to the community helps in countering criticism that companies extract the natural resource for the benefit of shareholders who may be on the stock exchange in another jurisdiction.

Engaging with community stakeholders is also vital, while having board members with strong connections to the communities in which they work will build relations and important partnerships.

 Through being inclusive, transparent and looking for creative solutions, companies that are able to weather the storm will be in a far better position to react to opportunities when the markets shift in future.

 Michael Simms is a partner in accounting and advisory network, Moore Stephens UK, based in London. Olivier Barbeau is the managing partner of Moore Stephens in Johannesburg.

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