LONDON (miningweekly.com) – Among analysts, fund managers and investors, questions surrounding liquidity, cash generation and squeezing out productivity gains dominated the conversation on how to best avoid the downcycle’s worst shoals.

Many a management had tailored their project and operational metrics in response to this debate. Unfortunately, the parameters selected were suited to measuring cost efficiencies rather than helping to deliver long-term project effectiveness, AMC Consultants principal mining engineer Brian Hall told Mining Weekly Online.

Over the past 15 years, Hall had specialised in mine planning and strategy optimisation for both surface and underground operations, building on over 40 years’ experience in mine designs, technical assessments, feasibility studies and strategic planning.

SEEING THE LIGHT?
In some instances, management teams were focusing their attention on reducing expenditure. This risked longer-term instability as projects became cash starved and corners were sometimes cut. “[Remember,] cutting costs isn’t necessarily a good thing: cutting fat is good, but too much cost-cutting can become an exercise in cutting muscle,” Hall warned.

He cited an example of a company that decided to spend only 75% of the capital requirements identified by the engineering work. “Maybe you can shave off 5%, but to shave off 25% means you are not going to build what has been envisaged.”

The core systems of the project were built, but the ancillary systems were not. This caused later difficulties and dictated retrofitting at a cost much higher than the outlay initially envisaged. “Now that’s an extreme example, but things like that are going on,” Hall said.

In some instances, companies claiming improved productivity had obscured this risk. They had failed to realise that their efforts were morphed into cost-cutting by another name.

World-class projects were often prone to this risk. “There’s always the desire to ask whether a cost can be screwed down further with these types of projects. But are you actually screwing down a cost? Are you taking out bits of fat or are you cutting out muscle? Worse still, are you fooling yourself and simply refusing to accept what the real cost will be?” Hall asked.

EARLY ISSUES
The problem of seeking value but using measures that failed to correlate with effectiveness frequently manifested itself as early as the preliminary economic assessment (PEA) stage. The situation was then compounded by many viewing the PEA as the final seal on project direction and expectations, rather than as a tool through which a company can judge a project’s viability.

“The PEA level is about moving a project forward. But afterwards, if there are some developments that might not match the PEA, many people assume this is somehow proof you’ve done something wrong: either that your previous study was wrong or that you were foolish for putting it out in the first place,” Hall said.

Connected to meeting value expectations as quickly as possible, some companies have felt it acceptable to move from a PEA to a feasibility study without the usual intermediate process of conducting a prefeasibility study (PFS). “That jump occurs because people sometimes say: ‘We’ve shown that we’ve got a project – the quicker we get it up and running, the better it will be’,” he noted.

Unsurprisingly, problems subsequently arose that could have been identified and mitigated during a PFS phase had it been undertaken. The company was then forced to take corrective measures at a premium.

CHOOSE WISELY
Decisions surrounding input choices for mine planning, such as cutoff grades, had also been used as drivers to meet value expectations rather than being focussed on boosting a project's or operation’s viability.

“At the moment, the market says it wants cash,” Hall noted. “Well, we can identify plans that generate cash, but the measures by which these plans seem to be evaluated by the market are not correlated with value, even though they superficially appear to be.”

Hall likened those companies that keep chopping or changing strategy inputs to meet expectations to someone who kept shifting lanes on the highway – they risk suddenly finding themselves on a turn-off without the means to get back on.

Unlike the addition of resources through new discoveries or exploratory work, the habit of lowering a resource’s cutoff grades to boost its scale had been unhelpful. In the worst cases, it had inflicted serious, albeit latent, cost burdens and production problems when prices fell.

“Generally speaking, increasing ounces does not increase the value. In fact, it drives value down,” Hall said. This is because the additional ounces, kilos, pounds or tonnes have included cash-neutral material or – and much more likely – ore that represented a cost.

“So companies that suddenly add a lot to their reserves [by using cutoffs that are too low] are, in fact, going to lose money in terms of overall cash generation,” he noted. It would be extremely difficult to subsequently amend, reduce or remove this type of resource add-on without agitating investors and the market.

GET ENGAGED
Mining companies should have also done more to quantify the importance of stakeholder engagement. “I have what I call a ‘hill of value’, a model with various sensitivity plots that incorporate things like prices and costs etcetera,” Hall said. “We map lines that tell you how value and optimum strategic decisions change depending on a price or a value input change.”

These models could be crafted for all stakeholders and Hall was struck by how stakeholder-focussed models achieved the most satisfaction and maximum value by following the same strategy inputs as a company’s.

“Simplistically, this makes sense because the strategy that generates the most revenue and net cash for the company is going to increase the size of the overall pie available to distribute among stakeholders,” he said.

Comparing models also helped companies define the goalposts for engagement between various stakeholders. However, difficulties have remained in creating models that allowed stakeholders to see the valued created by the exploration and mining industry on a wider level.

“And that’s a big issue for the industry: stakeholders need to identify what will generate value and how we should reward companies for delivering true value because, at the moment, we often punish companies for doing the right thing while rewarding those that don’t,” he said.