In a report, titled ‘Tough choices facing the South African Mining Industry’, professional services firm Deloitte’s strategic consulting arm Monitor Deloitte indicates that mining executives need to think strategically about attracting and developing key skills, raising and allocating capital and engaging with stakeholders to integrate them into a sustainable long-term strategy.

The report, published last month, provides a series of practical, analytical and strategic tools to assist mining companies in dealing with these challenges.
These tools focus on strategies to mitigate risk and take advantage of opportunities to create sustainable value.

Scenario Planning
The first of these tools – scenario planning – enables mining companies to group together critical uncertainties about the future, along with predetermined elements, into a manageable set of scenarios that vividly describe future possibilities.

Monitor Deloitte advises mining executives to use this tool as the basis for informed decision- making and to enhance their portfolio accordingly.
Scenario planning also alerts companies to early warning signs of danger or early indicators of high-value opportunities, some of which are not visible or unlikely to occur at the time when an investment decision is made.
Monitor Deloitte director Andrew Lane says integrating lessons learnt from scenario planning provides companies with a better understanding of which projects are likely to develop their sustainable advantage in the future.

“Mining executives can adopt aspects of a modern portfolio theory to analyse and select appro- priate projects to deliver shareholder value,” says Lane.

Managing Money
The second strategic tool focuses on managing volatile prices and rising costs, further focusing on effective capital allocation. According to Monitor Deloitte, astute companies will aim to enhance their portfolios by acquiring and mining high-quality, better-grade assets that generate strong margins, while ceding low-margin assets to junior miners.
However, board members and executives face difficult trade-offs between competing strategic objectives, notably with projects that have significant capital requirements. While in-depth financial model-ling is critical, Monitor Deloitte argues that decision-makers need to move beyond simply prioritising projects through value metrics such as net present value or internal revenue return.
Beyond this, the advisory firm emphasises the need for mining companies to assess the tangible and intangible benefits of projects. Companies can assign quantitative measures to these benefits, allowing for the comparison of projects on a value basis.

Capital allocation models in mining can be further improved by prioritising projects using a risk-adjusted capital allocation model. Moreover, Monitor Deloitte says proper risk management is crucial for mining companies, which are strongly influenced by global uncertainties, such as exchange rates, commodity prices and political risk.

Aggressive Innovation and Skills Development
The third tool outlined in the report focuses on the need for companies to innovate aggressively in dealing with critical skills. Typically, mining companies can opt for either a survival or leadership strategy, according to Monitor Deloitte.

“Those pursuing a survival strategy will cut costs to the bone while adopting a risk-averse posture and focusing on defending their core business. Other companies adopt a leadership strategy, aiming to identify unusual opportunities that will enable the mining company to gain ground during the downturn and make step changes in performance,” says Lane.

He adds that the challenge lies in turning innovative ideas into step changes that are reflected in good results. Mining companies should, therefore, focus innovation efforts on the critical few projects that are likely to achieve a step change in performance and then move fast to implement the strategy.

Monitor Deloitte further advises mining companies to defend their profits by managing costs and streamlining their overhead portfolio to focus on cost categories that drive growth.

Proactive Engagement
Engaging proactively with stakeholders forms the basis of Monitor Deloitte’s fourth tool. This toolset enables mining companies to develop a sophisticated stakeholder map, which is a living document that evolves over the life of the project and presents new opportunities to improve understanding and communication with stakeholders.

Proactive engagement also helps improve relationships among mining companies, government, labour and the community.

Adaptive Management
The fifth tool focuses on the need to manage costs adaptively. According to Monitor Deloitte, mining firms should make conscious decisions about their overhead ratios and, rather than allowing for cyclical cost fluctuations, should manage their overhead ratio consistently over time, as companies that consistently manage their overheads can achieve better returns.
This integrated management approach taken by Monitor Deloitte is a customised, data-driven process that provides an understanding of constituents and their inter-relationships, how they are influenced by prominent issues and how companies can build platforms to engage these constituents.
“Even in tough times, mining companies can use strategic think- ing and analytical tools to face their tough choices,” concludes Lane.