Miners forced to embrace more flexible planning strategies

1st December 2011 By: Henry Lazenby - Creamer Media Deputy Editor: North America

JOHANNESBURG (miningweekly.com) – Mining companies are being forced to incorporate more complex scenarios into their strategic planning as some elements of the industry are in constant change, a report highlighted on Thursday.

Deloitte Touche Tohmatsu Limited (DTTL) global mining lead Philip Hopwood said executives had to look beyond the traditional scenarios in their planning, for previously unanticipated risks, and must be willing to seek unconventional solutions to their conventional challenges.

“The factors influencing the global mining industry are moving to a new level of extremity, impelling companies to consider more sweeping scenarios than ever before.”

The ‘Tracking the trends 2012’ report identified the top ten trends in the industry, indicating that various elements of the industry are in constant change, necessitating companies to embrace more flexible planning strategies.

One of these strategies is known as ‘strategic flexibility’, a tool that supplements traditional scenario-planning techniques by defining a strategy that includes appropriate actions, regardless of which scenario actual events resemble.

This is even more valuable in today’s terms, owing to so-called once-in-a-hundred-years events seemingly happening increasingly regularly, calling for increased vigilance from executives. “Preparing for such unanticipated surprises is likely to require more of a creative licence than mining companies are accustomed to,” the report stated.

The report pointed to increasing demand from developing countries pushing commodity prices upwards, as supply cannot meet demand. “With commodity prices surging to all-time highs, accelerated production has become the mantra of most mining companies and costs are going up across the board,” it said.

Deloitte urged miners to understand cost drivers, enhance energy efficiency, improve capital project management, lock in supply by sourcing long term contracts with key suppliers and learn how to spend to save in the long-term to save costs.

Further, the analyst established that resources sector profits are increasingly tempting to governments, resulting in seven governments increasing mining royalties in the past year alone, while three others introduced new export duties, focused on the mining industry.

In addition to mining royalties, which tend to be charged against revenues rather than profits, many governments have begun to impose superprofit taxes, discovery bonuses, resource rents, licence fees, indigenisation quotas, environmental levies and reconstruction tolls.

Host countries are also seen as competing to become the world’s toughest regulators, as world nations ramp up their regulatory initiatives and increasingly focus on the mining industry, heightening the need for mining companies to review their regulatory compliance procedures.

This had resulted in miners battling to keep profits, while industry stakeholders are increasingly finding themselves subject to higher levels of activism from host communities to implement social responsibility schemes than ever before.

“To meet the demands of a broad stakeholder base, mining companies will need to integrate risk-based corporate social responsibility strategies and develop and track key performance indicators with the same diligence they use to track production,” the report suggested.

Further, there simply are not enough people to power projected mining company growth, and each year the skills gap extends to a wider range of functions. Steps companies can take to find willing workers include applying science to workforce planning, introducing industry-level cross training, and building a global culture.

However, project risks rise as the supply and demand gap widens. As commodity prices fluctuate and the gap between supply and demand widens, the number of capital projects across the globe is mounting in the mining sector. Mining companies must now focus on managing risks that could interfere with the ability to meet steady-production objectives.

New financing avenues are also increasingly being explored, but Deloitte cautions that new sources of funding require new levels of knowledge. Despite the increased amounts of cash companies have on hand, due to increased commodity prices, finding sufficient capital to fuel growth remained difficult.

The key to success in these efforts hinges on mining companies’ ability to build the relationships they require to gain access to foreign markets, while gaining better insight into those regions.

Meanwhile, dwindling access to deposits, deteriorating grades, spiking global demand, and lofty commodity prices have heightened mining companies’ appetite for geographic and economic risk, yet few companies possess the internal skills to grow their capital project portfolios aggressively, or to operate in unfamiliar regions.