OVER THE LAST YEAR OR SO, WE’VE SEEN A DEFINITIVE END TO THE MINING BOOM THAT SERVED AS A BACKBONE FOR AUSTRALIA’S RISING ECONOMY.
Now, companies in the resources sector are facing lower demand and falling prices, yet they still need to be profitable and remain a key component of the national economy. Many organisations are taking cost-cutting measures to stay afloat, but is this enough and is it a sustainable approach? What can they do to endure a long-term downturn, and will they be ready to seize opportunities when they arise?
Sherif Andrawes, BDO Chairman and Partner, and Craig Hook, Consultant, have extensive experience in the natural resources industry as well as expertise in corporate finance and business strategy. They came together to discuss what’s happening in the mining sector and the options companies have not just to stay afloat, but to prepare for a successful future.
What are the main issues facing the Australian mining sector?
Craig: It’s hard to ignore the news about depressed commodity prices and decreased demand. Investors want to make an adequate return, so enterprises in Australia’s mining sector are trying to look at how they can do just that - what steps they can take to sell more of their product, reduce their costs, produce a good return for their investors and continue long-term growth.
With this protracted downturn, we have to keep in mind that it’s at the end of a supercycle. A supercycle goes long, it goes high, but it also goes very low at the end. In mining, the typical cycles take four to five years from highs to lows, swinging plus or minus 20 per cent. As we’ve come off a supercycle that has run long and went very high, now on the downswing we’re landing pretty hard.
Sherif: At this point, the question everyone is asking is how long it’s going to last and how deep it’s going to be. That, we don’t have the answer to. At BDO we’re encouraging our clients to ask the more constructive questions: What do we do about it? How do we survive it?
Craig, as an experienced business consultant providing services to the mining sector, is cost-cutting an effective strategy to manage cash? Or is it purely a ‘quick fix’?
Craig: It’s both. It is certainly the right first step to take when conditions tighten, but it’s only a quick fix.
When we hear cost-cutting, we’re thinking about reducing head counts, limiting discretionary spend and assessing suppliers to see how we can get their prices down. These steps temporarily improve cash flow, which is good, but they don’t fundamentally change the business. They don’t make the business better and stronger in the long term.
So what’s next? It’s time to start thinking about productivity. Mining is very capital intensive, so you really need to be utilising your equipment more and working with people as efficiently as you can; being more innovative with capital spend; and focusing your staff on business improvement.
What are the medium and long-term repercussions of the cost-cutting approach?
Craig: If you’re in a protracted downturn and haven’t shaped your business accordingly by changing the way you operate, adjusting what people do, leveraging technology and so on, then you won’t have built a foundation for medium and long-term growth.
As Sherif said, we don’t have crystal balls here so we don’t know how long we’ll be in this downturn. If you’re only looking at cutting costs to survive, you might not be able to continue indefinitely, and probably aren’t continuing exploration or other activities aimed at growth.
Sherif: One thing we do know and can be confident of is that the cycle will change. We don’t know when or which commodities, but there’s a fair chance many companies won’t be well-prepared for that change when it does arrive. We want to take a look at how these enterprises can better position themselves to seize current opportunities to be successful into the future, even during today’s more challenging circumstances. What new technology or innovations do you think those currently in the mining sector should consider to protect them now and help with long-term growth?
Craig: At BDO we use a broad definition of innovation, which generally comprises three aspects:
- Look at ways our operations can be run differently
- Focus staff on doing things differently
- Leveraging technology, such as autonomous trucks.
This can even include some of our day-to-day technology. Most of us have a smartphone, and employees can make suggestions on them; managers can spot things that are going wrong take a photo or movie and communicate corrective action quickly; and business critical information can be communicated to those required to make decisions.
As a whole, the mining, oil and gas industries do innovation well. They’ve always worked in remote places and it’s very expensive to develop the deposits, so people are always looking at ways to improve.
What advice do you have for the junior explorers?
Sherif: If you’ve got a really good project with a really great team, focus on that. Get rid of some of the non-core projects and hone in on your strengths. That will help reduce the cash flow drain and help investors understand what you’re trying to do. That’s one of the key things.
There is an argument that you could be a ‘project generator’ - in other words, have lots of different projects in the hope that one of the many will work. I’m not really sure that’s the way to go these days. That works better when you have the freedom to raise funds more easily so you can spread capital across projects, but money is harder to come by these days. Therefore, you really need to have focus of what you’re using it on and why.
Sherif, with your experience in corporate finance, in what ways are companies trying to raise money? What are the trends?
Sherif: Referring back to the previous point, it’s hard to raise money in the public markets. So we’re not seeing many IPOs for mining or and oil & gas companies, whereas five or six years ago we saw many. Most companies need to look at other ways to raise funds. One option is divesting of non-core assets and putting the money towards your remaining projects. We’re also seeing quite a few private equity funds being raised. These investors want a higher return but understand the greater risk better than the retail market might. Another possibility we’re seeing is investors using convertible debt instruments which reduce their risk and give them an upside if things turn out well.
Finally, high net worth individuals or companies can be strong sources of investment. In mining there is a diverse range of commodities, some of which you can’t even pronounce. It’s often hard to sell these as investments to the public, but if a wealthy investor believes in it, they may put several million dollars in. We’ve seen a few deals happen that way.
With so many uncertainties in the mining sector, which areas are looking more positive?
Sherif: The most positive sectors in the mining industry are those companies that have a quality ore product and can go into production quickly with little capital. Gone are the days of making projects as big as possible before flicking the switch, now smaller and quicker to cash flow are the key features of any successful mining project. As the uneconomic projects disappear it frees up investors to focus on these companies and restore the supply/demand equilibrium.
How does Australia’s mining sector compare on a global scale?
Sherif: Australia is recognised as one of the leaders in the mining industry.
We have lots of commodities on our doorstep and a very developed capital market. We also have very strong experience in the industry, from experts who discover minerals and develop mines to those who operate them.
What else is unique about Australia? We don’t just mine here, we do it all over the world. Many of the enterprises we work with have operations and customers abroad, which is why our international network of BDO specialists can be particularly valuable, especially at a time like this.
Even when the mines aren’t doing so well at home, we’re able to export some of those people and innovations in technology that Craig was talking about earlier. Whilst the industry may be in a downturn, the weak Australian dollar helps with exporting. You’ll find Australian mining experts and companies in all corners of the world, and that’s something we can take pride in.