BOSTON, MA--(Marketwired - Aug 27, 2015) - Creating value remains an uphill battle for mining companies. Although unit costs have stabilized, falling commodity prices and slowing production have made it hard to deliver positive total shareholder return (TSR) -- and current productivity programs are running out of steam. That's according to Value Creation in Mining 2015: Beyond Basic Productivity, a new report being released today by The Boston Consulting Group (BCG).
The report examines TSR for 101 mining companies from 2010 through 2014. Over that period, the median TSR of the sample was -18 percent. These results contrast sharply with those of the first decade of the millennium (2000 through 2009), when the global commodity price boom fueled growth in profits.
Apart from the decline in commodity prices, BCG identifies two fundamental factors underlying the reversal of fortune: rising production costs (and, in turn, declining margins), along with investors' waning appetite for mining stocks.
Among some of the report's key findings:
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Industry EBITDA margins fell from 42 percent (in 2010 and 2011) to just 33 percent in 2013.
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The margin squeeze has been uneven across different countries. Between 2010 and 2013, unit costs increased by 6 to 10 percent in Australia, around 12 percent in Peru, and 14 to 15 percent in Chile.
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Gold and coal companies were especially hard hit during the 2010 through 2014 period.
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Unit costs, though finally stabilized after a decade of increases, still exceed 2009 levels. Mining companies' productivity programs are working, however not at the pace required.
Value Creation in Mining 2015 cautions that companies cannot rely on their existing productivity measures to improve TSR. "Achieving further cost cuts will become increasingly difficult as the more visible opportunities begin to disappear," says Gustavo Nieponice, a BCG partner and coauthor of the report. "In addition, given the uncertain economic outlook, companies cannot rely on an uptick in commodity prices as a lever for recovery."
Digging Deeper for Value
To rejuvenate their efforts, companies need to take an end-to-end approach to productivity and tackle three performance dimensions simultaneously: the efficiency of physical assets, the effectiveness of management systems, and the level of people excellence. This is best accomplished through a "triage" approach that targets the weakest areas first.
To illustrate, the report looks at the topic of contractor management. "Companies often focus on negotiating lower rates and better payment terms as a way to gain efficiencies with contractors," notes Thomas Vogt, a BCG principal and coauthor of the report. "In doing so, they overlook many other opportunities to improve productivity within these relationships." BCG has identified eight value levers -- among them, contract demand management, contract consolidation, contract scope breakup, and contractor productivity enhancement -- that have enabled companies to streamline, create efficiency, and save substantial portions of annual contract fees. A holistic approach to contractor management also includes using data and analytics to select, manage, and compensate contractors -- as well as developing internal capabilities to optimize how contractors are used on site.