Produce the highest volumes of ore at the lowest possible cost - for years, this was the cornerstone strategy of some mining companies. That bubble, of course, has long since burst. Yet many mining companies are still struggling to break free from that mindset and in today's complex mining environment, that's a problem. With the critical shifts now facing the industry, companies must broaden and reposition their strategic outlook.
The last few months have seen a number of announced mergers - Barrick/Randgold; Newmont/Goldcorp; Nevsun/Zijin and of course, last week's announced bid by Barrick for Newmont. These announcements are only the beginning, and as they play out over the next few months we are likely to see another round of consolidation amongst the remaining gold majors, as well as amongst the mid-tier miners.
Some of these will be acquisitions, some mergers and others may pick up assets from the realigned portfolios of the majors. Throughout this wave of M&A, it's important that companies don't lose sight of strategy. Companies will need to be clear about their long-term strategy and their ability to deliver on the value creation proposition beyond the initial transaction.
As outlined in Deloitte's 2019 Tracking the trends report, the industry is moving in ways that many executives never anticipated.
New voices, new paradigms
A new strategic approach is more important than ever for mining companies given some emerging trends. Take consumers. Mining companies have never truly had to answer to the broader public - not like consumer-facing businesses. But that's all changing as users of smartphones (which contain more than 62 different metals) and drivers of electric vehicles (EVs) - which rely on increasingly in-demand commodities such as lithium, graphite, cobalt, copper, titanium, aluminium, nickel and manganese - are now questioning whether the metals and minerals in their end-products are ethically sourced.
Governments and communities have also become more vocal over the years and possess the power to delay or even shut down projects if their needs are not adequately addressed. As a result, corporate social responsibility (CSR) initiatives, once approached as mere compliance exercises, are now morphing into stakeholder engagement programmes. The social license to operate is fast becoming a pivotal strategic issue that can either differentiate or derail a mining company.
A similar strategic struggle is taking place at the portfolio level as mining companies attempt to select the ‘best' assets. The trouble is that, while certain assets look good on paper, in practice their return profile is compromised. A prime example are world-class orebodies located in politically risky geographic regions. In this scenario, government demands are taking the form of higher royalties, resource taxes, growing requirements for local beneficiation, and even reclassification of key commodities as ‘strategic'.
Equally challenging is operating in regions where key inputs, such as energy and water, are scarce. With fluctuating energy prices and the difficulty of placing true value on water, mining companies must continually readjust the relative value of their individual assets - especially in terms of their carbon and water footprints. The strategic implications of this cannot be underestimated.
In the face of this M&A activity and the wider set of strategic trends that mining companies are dealing with, firms should be challenging their strategy across a number of key dimensions by asking some key questions:
1. Competitive positioning:
- How confident are we in our underlying life of mine models? Are our models static and based on imperfect assumptions? Or, are they sufficiently dynamic to take commodity, grade, and orebody fluctuations into account?
- Are we exploiting possible synergies in the assets or are these a standalone set of independent assets?
- Are the portfolio of assets competitively positioned and do we have clear plans to enhance the competitiveness of the individual and collective assets?
- Are we relentlessly focused on ensuring the cost competitiveness of our assets? To what extent are we embracing digital technologies to control costs?
- Can we consistently and optimally operate our mines, while adopting necessary local variations? Or, does our model result in a different operating model for each of our mines?
2. Value creation:
- How actionable is our strategy? Have we delineated consistent actions to create value across each operating division? Or, is our strategy confined to the level of aspiration?
- Are we the best owners for these particular assets? Can we prove that our portfolio of assets create more value in our hands than they would in someone else's hands?
- Do we have a sufficiently differentiated strategy that describes how we create value for each of our stakeholder groups, such as our investors, customers, communities, and governments? Why would a stakeholder group align with us rather than with a competitor?
3. Risk profile:
- Is our portfolio robust enough to withstand the complex array of industry, community, and government risks we face? Do we have a response plan and contingent scenarios should the regulatory environment alter?
- Are we thinking about the future of mining? Can we identify ways to generate returns more quickly or respond with more agilely to shifting demand factors?
Broadening the strategic outlook
This expanding range of issues must be taken into account when a mining company set its corporate strategy today. When done well, strategic planning cycles consider a range of issues in addition to cost, including the role of individual assets in the portfolio, the path to value creation, the balance between risk and return, and how the company is differentiating itself in the market. To help rethink strategy, companies should consider the following:
- Put strategy to the stress test: In an age of disruption, a company that doesn't expose weakness in its strategy will be at risk. Stress testing a strategy can clarify a company's understanding of its most coveted customer segments, its stakeholder value proposition, its key performance metrics, and its risk tolerances.
- Use data to drive strategy: Intuition only goes so far. Mining companies need to rely on data to mitigate unanticipated risks and overcome longstanding biases. Relying on data to drive strategy can also shorten the strategic planning cycle and enable feedback loops between geological and financial planning.
- Consider a range of scenarios: Scenario planning, now enhanced with artificial intelligence (AI), gives executives a structured way to consider and prepare for a range of unpredictable futures. This is particularly useful to mining companies eager to test the robustness of their portfolio strategy using AI to consider and monitor multiple market signals.
Forward-thinking mining companies are already taking steps to reposition their outlook by revisiting their underlying business models and making new strategic investments. While it is currently unclear whether these moves will be sufficiently far-reaching or radical, one thing is clear: to break away from outmoded thinking, management teams must put strategy front and centre.
Andrew Swart is Deloitte Canada's mining & metals leader and the global mining & metals consulting leader. This piece was originally published on LinkedIn and was republished with permission.