Productivity is key to value creation for mining companies: BCG

Rising Costs and Falling Commodity Prices Have Eroded Shareholder Returns for Mining Companies.

May 29, 2014 2:51 IST | India Infoline News Service
Escalating costs, combined with declining commodity prices, have dramatically squeezed the margins of mining companies, forcing them to dig deeper to find sources of value creation. Given the uncertain economic environment, creating shareholder value will increasingly depend on enhancing productivity, according to a new report titled Value Creation in Mining 2013: The Productivity Imperative, which is being released today by The Boston Consulting Group (BCG).

The report dissects total shareholder return (TSR) of 42 major mining companies over a ten-year period. On the whole, the decade was lucrative; most companies delivered an average annual TSR of about 16 percent, while the top ten produced an average annual TSR of approximately 35%.

Mining companies were hit hard, however, after 2009. Even the top ten saw TSR fall by more than half, to 15%, andit was flat for the sector.The profitability pinch shows that mining companies cannot rely on costs to automatically contract when prices decline.

With the economics of mining under pressure, efforts to enhance productivity have emerged as primary levers mining companies can apply to create shareholder value. Gustavo Nieponice, a BCG partner and coauthor of the report, observes, Common approachessuch as reducing headcount and deferring expendituresquickly reach their limit. A great deal of hidden value can be captured by using asystemic methodology that encompasses not only physical assets but also management systems and people.

MOST is a maturity-based, optimized, sustainable, and transformational framework designed to overcome the hurdles companies typically encounter in their productivity efforts. MOST is built on BCGs experience with more than 150 projects around the world. Mining companies often struggle with productivity initiatives and do so for various reasons, says Alexander Koch, a BCG partner and coauthor of the report. Sometimes managerspursue incremental improvements and miss opportunities to apply innovative technologies or new ways of thinking to operating an asset. Or, managersmay ignore the organizational structure, culture, or management systems, all of which are needed to enable change. A systemic productivity initiative, the report shows, requires the combination of deep technical knowledge, an innovative mindset, and the rigorous application of change-management levers.

Now in its third year, the Value Creation in Mining report is sponsored by BCGs Industrial Goods practice. The reportis part of BCGs Value Creators series, which uses BCG proprietary methodology todisaggregate the sources of value creation among top-performing companies throughout leading industries.

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