Reliability Analysis Drives Mining Asset Management
The Covid-19 pandemic has affected all industries. The mining industry, too, is recovering from the impact of the pandemic. Market volatility, reduction in commodity prices, easy availability, etc., are some trends defining the new normal in the mining and metals industry. Hence, companies invest in cutting-edge technologies to introduce automation, reduce costs, and improve operational efficiency.
Nonetheless, additional complexities are mounting up, such as public scrutiny, shareholder involvement, government regulations, environmental risks, etc. According to industry experts, in the coming years, more demand for minerals is anticipated. However, along with the trends mentioned above, other industry patterns will determine which mining companies can survive in the future.
With the development of technological innovations, an economy must be strong. For this, mining, metal, and fertiliser industries should have high levels of reliability. It is well-pointed in a recent report - Global Economics of Reliability Report by Pinnacle, the largest reliability analytics company in the world.
Exploring the impact reliability has on mining and fertiliser miners, this report discloses some crucial facts about the mining industry after analysing data from 15 large, publicly traded miners. This report examines the financial performance of metal and fertiliser miners, whether their reliability investments enhance their overall reliability and the association between reliability budget and the overall performance of the mining industry.
To conduct its analysis, the researchers relied on important data sets from The International Monetary Fund (IMF), lithium pricing from Statista, The United States Geological Survey (USGS), uranium production volume data from the World Nuclear Association, and financial performance data from 15 large and publicly-traded miners.
The report concluded that despite mining organisations spending so much on their reliability activities, they did not gain returns because of spending their reliability budgets on areas that did not impact the reliability of their mines.
Before we get more insights into it, let's first try to understand what reliability is.
Definition of Reliability
According to the researchers and analysts who conducted the study of this report, reliability is measuring the results/achievements organisations gain when they want something to run. In simple terms, what are organisations’ efforts or investments to improve reliability, and are they achieving results?
In the case of the mining industry, the report analyses the reliability in metal and fertiliser mining space, activities ranging from resource extraction to processing operations. Base metals like aluminium, cobalt, copper, iron ore, lead, lithium, molybdenum, nickel, tin, uranium, zinc, and precious metals such as gold, palladium, platinum, etc. silver are considered. However, reliability is ubiquitous. One common mistake mining operators make is they report the significance of reliability in words. Simultaneously, they discuss holistic operational results with the minimal significance of reliability's quantitative impact on performance.
Global Production and Related Economic Value of the Mined Resources
After analysing the data from the data sets, the total economic value of the mined metals and fertilisers was US$782bn in 2020. The dominant leader is metals, accounting for US$700bn. It was followed by gold, accounting for US$184bn. Other contributors include iron ore, copper, aluminium, and nickel. In the case of fertilisers, it was phosphate rock and potash, accounting for US$72bn and US$9bn, respectively.
While this was the overall economic value of mining metals and fertilisers globally, the report dived deep into the geographical distribution of the economic value and then calculated the corresponding reliability spend.
For a total economic value of US$782bn, the corresponding reliability spend was US$55bn. As per geographical distribution, Asia was the leader, holding US$214bn in economic value, and in Asia, China was the ruler with US$167bn. South America occupied 2nd position in the list with US$107bn in economic value.
Thus, it was estimated that metal and fertiliser miners worldwide spend US$55bn per annum on reliability. This was 10% more than the reliability budget of the refiners, which spent US$51bn per annum.
Revenue and Profitability
Miners suffered in profitability in 2015 due to the major oil price crash. However, after examining the financial performance of 15 large publicly-traded meal miners from 2015-2020, it was noted that miners suffered a revenue drop of 3% from 2015-2016. Still, their operating margin increased by 11 percentage points.
As the recovery from the crash started in 2017, the revenue increased by 25%, and the operating margin increased by eight percentage points. A similar trend was witnessed in 2019-2020. With the Covid-19 outbreak, mining organisations didn't operate their least productive mines or any other non-performing facilities. It enabled them to gain 10% more operating profit against 12% less revenue. These figures strongly indicate the capabilities of the mining industry to mitigate serious challenges posed on the industry. The mining organisations made a smart move to keep their non-performing plants idle as operating them would have caused deterioration of their financial performance.
Cash and Debt Analysis
2015 and 2016 were terrible years for metals and fertiliser miners, affecting their profitability due to the market's volatility. Nonetheless, from 2017-2019, they could recover, having a steady operating profit and margin. Then again, in 2020, the pandemic caused revenue decline.
While the mining organisations could keep a steady operating profit and margin, it's also important to consider their cash balance and total debt. With an excessive debt burden, it is difficult to survive in the market.
In 2015, total debts were US$224bn with a cash balance of US$46bn, generating a net debt of US$178bn. From 2016-2018, the balance sheet was different, with a larger cash balance against a smaller debt load. This pattern was witnessed even during the pandemic in 2020 as mining organisations safeguarded their balance sheets by reducing their spendings.
Cash balance and debt load are related to reliability. A poor balance sheet can be risky for any business, not just mining. However, reliability budget cuts are often the top priority for cost mitigation. If mining plants and related facilities are not functional, then the reliability burden will also decrease. Moreover, it is to be noted that such reliability cost reductions are not for non-performing facilities. It, of course, creates reliability challenges.
While the mining organisations recovered from the commodity price crash from 2016-2019, during the outbreak of the Covid-19 pandemic in 2020, they protected their balance sheets.
The increased debt in 2015 affected capital investments too. The cash balance increased from US$46bn in 2015 to US$60bn in 2019. In 2020, it went to a whopping US$82bn. As miners were recovering from the price crash from 2016-2018, a huge reduction in capital expenditures was also witnessed.
The debt load went down from US$178bn in 2015 to US$147bn in 2016. At the same time, capital expenditure was reduced by US$21bn from 2015 to 2016. That is a 40% year-over-year decline.
A reduction in capital expenditures might appear to be a relief, but this adversely affects reliability. There is no capital being pumped into expansions, setting up spare units, data storage, visualisation systems, etc. Organisations can save up cash and improve their balance sheet, but the reliability quotient will decline over time.
Relation between Profitability and Reliability
The same logic applies to any business: the lesser the operating cost, the more the operating margin. However, this does not hold for mining organisations. The study shows that mining operators that spent least on reliability incurred more profits. It points out that mining operators that spend a lot on reliability are unlikely to get better returns.
It raises one important question: if miners overspend on reliability, why is it challenging to cut down their reliability spending? The study suggests that mining operators can reduce their spending but, at the same time, reinvest excess reliability spend while ensuring profitability. Hence, to gain fruitful outcomes and profits, it is important to optimise the reliability spend.
Also, as the economy is continually evolving, digitisation of activities demands better utilisation of the reliability budget. To ensure strategic reliability investments, the study suggests intentional, multi-dimensional, system-wide analysis.