Productivity is key concern for miners, says report

E&Y analyses risks for sector

FINDING ways to improve declining productivity levels will be the biggest priority for the mining and metals industry this year, says an Ernst & Young (E&Y) report entitled Top 10 Business Risks Facing Mining and Metals in 2014-15.

It says the majority of junior miners have been “cashstarved” and “focused on survival” in the past year.

The report, which is based on a combination of desktop research and interviews with mining executives globally, also shows that, worldwide, productivity and transformation are necessary for the industry which is operating in a marginconstrained environment.

At the same time, it says, the major producers have cut capital expenditure and divested in non-core assets to preserve cash over the past year.

Maintaining social licences to operate is the third risk as pressure from communities and environmental groups for companies to stick to their commitments is mounting.

Other risks are price and currency volatility, access to infrastructure and sharing the benefits with stakeholders.

Notably, access to water and energy is cited as the number 10 risk for the industry.

“South African mining companies are struggling to adapt to consumption patterns and mining methods resulting in substantially higher electricity bills and notable margin erosion,” says the report.

Last year, the National Energy Regulator of SA awarded the governmentowned power utility, Eskom, with an 8 percent average electricity tariff increase over a period of five years.

Wickus Botha, a mining and metals sector leader at E&Y, said a contributing factor in declining productivity had been that nearly all cost categories had increased at rates that were higher than consumer and producer inflation indexes. Productivity ranked second in last year’s research and ranked fourth in 2012.

Botha said improvement in productivity was necessary so that companies could regain lost ground following the 10-year commodity price boom between 2002 and 2012.

“To remain competitive, now that supply exceeds demand for many minerals, miners need to re-address inefficient practices that crept in during the last growth cycle.

“Behavioural change will be a large component of this, given many mine managers, engineers and operations supervisors have never operated in a margin-constrained environment,” he said.

Innovation should also be pursued to recover their competitive advantage, he said.

The report highlights how the declines in productivity are a by-product of the industry’s choice to pursue volume growth during the commodity price boom.

“Mines were developed to get product out as quickly as possible, not as efficiently as possible,” it says.