|By Marketwired .||
|January 7, 2013 12:01 AM EST||
BOSTON, MA -- (Marketwire) -- 01/07/13 -- Between 2001 and 2011, while the S&P 500 eked out an average 3 percent annual total shareholder return (TSR), the mining industry averaged 18 percent. Even more remarkable was the decade-long annual average TSR of the industry's top ten: a stunning 39 percent. Furthermore, unlike their industry peers, the top ten mining companies continued to earn high TSRs during the second half of the decade, the period encompassing the global financial crisis.
How did they do it? Chalk it up to excellent capital stewardship, robust organic growth, and a strong, credible outlook for value creation. So says "Value Creation in Mining 2012: Taking the Long-Term View in Turbulent Times," a new report from The Boston Consulting Group (BCG).
The report, BCG's second annual Value Creation in Mining report and an offshoot of the company's flagship Value Creators report series, disaggregates the sources of total shareholder return for 34 major industry companies using BCG's proprietary model. It also compares the drivers of performance in both the first and second halves of the decade, periods characterized by significantly different macroeconomic conditions. The report then identifies four critical management levers for long-term success. "There are lessons here for all mining companies," says Gustavo Nieponice, a BCG partner and coauthor of the report. "And they will only become more important as companies face persistent market uncertainties, increasingly challenging industry economics, and growing social and policy risks."
Smart Financial Moves
Revenue increases attributable to rising commodity prices accounted for nearly 14 of the total 18 percentage points of TSR that the industry averaged. The remaining 4 percentage points came from a combination of production increases (5 percentage points), margin expansion (6 points), and contributions from cash flow (1 point), all of which were offset by declining investor expectations (-8 points).
The top ten's significant TSR differential (39 percent per year, more than double the industry average) came in part from the deft management of capital expenditures that resulted in better cash flows and from lower debt and equity issuance. Another key contributing factor was their robust organic growth, which triggered rapid increases in profits, given strong commodity prices. Finally, the top ten's successful track record and strong value-creation outlook kept their valuation multiples healthy throughout the decade. "What's even more noteworthy is the fact that success wasn't commodity dependent," says Thomas Vogt, a BCG principal and coauthor of the report. "The top ten include the full spectrum of mineral producers, from gold and copper to coal and industrial minerals."
The report examines the reasons underlying the shift in value creation, looking at the difficulties many companies had in the second half of the decade -- and what those difficulties suggest for the coming years. In particular, it describes three major risks that loom large for mining companies.
First -- like most industries -- the mining industry faces continued uncertainty in the financial and capital markets as well as in customer markets. Second, the economics of mining have grown more and more challenging, owing to a combination of declining ore quality and the need to mine deeper and farther afield to access ores. Finally, social and policy risks -- from social and labor unrest to tax and royalty hikes -- make it incumbent on companies to plan more rigorously. "It's all the more important that companies consider a range of scenarios -- and that they boost their agility and their ability to adapt," observes Tom King, a BCG partner and coauthor.
Four Value Creation Levers for the Long Term
The top ten's success factors point to a set of skills and strategies that have always been important for value creation but that will be increasingly so amid the challenges of a turbulent and uncertain future. The report digs deeper to identify four management levers that, when applied in concert, can help companies achieve solid financial performance and enduring competitive advantage -- regardless of scenario. "These levers deserve renewed attention from mining executives," says King. "Investors and other stakeholders are demanding more of mining companies, and these levers -- when applied appropriately -- have the potential to create tremendous value."
The first lever consists of regularly revisiting and pressure testing the value creation strategy. Companies must get capital allocation and portfolio management right. More important, they should address value creation and risk in a systematic way, across different investment options, so that they can be confident of making the right tradeoffs.
The second lever entails managing country risk and stakeholder relations proactively and continuously -- not only in the development phase but throughout the life cycle of each operation.
Lever three involves boosting the odds of project success. Project execution has grown more complex, and megaprojects have become the norm. "Capex overruns, missed deadlines, and a host of other value destroyers can be successfully mitigated through capex discipline and a number of often-overlooked tools," notes Gustavo Nieponice. "These range from a sound project-governance model and strategic EPC relationship management to rigorous resource planning and having a holistic view of the project pipeline."
The last lever -- developing an advantaged operating system -- encompasses multiple strategies for counteracting the impacts of uncertain demand, rising costs, ever-harsher economics, and declining labor productivity. The report delineates numerous opportunities for leveraging existing assets, from capitalizing on scale for procurement purposes to improving repeatability. Companies can also adopt next-generation mining techniques -- new automated technologies (such as autonomous trucks, remote operations, and new recovery and refining methods), as well as new processes (including the greater use of data and information systems). Finally, companies should create people advantage to combat a dwindling talent supply and declining labor productivity. Drawing on BCG's extensive research on talent and people management, the report offers several people strategies, including focusing on the company's employer brand (specifically, highlighting the employee value proposition); adopting strategic workforce planning; managing talent across the employment life cycle; and centralizing talent and people management efforts in productive ways.
"Value Creation in Mining 2012" provides abundant exhibits, along with a broad array of strategies, methodologies, and approaches that companies can implement to hone their value-creation strategy over the long term. To stimulate discussion and thinking, it also offers a list of key questions for executives.
A copy of the report can be downloaded at www.bcgperspectives.com.
To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected].
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 77 offices in 42 countries. For more information, please visit bcg.com.
Bcgperspectives.com is a new website -- available on PC, mobile phone, and iPad -- that features the latest thinking from BCG experts as well as from CEOs, academics, and other leaders. It covers issues at the top of senior management's agenda. It also provides unprecedented access to BCG's extensive archive of thought leadership stretching back almost 50 years to the days of Bruce Henderson, the firm's founder and one of the architects of modern management consulting. All of our content -- including videos, podcasts, commentaries, and reports -- can be accessed via PC, mobile, iPad, Facebook, Twitter, and LinkedIn.
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