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The Year’s Top Priorities for Mining CEOs

December 31, 2012 Comments off

With rapidly increasing production costs, metal and coal prices stable or decreasing, and general global market uncertainty, 2012 was not an easy year to be the CEO of a mining company. The boards of many mining companies have drawn their conclusions and decided 2013 will be the year in which a new leader will make a start. These new executives and the veterans that survived 2012 will face many similar challenges in the new year. The market for project development appears to cool down, but cost pressures and decreasing margins are real and volatility is here to stay for some time.

Below 7 key priorities for mining CEOs in the coming year:

1. Watch your balance sheet

Global debt problems aren’t over yet, and a company’s debt is never stronger than the host country’s sovereign debt. A lot of national, regional, and corporate debt is still overvalued. The European financial system being too young to make tough decisions, the American political system being to antique and entangled in corporate interests to make tough decisions, and a new Chinese government being too dependent on international markets and national stability to make tough decisions are not going to help to solve the debt issue anytime soon. A new chapter of the debt crisis is likely start in 2013, creating a volatile environment in which prudent balance sheet management is key for business stability, preventing you from finding yourself standing at the edge of a solvency cliff, as many coal miners and even iron ore miner Fortescue experienced recently. Don’t get deep into debt, and don’t wait ‘till the last moment to refinance maturing debt, as many global developments could make raising money in debt markets suddenly very hard.

2. Kill bad projects

As a result of rapidly increasing product prices and in the knowledge that global demand for most commodities continues to grow over the next 2 decades, the project pipelines across the industry have been filled to the max. However, for most products only about one third of the projects currently being communicated as ‘planned’ is actually needed to bridge the supply-demand gap in the 2025. That means two out of three projects need to be stopped. And yes, that includes some of your projects. Deciding which of the development projects in the global industry actually are the good projects, and which not so good projects do have a chance to succeed simply because they have a powerful developer, is going to be a key task for this year. Simply doing an IRR calculation based on an imaginary product price doesn’t do the trick; there might be plenty of better projects out there that will make your price forecasts miss the mark completely. It’s time to rev up the intelligence on competitor’s projects: in the end the best projects survive. Making sure you get hold of your fair share of good projects is the objective for the coming years. Those projects that don’t pass the test and that happen to be yours? Kill them, and move on to priority number 3.

3. Expedite good projects

Hopefully your assessment of global project potential confirms your view that some of the projects in your pipeline will make the cut. Now do everything you can to bring those projects forward. Counter-cyclical investment has been a mantra of management gurus forever, but very few executives actually dare to execute on it. Redirect the resources you free up by killing bad projects – finances, human capital, and equipment – to those projects that might succeed. This does not only help you to bring those projects forward, it also sends a clear signal to the market that those projects really are the probable survivors of the battle of the fittest projects. If you decided that none of your projects are good enough to make it? Get to work on priority number 4.

4. Buy cheap future growth

Many of the important mines of the end of this decade and of the coming decades are still in the hands of explorers or juniors that don’t have the funds or appetite to develop the projects, that are always on the outlook for the acquirer, and that have seen their share price become much more discounted than the prices of their potential acquirers. Buying current production is expensive as always and will be tough on your balance sheet, but this year is not a bad moment to buy the exploration-stage projects that will make your company great in the long run. Be aware that for many of these projects the development capital, that scares most company executives at this point, will actually only be needed during the next commodity price cycle. And yes, those projects are challenged geographically, politically, technically, and environmentally, but so were most of the current great mines 10 years before they started producing.

5. Be tough on suppliers and contractors

The slump for mining suppliers and contractors lags the slump for miners by about a year. Last year was the moment of the great awakening in mining companies that the period of rapid growth is over; this year their suppliers and contractors will feel the pain. Don’t forget to squeeze your suppliers out this year! With many projects being shelved or stopped the bargaining position of engineering and construction constructors and equipment manufacturers is deteriorating quickly. Over the past years they have enjoyed a situation in which there were simply not enough skilled people and production capacity to serve all of the industry’s wants straight away, but that period is about to be over. Cost pressures are still there, but the mining companies can solve part of that issue by paying less in new procurement and trying to renegotiate existing contracts.

6. Get talent on board when the job market is down

The suddenly emerging reality of thinning margins has made most mining companies very hesitant in recruiting, and has led several companies to reduce the size of the workforce or implement hiring freezes. The job market in the industry does not look good, so people stay where they are. Just as you should be searching for the right projects especially during tough times, you should be on the hunt for ambitious talent when the job market is bad. Good people always want to make the next step, and any period in which making steps is hard is a headhunter’s bonanza. Not only half of Xstrata’s executives is seriously looking for a new challenge away from Glenstrata, but junior, mid-management, and executives in paralyzed companies around the world are sensitive to a good offer at this time.

7. Prepare for the low/now growth era

Most of the young talent you recruit at this point will witness the age of ‘peak mining’ during their career. Riding the wave of development in emerging countries the mining industry’s output will grow over the next decades. Still, driven by demographics, economics, and increasing recycled metal supply, the demand for most mined metals is likely to start a slow decrease around 2040. Your investors don’t really care about anything that happens after 2020, but the talent you are recruiting and the communities you are operating in do care. Rio Tinto’s ‘Mine of the Future’ program is focused entirely on the technological future of mining. However, preparing your company for a new, low or no growth, normal implies exploring a whole new way of doing business, technology only being a minor part. Wouldn’t it be great to be known as the CEO who prepared the company for ‘Mining of the Future’?

Enough to work on to keep the miner’s job interesting in the new year! Do you happen not to be the CEO of your company? Don’t hesitate to forward this text to him/her to make sure the most important to-do list in the company includes these priorities. Happy new year!

2012 | Wilfred Visser | thebusinessofmining.com

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Investor presentation benchmark

The executives of the major international firms try to convince the investor community during an investor presentation in February. Apart from the financial insights presented, investors can learn a lot from the slide decks presented. Comparing these decks provides insight into the Executive Vision, Executive Communication, and Professionalism of the Organization. Xstrata comes out on top of the presentation benchmark for 2010, followed by Rio Tinto. Vale’s presentation is the least convincing of the peer group.

Investor presentations are the primary communication channel from public companies to the investor community. The opinion about corporate performance of investors can be influenced during these presentations, especially in the yearly meeting in which the financial results are presented. As in any presentation setting, the content of the board’s words shape the perception of the audience only for a limited part. The hearing experience (intonation, rhythm, etc.) and the visual experience (posture, gestures, presentation material) carry at least as much weight as the content of spoken words.

The annual investor presentation slide deck is therefore arguably the most important deck produced by the company in the year. However, many companies put a lot of time in dragging together the material to be presented, but spend little funds and effort on the slide deck. This benchmark will analyze the investor presentation decks of the major mining houses to extract the implicitly communicated messages.

Methodology

What can we learn from the quality of the investor deck? There are three key messages that investors will consciously or unconsciously derive from the deck. Each of these messages is translated into two benchmark criteria as depicted in the image below.

  • Firstly the deck will demonstrate the Executive Vision. The vision is communicated effectively through a logical and convincing storyline, in which priorities are clearly shown. Furthermore the contents of the deck will be balanced according to these priorities. In case the board is dominated by a single person of functional view, this will result in over-representation of this topic in the investor deck. The size of the deck should be limited, indicating the ability of the board to select the relevant messages.
  • Secondly the deck indicates the quality of Executive Communication. The objective of the presentation will be to leave the investors with a limited number of messages, so these messages should be presented clearly. Each slide should have a clear meaning, presented in an effective and sticky tagline. Furthermore, the messages will need to be adequately supported by relevant and insightful data. Data presented should be driven by the messages the board wants to communicate, not the other world around. Too often the board members add their favorite graphs to the investor deck, without extracting any relevant insight from the data.

Investor presentation benchmarking criteria

  • Finally, the deck displays to what extent the board has build a Professional Organization. In order to make the most important presentation of the year, the board members will need to surround themselves with professionals. The corporate communication department, business units and executive advisors (often strategy consultants) will need to be led in an effective manner. This professionalism is demonstrated by visual appeal and consistency in terms and referencing. Unclear graphs, misaligned text, distracting graphics, lack of references and discontinuity of layout from slide to slide are typical features indicating amateurism.

The decks are judged based on the criteria explained above. For each of the criteria a score is awarded on a 5-point scale, ranging from “very good” to “very poor”. The overall benchmark results are calculated as the average score over the six criteria.

Benchmark results
This study benchmarks the investor decks of BHP Billiton, Vale, Rio Tinto, Anglo American and Xstrata. Each of these companies presented the 2009 financial results in the period February 8 – 19 2010.

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