The global mineral resources industry has been told to pick up its pace in coping with commodity price and supply cycles and take some strategic lessons in “how to manage boom and busts” from other global industry peers. McKinsey & Company Partner, Prabhav Sharma, told the Australian Geoscience Council convention in Adelaide today that mining worldwide has been and will remain a boom and bust industry unless it adopts key survival principles which have proven their worth in other key industries such as automotive.
“In the recent super cycle, resource prices beat the global economic output but it could be argued that the mining industry did not take advantage of the boom,” Sharma said. “Mining’s return on invested capital collapsed from around 17% for mining companies in 2004, to 2 or 3% in 2015,” he said.
“Global urbanisation is driving demand for many metals at a time grade decline has been a significant cost contributor to many metals such as iron ore and gold. While geology is not fully controllable, productivity is and in mining, productivity performance has invariably followed the commodity cycle.
“Alarmingly, mining productivity has been dropping at between 5-7% per annum.”
Sharma called on miners to adopt and learn from the four principles from other industries to side step the boom and bust cycle.
These included consistency of purpose, as the car sector had shown over five decades; a simultaneous focus on volume growth and cost, not just one or the other depending on where a metals price sat; sustained and committed investment in R&D, and talent; and being far more innovative.
“Toyota embraced timeless operating principles 50 plus years ago and has emerged because of that as one of the world’s top three carmakers,” Sharma said.
“The global mining industry has to ask itself can it stick unwaveringly to a set of operating principles?
“When mining booms, do miners spend growth capital in a smart and lean way and when prices come off, do we cut costs with due consideration to imminent and future risks?”
Sharma said mining investment in R&D was a very erratic spend and this had been a major contributor to the lack of exploration success which in turn was one of the biggest erosions of productivity. “Worldclass mineral discoveries cost over $1 billion and are scarce,” Sharma said. “The cost of non-discovery is far much higher than the cost of discovery. We are finding only two thirds of the deposits we need to maintain even current production.
“In oil and gas, they have been able to improve resource recovery from wells by investing significantly in R&D at a time of softening prices.”
He also pointed to mining’s dire lag behind other industries in some innovation areas, particularly digital maturity which had to be adopted at a much faster pace.
