Companies must find balance between caution and opportunity
VANCOUVER, Dec. 9 /CNW/ - After surviving tremendous price volatility over the past year, mining and metals companies are beginning to apply the lessons from change to prepare for the upturn, according to a report released today from Ernst & Young.
"A new performance agenda has emerged for Canadian mining and metals companies," said Tom Whelan, Leader of Ernst & Young's Canadian Mining & Metals practice. "Right now, industry players are focused primarily on optimizing capital, establishing operational flexibility and reassessing their ability to manage risk."
Lessons from change explores what companies have learned as a result of the financial crisis and how they're applying this new knowledge to the recovery ahead. The report outlines the fact that mining and metals companies are no longer making big deals or bringing on new production without careful consideration - and many seem to be waiting for the competition to make the first move.
"The mining and metals landscape has changed faster and more dramatically than anyone thought possible, and market unpredictability is quickly becoming the biggest challenge mining and metals companies face," said Whelan. "As a result, companies need to be increasingly nimble when it comes to capital."
Having a solid balance sheet or the ability to refinance debt will enable mining and metals companies to capitalize on opportunities and ensure growth as the upturn begins.
Similarly, risk is no longer viewed as merely a compliance function, but rather as a key component of how mining companies do business. Screening processes have become more rigorous, and more projects are being discarded at the due diligence stage. Companies are also demonstrating more strategic thinking on acquisitions - looking for an acquisition when the time is right, instead of resource replacement at any price.
"The persistent challenge is that the global financial crisis has shaken the prior confidence of market players," said Whelan. "Exploration and development companies are inexpensive and good long-term prospects, but there's still not enough confidence in the market to make them attractive acquisition targets for the majors and companies with cash."
Some smaller, low-risk deals are taking place - 910 of them globally from January to November 2009 - but even with these micro-mergers, the deal-making is far from casual. They are taking place with more scrutiny than ever before.
"Paradoxically, this cautious outlook raises the risk of missing an opportunity," said Whelan. "Given the long lead time required to develop new mines and new markets, the reality is that companies should act soon, before this unusual door of opportunity shuts."
According to Whelan, Canadian mining companies should be factoring the ongoing price volatility into their business practices and learning how to work with it, because it's not going away. In fact, the frequency of dips and spikes is only likely to accelerate. This means going back to basics - analyzing cash flows and costs, and cutting the costs that spiralled out of control during the boom.
Mining and metals companies who demonstrate the foresight to apply the lessons from change will guide their companies to success in the mining and metals sector. But they must be aware that timing is critical and the door to opportunity will not remain open forever.
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