Cutting Costs Without Cutting Corners

Over the past year, the prospects for mining companies have improved with the market’s recovery from the global economic crisis. Now, a strong demand for commodities is leading many mining executives to loosen their purse strings to focus on growth.

A recent PwC report found many mining companies are planning for moderate or aggressive growth over the short to medium term. With the recession’s impact still a recent memory, however, mining executives cannot afford to lose sight of the need to also cut costs.

While production volumes need to increase to meet rising demand, mining companies should make it a priority to also reign in unnecessary spending and reduce capital costs of new investments. This would put them in a better position to grow, and keep balance sheets healthier in light of a still uncertain future.

But doing so is easier said than done. The following shows why traditional methods have historically failed, and what mining companies can do to make lasting financial change.

Our discussions with mining executives reveal that more than 80% of cost reduction approaches fail to achieve their intended benefits. Of those that do, the benefits tend to be short lived.

The recession was a case in point. During the crisis, commodity prices plunged and mining companies made bold moves to preserve cash by cutting spending on exploration, contractors and head office costs. But, these initiatives were reactionary and did not address the root cause: the inflated costs of existing production assets.

Cost-cutting attempts fail for a variety of reasons. A lack of a strong foundation in financial discipline makes it difficult for companies to identify ways to reduce costs. Another common reason is overlooking the operating costs of your operations and third-party spending where many opportunities to reduce expenses tend to exist. Finally, not changing the spending culture or refraining from measuring results can be barriers to creating the long-term cost savings desired.

As individuals, we have all been there. We’ve set goals to cut costs, but are unable to commit for the long term. The same goes for most mining companies. To be successful, the mantra of “eliminating bad costs and supporting good costs” is something all mining companies should live by.

That’s where sustainable cost management comes in. Reducing costs to create long-term positive impacts should be the end goal. This requires a strong foundation built on effective planning, a well-controlled spend culture and employee awareness about the direct impact they have on operating costs. The ability to track and monitor benefits and feedback is also critical to continually improve approaches. Sustainable cost reduction is a journey that typically takes several years to fully embed. The key steps are:

Purge costs that are non-essential to business operations.

Analyze operating cost sources and link financial plans to operating plans to provide transparency, improve accountability and make it easier to measure cost-cutting efforts.

Ensure that sound agreements are being made with third parties to help reduce costs and improve the supply chain.

Encourage individual responsibility for managing and controlling spending.

Never has it been more expensive for mining companies to operate. Costs have ballooned globally over the past five years with energy, maintenance and labour all being significant cost drivers.

In 2011 and beyond, reducing costs and waste at the operational level will be a top priority for mining industry executives. While external costs will continue to climb, mining companies can control their expenses for the long-term, and at the same time, put themselves in a better position for success. This requires effective planning, understanding what’s driving their costs and how to control it, and establishing a controlled spend culture where all staff understand their impact on the bottom line.

To read PwC’s Sustainable Cost Reduction in the Mining Sector report, visit www.pwc.com/ca/en/mining/sustainable-cost-reduction-mining-sector.jhtml.