How to address: Taking a disciplined approach to capital planning and using the full range of financial levers.
Leading companies have a clear perspective on use of cash and capital returns through the cycle, including risk-based views on the sources and uses of cash. They evaluate where they are in the cycle against their long-term capital-expansion plans to develop through-cycle-financing plans:
Take a disciplined approach to capital planning, saving more during the upcycle and continuing to buy during the downcycle:
Review the traditional spending cycles. Price cycles suggest that it is more relevant for miners to save during upcycles and invest during downcycles.
Benchmark the level of investment needed. Research on the impact of big moves on economic profit suggests that leaders spend 1.7 times more than the industry median (measured by annual capital expenditure to revenue).
Dynamically reallocate resources. We find that businesses that reallocate substantially see outsize, and more sustainable, performance relative to peers. Our research suggests the bar is reallocating at least 50 percent of capital expenditure among businesses over a decade, supported by assessing businesses’ performance at the cell level.
Debias the process. Adopt organizational, analytical, and debate countermeasures intended to counter the most common cognitive biases.
Use the full range of financial levers, including the following, to manage capital and returns through the cycle:
EQUITY: For most majors, this means issuing stock when net asset values fall below market valuation. Specialist-mining private equity can also be an attractive alternative for juniors that struggle to raise on public markets.
CORPORATE DEBT: Take on debt when the company can handle interest payments, either in a period of sustained moderate-to-high pricing (though avoiding expansion during fly-up periods in which oversupply is likely) or in a period of low interest rates.
ALTERNATIVE FINANCING AND DEBT-LIKE INSTRUMENTS: Use all no-core debt levers, such as streaming and net smelter returns 10 and net profits interest. These alternative financing means allow companies to provide a variable payout to the lender, depending on the financial performance of the company and spot prices.
ASSET OR PROJECT-LINKED FINANCING: Take advantage of low valuations or opportunistic access to the right strategic partners to fund green or brownfield projects when traditional structures are less available or attractive.
SALE OF NO-CORE ASSET: (for example, tolling, joint ventures, and rental agreements). Protect the balance sheet and drive clearer valuations by selling a portion of the value of an existing or new asset in exchange for financing or by converting capital expenditures to operating expenditures when possible.
CASH MANAGEMENT: Optimize net working capital and operational cash flow to direct a greater share of cash to high-value projects. Free cash flow for the industry has declined 25 percent since the 2017 price crash, suggesting that it may be time to review cash management again.
DEVELOP A TARGET FINANCING PORTFOLIO: Companies are increasingly adopting target asset portfolios, but few take a similarly rigorous approach to financing. Establishing top-down goals that go beyond deleveraging can help companies take a longer-term view of financing and evaluate options more thoughtfully. This can include clear guidelines for which financing structures are preferred under different market conditions (and at what scale), as well as target through cycle financial-health metrics and guidelines for when these may be breached.
While through cycle mining returns are attractive, investors have historically been discouraged by near-term fluctuations in commodity prices. This, in turn, has driven volatile valuations, capital expansion, and balance sheets.
The current environment rising prices propelling investment creates a window of opportunity for mining companies to address these challenges through disciplined capital planning and use of an extended range of financial levers.
While capturing the opportunity requires work, organizations that take up the challenge and succeed in changing their investment strategies might just beat the cycle.
Leading companies have a clear perspective on use of cash and capital returns through the cycle, including risk-based views on the sources and uses of cash. They evaluate where they are in the cycle against their long-term capital-expansion plans to develop through-cycle-financing plans:
Take a disciplined approach to capital planning, saving more during the upcycle and continuing to buy during the downcycle:
Review the traditional spending cycles. Price cycles suggest that it is more relevant for miners to save during upcycles and invest during downcycles.
Benchmark the level of investment needed. Research on the impact of big moves on economic profit suggests that leaders spend 1.7 times more than the industry median (measured by annual capital expenditure to revenue).
Dynamically reallocate resources. We find that businesses that reallocate substantially see outsize, and more sustainable, performance relative to peers. Our research suggests the bar is reallocating at least 50 percent of capital expenditure among businesses over a decade, supported by assessing businesses’ performance at the cell level.
Debias the process. Adopt organizational, analytical, and debate countermeasures intended to counter the most common cognitive biases.
Use the full range of financial levers, including the following, to manage capital and returns through the cycle:
EQUITY: For most majors, this means issuing stock when net asset values fall below market valuation. Specialist-mining private equity can also be an attractive alternative for juniors that struggle to raise on public markets.
CORPORATE DEBT: Take on debt when the company can handle interest payments, either in a period of sustained moderate-to-high pricing (though avoiding expansion during fly-up periods in which oversupply is likely) or in a period of low interest rates.
ALTERNATIVE FINANCING AND DEBT-LIKE INSTRUMENTS: Use all no-core debt levers, such as streaming and net smelter returns 10 and net profits interest. These alternative financing means allow companies to provide a variable payout to the lender, depending on the financial performance of the company and spot prices.
ASSET OR PROJECT-LINKED FINANCING: Take advantage of low valuations or opportunistic access to the right strategic partners to fund green or brownfield projects when traditional structures are less available or attractive.
SALE OF NO-CORE ASSET: (for example, tolling, joint ventures, and rental agreements). Protect the balance sheet and drive clearer valuations by selling a portion of the value of an existing or new asset in exchange for financing or by converting capital expenditures to operating expenditures when possible.
CASH MANAGEMENT: Optimize net working capital and operational cash flow to direct a greater share of cash to high-value projects. Free cash flow for the industry has declined 25 percent since the 2017 price crash, suggesting that it may be time to review cash management again.
DEVELOP A TARGET FINANCING PORTFOLIO: Companies are increasingly adopting target asset portfolios, but few take a similarly rigorous approach to financing. Establishing top-down goals that go beyond deleveraging can help companies take a longer-term view of financing and evaluate options more thoughtfully. This can include clear guidelines for which financing structures are preferred under different market conditions (and at what scale), as well as target through cycle financial-health metrics and guidelines for when these may be breached.
While through cycle mining returns are attractive, investors have historically been discouraged by near-term fluctuations in commodity prices. This, in turn, has driven volatile valuations, capital expansion, and balance sheets.
The current environment rising prices propelling investment creates a window of opportunity for mining companies to address these challenges through disciplined capital planning and use of an extended range of financial levers.
While capturing the opportunity requires work, organizations that take up the challenge and succeed in changing their investment strategies might just beat the cycle.
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