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TOUGH CHOICES FACING THE SOUTH AFRICAN MINING INDUSTRY 197

IntroductionMining companies in South Africa face significantchallenges, putting the industry at a crossroads. Localmining companies manage unique South Africanoperational complexities while still operating in the contextof global pressures. Monitor Deloitte has identified fivetough choices that mining executives must face to ensurelong-term sustainability. The answers to these questions arenot obvious, and require an analytical approach. This paperproposes five tools that can assist mining executives in

understanding the issues underlying these questions, andhow mining companies can develop integrative strategies todrive sustainable growth.

The current mining situationGlobally, mining companies are facing a series ofeconomic, financial, and operational challenges. SouthAfrican mining companies must also account for uniquelylocal issues with profound operational implications. Someof the pressing issues are shown in Figure 1.

LANE, A., GUZEK, J., and VAN ANTWERPEN, W. Tough choices facing the South African mining industry. The 6th International Platinum Conference,‘Platinum–Metal for the Future’, The Southern African Institute of Mining and Metallurgy, 2014.

Tough choices facing the South African mining industry

A. LANE*, J. GUZEK†, and W. VAN ANTWERPEN†

*Monitor Deloitte†Deloitte Consulting

Strategy is about making choices. Mining companies choose to do certain things and not to doother things. Mining is a long-term business, and the choices made typically have largeinvestments attached to them, long payback periods, and significant socio-economicconsequences. In today’s uncertain world, it is important to get these choices right. The miningindustry in South Africa finds itself in a difficult situation – operating conditions are tough, thesocio-political environment is complex, and financial performance has been under pressure.Choices made by all the stakeholders in this industry in the short term will shape the future of theindustry. This paper characterizes some of the big, difficult decisions faced by the mining industryin the South African context, and discusses how these decisions could be approached in a fact-based and robust way.

Figure 1. Global and local influences on mining companies with South African operations

‘PLATINUM METAL FOR THE FUTURE’198

The global situationMining companies are inevitably influenced by globaldevelopments, with macro-economic growth andinternational markets strongly influencing both the demandfor resources and mining companies’ profitability.

Historically, there has been a strong correlation betweenthe performance of commodity markets and mining stocks;however, this relationship appears to have broken down.Mining stocks (including those of global diversified miningplayers such as BHP Billiton and Rio Tinto) continue tounderperform broad commodity price benchmarks. Thisgap in mining stock performance relative to commodityindices may be due to investors attaching a higher riskpremium to mining stocks owing to a poor track record ofproject delivery and a lack of new discoveries, resulting insub-optimal shareholder returns.

Important global economies such as the USA, Europe,and China, are slowly recovering from the recession;however, there are mixed signals for future growth. Whilethe USA, the world’s largest economy, has been recoveringslowly, Europe continues to face a sovereign debt crisis. Inresponse to this, the European Union has undertaken deepstructural reforms. These have included various financialsupport mechanisms (such as bailouts and austerityprogrammes) for countries with troubled economies. Whilethis may have temporarily appeased markets, the memoryof the Eurozone crisis is likely to remain fresh in investors’minds in years to come. With limited post-recession growthprospects in the USA and Europe, companies have lookedto Asia to drive global demand. China’s expected growthrate of 8.4% in 2013 (Deloitte, 2013) falls short of its pre-recession growth rate, which averagedg 10.3% between

1999 and 2009 (McNitt, 2013); however, the year-on-yearincrease from 7.5% in 2012 is positive news for miningcompanies that rely on China’s continued appetite forresources. While the global economic outlook for these keyeconomies remains constrained, the ongoing trend towardsindustrialization and urbanization is likely to sustain long-term demand for resources.

In addition to the current decline in demand, miningcompanies face further challenges to profitability in theform of unfavourable commodity prices and tougher miningconditions. While commodity prices have improved sincetheir 2008 lows, prices remain stagnant or falling, limitingrevenue potential for mining companies. Declining oregrades at current depths also mean that mining companieshave to mine deeper to reach new deposits, significantlyincreasing the cost of extraction. Since the start of 2000,over 75% of new base metal discoveries have been atdepths greater than 300 m (Deloitte, 2013). Mining at thesedepths also introduces additional safety issues due to thehigh risk of rockfalls, flooding, gas discharges, earthtremors, and ventilation problems.

Compounding these economic and operational factors,mining companies also face regulatory uncertaintyfollowing a global trend of resource nationalism.Governments throughout the world are looking to increasetheir share of mining profits as a means to bolster sloweconomies and drive socio-economic development. Stateinterventions in the mining industry vary from theintroduction of new resource-based taxes to transferring ofmining rights to state-owned companies, as shown in Figure2. This regulatory uncertainty poses a significant challengeto mining companies’ long-term strategic planning.

Figure 2. Resource nationalism across the world


Despite the particularly uncertain regulatoryenvironment in Africa, global mining companies cannotignore the substantial growth prospects that the continentoffers. Africa has vast mineral riches, with significantreserves of more than 60 metals and mineral products,estimated at 30% of the world’s entire mineral reserves(Deloitte, 2013). Despite this resource base, Africa’sproduction represents only 8% of global mineralproduction, and is mostly exported from African countriesin raw form. The relatively low exploration spend (at US$5per square kilometre across Africa compared with US$65 inCanada, Australia, and Latin America) further highlightsthe opportunity for mining companies to take advantage ofthis new frontier for expansion, especially for thosecompanies looking to expand into emerging markets.

Mining companies looking to operate in Africa facechallenges unique to the continent. While most companiesbenefit from long-term certainty and predictability, thesemarket characteristics are even more important to long-termbusinesses like mining. Mining companies require a degreeof political stability, investment-friendliness, appropriatetransportation infrastructure, and balanced fiscal regimes tooperate successfully. There are several issues prevalentacross the African continent in direct contrast to theserequirements, which contribute to the perception of Africaas a risky destination for business. Poor governance, theprevalence or perception of corruption, tenuous legislativeframeworks, fragile security of tenure, and unclear royaltyand tax regimes make strategic decisions difficult.Furthermore, long-standing issues such as civil unrest,insurgency, and a history of ethnic conflict pose additionaloperational risks in certain countries.

Beyond socio-economic and political complexities, thelack of appropriate infrastructure across Africa is a furtherbarrier for mining companies. The required infrastructurecapital is far more than the current infrastructure spend,leaving a substantial spending shortfall. This developmentconstraint leaves investors with little confidence thatpublic-sector infrastructure development will improvesufficiently to facilitate operations. African governmentsare turning to mining companies themselves to accelerateinfrastructure development, linking mining licence issuanceto huge infrastructure projects (McNitt, 2013). These multi-billion dollar foreign investments are likely to have a fargreater impact on African infrastructure development thanpublic-sector spending.

The relationship between mining companies and hostcountries’ governments is challenging. Of the 54 countriesin Africa, 24 rely on relatively few mineral products togenerate more than 75% of their export earnings (MonitorDeloitte Analysis, n.d.). Despite this economic dependenceon a prosperous mining industry, host governmentshabitually treat mining companies with suspicion. Miningoperations are viewed as operations in isolation without thenecessary linkages and benefits to other sectors of theeconomy or alignment with local aspirations. Furthermore,the history of colonialism across Africa often means thatforeign-owned mining companies are viewed bycommunities as entities with no long-term commitment tothe country. Communities often perceive companies asgenerating wealth and repatriating dividends, leavingbehind a damaged environment with little lasting benefit forthe community.

The South African situationIn addition to the complex factors affecting mining

companies at a global level, mining companies with SouthAfrican operations face additional complexities in the localenvironment. Mining has historically been a very importantsector to the South African economy. Like many otherAfrican countries, South Africa has vast mineral wealthwith immense value generation potential. South Africa hasmore than 52 mineral commodities, including the world’slargest reserves of platinum, manganese, chrome,vanadium, and gold, as well as major reserves of coal, ironore, zirconium and titanium minerals (Monitor DeloitteAnalysis, n.d.). The combined value of these resources isestimated at US$ 2.5 trillion. The industry’s substantialwealth has traditionally supported the country’s growthwith strong resource exports and job creation. However, themining industry’s relative contribution to the economy hasdeclined due to growth in the financial and property sectors.

To an even greater extent than their global counterparts,South African mining companies’ margins are underpressure. The combination of stagnant or falling globalcommodities prices and rising input costs is forcing miningcompanies to make difficult decisions in an attempt tosustain short-term operations, while still aligning thesedecisions with long-term objectives. In particular, labourand energy costs have exceeded inflation. The annual’strike season’ is characterized by ever-increasing demandsby unions and mineworkers who may not have a fullappreciation of the challenging operating environment thatmining companies face.

In addition to the requirements by workers, there arerising demands by government as to the role mines shouldplay in society. The government increasingly expectsmining companies to fulfil social needs typically addressedby government in developed countries, such as theprovision of basic services, education, and health care.These expectations are often not clearly defined, and arecompounded by local communities’ demands foremployment opportunities, skills developmentopportunities, education, and modern health care facilities.

‘Gone are the days when mining contribution is measuredonly its contribution to the gross domestic product, orroyalties that it pays to the fiscus. Communities expect

mining companies to become engines of socio-economicdevelopment of their areas’

- Susan Shabangu, former Minister of Minerals

The perception of a lack of (or inadequate) progress inthese key areas is often met with vocal opposition, strikes,and unrest. This can have a significant impact on projectdevelopment through costly operational delays andreputational damage to mining companies. This puts miningcompanies in a tenuous position, with corporate socialresponsibility (CSR) today extending well beyond theminimum legal requirements. South African miningcompanies require a deep understanding of shiftingcommunity and government expectations and acommitment to a high level of transparency and operationalsustainability to address the demands of relevantstakeholder groups.

Government’s requirements are further obscured by alocal environment loaded with rhetoric. Some governmentofficials have criticized the country’s inability to translateits mineral wealth into sustainable economic developmentat grassroots levels. The government has been criticized forbeing seemingly slow to address what the previous MineralResources Minister, Susan Shabangu, called South Africa’s


‘evil triplets’ of poverty, inequality, and unemployment(Sowetan, 2011).

In this highly political context, proponents of radical stateintervention into the South African mining industry haveasserted that the mineral wealth of the country ends up inthe pockets of ’monopoly capital’ rather than benefiting thebroader population (Monitor Deloitte Analysis, n.d.). Whilethe government has ultimately declared that it has no short-term agenda to pursue resource nationalization, the widelyreported rhetoric has caused a sharp decrease in thecountry’s attractiveness as a mining destination, resulting inbillions of dollars in deferred or abandoned investments(The National, 2013). This negative local sentiment islikely to have gained additional momentum due to theglobal trend towards resource nationalism and communityactivism, especially across the developing world.

The overarching challenge in Africa (and particularly inSouth Africa) is to strike an equitable balance of interests,ensuring that mining is productive and profitable, as well asbeing fair to foreign investors, host states, and affectedlocal communities alike. These challenges, at both a localand global level, make strategy critically important formining companies.

The strategy of decision-makingStrategy is about making choices. Companies choose to docertain things and not to do other things (as opposed totactics, which are about how to execute the choices made).The complex operating environment in which miningcompanies function results in difficult choices. Thisnecessitates a deep understanding of the factors thatinfluence mine profitability, as well as those affecting the

company’s reputation and relationship with stakeholders.Adopting a structured approach to making choices at acorporate and business unit level is necessary. Strategy isan integrated set of choices that include both strategicpositioning choices and strategic activation choices.

Monitor Deloitte assists mining companies to makedifficult decisions based on a series of cascading choices, asshown in Figure 3. Mining companies should be able toanswer each question successively, working down thecascade. Where a question leads to a re-evaluation of theinitial propositions, executives can trace back up thecascade to redefine various aspects until the strategy iscohesive. These questions allow mining companies tosuccessively focus on key aspects of their high-level andoperational strategies, which collectively form the basis forlong-term strategic planning and short-term prioritisation.The questions shown in Figure 3 can be adapted to themining context as follows:

What are our aspirations? Mining companies should be able to clearly define both thefinancial (such as achieving year-on-year increases inaverage IRR) and non-financial objectives (such asconsistently achieving ‘zero harm’, or making a positivesocial impact in host countries). These objectives should bealigned with the company’s overall vision, as they willguide investment decisions.

Where will we play?Mining companies must choose the resource portfolio thatthey wish to develop and the countries in which they willoperate. Mining companies must also decide which parts of

Figure 3.


the value stream they will target, and where in the projectlife cycle they should enter or exit.

How will we win in chosen markets?Mining companies should identify sources of sustainableadvantage, and use these as the basis for business modeldevelopment. These choices typically include the miningmethod, mine design, technology, and sustainabilitychoices. These choices are necessary to achieve the goalsand aspirations within the confines of where the companyhas chosen to play.

How will we configure?Mining companies should ensure that they have thecapabilities and skills in place and that they are configuredappropriately to successfully implement these strategies.

What are the priority initiatives?In a complex global market, mining companies mustprioritize key initiatives and investments in order to executethe choices made.

Tough choices facing mining companiesManagement teams at mining companies with SouthAfrican operations face a series of tough choices and trade-offs. These are difficult decisions with a broad impact, butultimately they are critical for long-term survival. Using thedecision framework outlined above, Monitor Deloitte hasidentified five generic questions of particular significancefor South African mining companies in light of the globaloperating context:

• How to achieve a step change in profitability and safetyperformance?

• How to attract and retain critical skills?• How to raise the capital needed for South African

operations?• What is the best and most sustainable use of capital?• How to balance the conflicting needs of stakeholders?These questions are explored below.

How can mining companies achieve a step change inprofitability and safety performance?South African mining companies must simultaneouslydefend and grow profits, while also ensuring that safetyrecords improve. Although South Africa’s safety records onmines are steadily improving, mining injury and fatalitylevels are still above those achieved elsewhere in the world(Business Day, 2013a). With mines becoming progressivelydeeper and ore grades declining, the unit cost of mineproduction in South Africa is under significant pressure.The situation is exacerbated by rapidly rising input costs,particularly those of energy and labour.

All of the major South African mining companies havebeen through successive waves of cost reduction and safetyimprovement initiatives. While these have often beensuccessful, the rate of incremental improvement has notkept pace with the pressures that are inexorably driving upunit costs. Most mines operating in South Africa are in needof a step-change in performance.

How can mining companies attract and retain criticalskills?Mines continue to face severe frontline and professionalskills shortages which affect critical day-to-day operations.

Although training programmes have improved, there is stilla lack of experienced skills in frontline positions, such asartisans and supervisors, as experienced personnel retire orleave the company. Although current learnerships producehigh volumes of graduates, these graduates often lacknecessary hands-on experience. This directly affects output,quality, and safety, while increasing overhead costs.

Professional skills are also difficult to attract and retain inmining. The mining industry competes with many otherindustries for professional talent, and mines are at adisadvantage due to the harsh conditions and remotelocations in which they operate. At a global level, SouthAfrica is losing professional skills to other countries asexperienced professionals emigrate.

Executives are challenged to develop an understanding ofthe human resource capabilities required, and look toimplement structures that attract, develop, and retain theseskills. However, the dynamic nature of the industry (and theindustries that drive resource demand) means that it willbecome increasingly challenging to balance the skillsrequired today and the skills needed by mines in future.

How can mining companies raise the capital they needfor their South African operations?Investors are starting to attach a risk premium to SouthAfrican mining investments. This has the effect ofincreasing the cost of capital to South African miningcompanies. Several companies have moved to separate theirSouth African assets from their global assets, to help themraise capital for international investments. This leaves theirSouth African assets cash-constrained and struggling tofund expansion projects.

Furthermore, many Black Economic Empowerment(BEE) transactions are vendor-financed in a way that leavesthe new company cash-constrained and unable to fundexpansion projects. In an environment of rising costs andlacklustre commodity prices, South African executives havetheir work cut out for them to fund expansion out ofoperating cash flows.

How can mining companies determine the best and mostsustainable use of capital?Capital decisions are complicated by the global and SouthAfrican factors influencing the current and future operatingenvironment. The increasing regulatory uncertainty andvolatile labour conditions in South Africa have substantiallyincreased the inherent operating risk in the country. This iscompounded by increasing pressures from rising costs, andmining companies sometimes find that increasingproduction is not always more profitable. Miningcompanies have subsequently increased their thresholds forproject profitability, abandoning projects that do notpromise high enough returns.

In addition to analysing local projects, mining companieshave a myriad of options to consider elsewhere. The trendtowards African exploration promises growth for miningcompanies willing to absorb the higher operational risks.Beyond the choice of geographic focus, mining companiesmust also assess which commodities are the most profitableand viable under the current conditions, and which are ofstrategic importance for future growth. Finally, miningcompanies have the choice of investing in mature mines, ordeveloping early stage operations.


How can mining companies balance the conflictingneeds of stakeholders?Mining companies have the unenviable task of balancingthe needs of multiple stakeholders. Each stakeholder grouphas its own unique objectives, often conflicting with thoseof other stakeholders, as shown in Figure 4.

Government looks to maximize revenue to the state whileensuring that mining companies contribute to socio-economic and infrastructure development. Where thegovernment has historically struggled to adequately providethese services, mining companies are often used as avehicle to accelerate change. The role of mining companiesis further obscured by the fact that multiple arms ofgovernment are often not aligned, with inconsistent policyand populist rhetoric. Calls for distribution of the country’smineral wealth through resource nationalization havebecome increasingly popular with politicians looking togarner favour with the country’s impoverished majority.While current government policy is against short-termresource nationalization, this stance may change in futuredepending on the success of other African countries whohave implemented resource-based interventions to drivesocio-economic progress.

Mining executives should also bear in mind that policymay shift without being considered a ’radical intervention’(for example, by increasing royalties or taxes on miningcompanies). These interventions can nevertheless have asignificant impact on profitability and operationalsustainability.

Similarly, labour, organized labour, and communities alsoexpect mines to play an active role in socio-economicdevelopment. Mines frequently operate in areas with

historically poor levels of service provision, and are oftenon the receiving end of decades of frustration due to a lackof tangible economic development, resulting in socialunrest. The perception that international mining companieshoard wealth and do not share it with the communities inwhich they operate (despite the CSR investments thatmining companies make) further threatens the fragilerelationship between mining companies and communities.

While many shareholders appreciate the value of CSRinitiatives, the increasing requirements for miningcompanies to invest in broad service-provision activitiesmakes it difficult for mines to balance their responsibility tothe shareholders and their responsibility to the community.Mining companies, as is to be expected, look to maximizeprofit while retaining a social licence to operate. The fluidand increasing government and community expectationsmean that mining companies are not always willing or ableto deliver social projects to the levels expected. Even whencompanies are willing to drive social change in their areasof operation, mines often do not understand thecommunities’ needs, and find that fulfilling needs identifiedby local municipalities sometimes also falls short ofmeeting community requirements.

Tools employed in facing these choicesThe tough questions facing mining executives requireanalytical tools as the basis for data-driven decision-making. Monitor Deloitte has identified five tools that canhelp mining executives understand the key issuesunderlying these challenging questions, as well as thestrategies necessary to mitigate risk and take advantage ofopportunities to create sustainable value.

Figure 4.


Tool 1: Take a long viewMining companies can benefit from thinking about thelong-term future using tools such as scenario planning.Scenario planning allows mining companies to organizecritical uncertainties about the future, along with pre-determined elements, into a manageable set of scenariosthat vividly describe potential future states of the world inwhich stakeholders live. Scenario planning was developedat Royal Dutch Shell in the 1970s as a tool to aid executivesin making high-stakes decisions involving largeinvestments and volatile situations, making it clearlyapplicable to the mining industry.

The foundational proposition of scenario planning is thatno-one can predict the future. However, mining companiescan choose to adopt a disciplined and imaginative point ofview about possible futures by focusing on key interactionsamong critical uncertainties and how these interactionscould reasonably play out. Furthermore, scenario planningalso generates early indications that can act as warningsigns of danger, or even more valuable early indicators ofhigh-value opportunities, some of which are barely visibleor unlikely at the point at which an investment decision ismade.

Case study: take a long viewA decade ago, miners had great hopes for the investment potentialof Zimbabwe. Despite ongoing political turmoil, Harare wassignalling a new openness to foreign investors. However, in 2011,the Zimbabwean indigenization minister moved to enforce apreviously unenforced law limiting foreign ownership in themining sector. This left mining companies with three choices: (1)comply with the law, ceding 51% of their stake, (2) refuse tocomply and fight for their stake, or (3) walk away from theirinvestment. This presents a tough choice. Scenario planning adecade ago may have thrown up a potential indigenizationscenario, and would have helped executives develop a strategythat could survive in this scenario, as well as provide the tools toidentify the scenario as it developed.

Tool 2: optimize portfolioThe new reality of volatile prices and rising costs meansthat companies have to optimize their portfolios byacquiring and mining high-quality assets with better gradesand strong margins, while ceding low-margin assets tojunior miners.

Mining company board members and executives facedifficult trade-offs between competing strategic objectives,especially when it comes to projects with significant capitalrequirements. While in-depth financial modelling is critical,decision-makers need to move beyond simply prioritizingprojects by value metrics such as NPV or IRR . Companiesmust assess the tangible and intangible benefits of projectsunder consideration. While evaluating intangible benefits isoften subjective, mining companies can assign quantitativemeasures to these benefits, allowing projects to becompared on a value basis.

Capital allocation models in mining can be furtherimproved by adopting principles from modern portfoliotheory. Widely used to assess the value of stocks and otherinvestment instruments, modern portfolio theory allowsmining companies to prioritize projects using a risk-adjusted capital allocation model. Methods that account forrisk are especially crucial for mining companies stronglyinfluenced by global uncertainties, such as exchange rates,commodity prices, and political risks, over and above the

project-specific risks. Executives are also faced with the decision to allocate

capital to growth projects, or sustaining capital to existingprojects. As the market expects healthy project pipelines,companies are under pressure to ensure that they are well-positioned to analyse, select, and implement key projects.Allocating sustaining capital is often more difficult, as thestrategic objectives between projects vary greatly, making itdifficult to directly compare the return on capitalallocations.

Case study: optimize portfolioIn June 2013, Sentula Mining announced that it would sell off itscoal assets as part of a strategy to dispose of non-core assets tofocus on its core businesses (Business Day, 2013b) (including itscontract mining and exploration operations in Mozambique), inline with similar disposals by global mining companies such asRio Tinto and BHP Billiton (Bloomberg, 2013). By focusing itsactivities on key geographies and commodities in clearly definedparts of the value chain, Sentula has made the complex choices of‘where to play’ and ‘how to win in chosen markets’. This strategicdecision will streamline Sentula Mining’s capital allocationprocess.

Tool 3: innovate aggressivelyDuring challenging times such as these, mining companiescan choose to pursue a ‘survival strategy’ or a ‘leadershipstrategy’. Those pursuing a survival strategy will cut coststo the bone while adopting a risk-averse posture and focuson defending their core business. Other companies adopt aleadership strategy, looking to identify unusualopportunities that will enable them to gain ground duringthe downturn and to make step changes in performance.

Mining executives often associate innovation withtechnology. While this is often the case, there are manydifferent ways in which a company can innovate, as shownin Figure 5.

There is no lack of innovative ideas in any business. Thechallenge is turning these ideas into a step change in results.Good ideas often fall foul of resistance to change and afailure to understand the whole system of innovationsrequired to make the idea successful. For example, a newmining technology for the mine of the future will inevitablyrequire innovative thinking in skills provision, mineplanning, and performance measures. Mining companiesshould focus their innovation efforts on the few criticalprojects that will achieve a step change in performance andthen move fast. It is also not necessary to reinvent thewheel. Many of the most successful innovations startedwith an idea from outside the company.

Case study: engage proactively with stakeholdersThe Pilbara region of Western Australia, home to the Aboriginalpeople, has some of the largest iron ore deposits in Australia. Thearea contains many sacred areas and burial sites. In 2005, RioTinto began to explore the possibility of putting in place acomprehensive agreement with local stakeholders. After gatheringsocial data, it built relationships with key stakeholders anddeveloped community programmes. Seven years later, Rio signeda $2 billion agreement with five Aboriginal groups, giving thecompany access to 70 000 km2 of traditional land to mine. Byunderstanding communities’ needs and creating shared valuethrough their mining activities, Rio Tinto’s shareholders havebenefited as much as the Aboriginal people.


Tool 4: engage proactively with stakeholdersMining companies operate in a complex stakeholderenvironment. As stakeholder understanding is oftenunstructured, mining companies can adopt a far moreanalytically rigorous approach to defining andunderstanding the stakeholder mind-set. Mining companiesoften take a too narrow view of their stakeholder landscape,missing interdependencies and ‘new’ groups whoseinterests will be mobilized over the course of the project’slifespan.

Mining companies should develop a sophisticatedstakeholder map, a living document that evolves over thelife of the project and presents new opportunities toimprove understanding and communication, and mostimportantly, to find new common ground.

Equipped with a deep understanding of stakeholders’needs, mining companies must choose to engageconstituents in a deliberate and thoughtful manner thattakes a long-term view and seeks to build productiverelationships. At its core, this integrated, long-termconstituent management approach extends beyond aparticular project; it is a highly customized, data-driven

process that provides a deep understanding of constituents,the interrelationships between them, how they areinfluenced by prominent issues, and how companies canbuild platforms to engage these constituents to achievemutually beneficial objectives.

Tool 5: manage costs adaptivelyMining firms should make conscious decisions about theiroverhead ratios. Some companies manage their overheadratios according to economic cycles, cutting overheadsduring recessionary periods with either less focus on costoptimization during periods of growth, or actively allowingfor increased costs to fuel capabilities that drive growth.Rather than allowing for cyclical cost fluctuations, miningcompanies should manage their overhead ratio consistentlyover time. Research has shown that companies thatconsistently manage their overheads fare better than thosewith more volatile overheads, as shown in Figure 6.

Mining companies can approach adaptive costmanagement by mapping their costs against four maingroups to gain a deeper understanding of where to createvalue. The return on each overhead class can then be

Figure 5. Types of innovation in mining

Figure 6.


calculated, allowing firms to prioritize and optimize costs,focusing on value-creating activities through the cycle, asshown in Figure 7.

ConclusionMines currently face tough choices around theirprofitability, attracting and developing key skills, capitalraising, capital allocation, and stakeholder engagement.Mining executives need to think strategically about theseissues and integrate them into a sustainable long-termstrategy.

The rising pressure on mining companies to grow profitsdespite a sub-optimal macro-economic environment andrising costs requires in-depth analysis. Mining executivescan use scenario planning to understand possible futures asthe basis for informed decision-making in an uncertainenvironment, and then optimize their portfolio accordingly.Seizing opportunities to innovate, from technologicalbreakthroughs to internal process changes, offers mines afurther opportunity to control their future. With limitedrevenue potential due to unfavourable commodity prices,mining companies may seek to defend their profits bymanaging costs and streamlining their overhead portfolio tofocus on cost categories that drive growth.

Mining companies should welcome innovations to

address the critical skills shortages affecting the industry.Scenario planning may be useful to structure thinkingaround the kinds of skills that will be required for mining inthe future. This will provide the basis for developingstrategies to attract, develop, and retain these skills tosecure future capabilities.

Furthermore, mining executives face difficult capitalallocation decisions. By integrating lessons learned fromscenario planning to create an understanding of whichprojects will develop the mining company’s sustainableadvantage in future, mining executives can adopt aspects ofmodern portfolio theory to analyse and select appropriateprojects to deliver shareholder value.

Finally, mining companies must take cognisance of theiroperational context, especially in South Africa. The miningindustry must understand and anticipate the needs ofvarious stakeholders. Mining executives can use ananalytical approach to understand the stakeholderlandscape, ensuring that an effective stakeholderengagement strategy is in place. This strategy should seekto create shared value for stakeholders, resulting inmutually beneficial and productive relationships betweenthe mining company, government, labour, and thecommunity.

Even in tough times, mining companies can use strategicthinking and analytical tools to face their tough choices.

Figure 7. Analysing return on overheads

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