Invest at the bottom of a cycle if you are smart

Last week's article discussed the current mining market and how bigger companies  fare better in difficult times.  This article by Lawrence Williams published in Mineweb gives a great background to this.

Survival of the fittest!


Surviving the Downturn - Removing Unnecessary Purchases

In our last blog, we discussed how procurement techniques may help companies to survive this seemingly-everlasting financial downturn.  There are three procurement-related contributions that companies can make that will help to reduce procurement expenditure:

1. Removing unnecessary purchases

2. Reducing quantities and ordering only what is economically viable, and

3. World-class negotiation


Overall, a business fundamental is to remain profitable.  Simplistically, this is achieved by ensuring that costs are lower than expenses.  Additionally, as the old saying goes, ‘CASH IS KING’ a positive cash flow is essential.  Even profitable companies may be brought to their knees by poor cash flow management.


Good procurement management unquestionably helps with cash flow management and profitability; every cent that is saved goes straight to the bottom line; every cent that is saved protects cash flow.  Today we discuss removing unnecessary purchases. 


There are several principal types of purchase-related expenditure:

a)    Raw Materials

b)    Bought-out production parts

c)    Spare parts (for repairing/maintaining operational equipment)

d)    Wear parts (for maintaining operational equipment)

e)    Service parts (for servicing operational equipment)

f)     Non-production-related operational requirements

g)    Administrative purchases (marketing, advertising, travel, security, stationery etc.)

h)    HSE needs

i)      Service contracts

j)     Sustainable capital expenditure

k)    Other development and operational capital expenditure

l)      Power and other utilities

It will be obvious that some costs are essential and others are flexible depending on financial situations and production needs.


Companies that operate successful warehouses for incoming materials know that inventory is categorised into CRITICAL, ESSENTIAL AND NON-ESSENTIAL materials and is strategically purchased/replenished even in the best of times.  This is doubly important in times of hardship.  But not all purchases of materials and services relate to inventory replenishment (which we will cover more thoroughly in subsequent blogs) and many purchases and service requests are requisitioned directly to purchasing department.


Each and every purchase for materials and services should be categorised into CRITICAL, ESSENTIAL AND NON-ESSENTIAL.  This cannot be accomplished by procurement department alone – it must be a team effort involving end-users, management, finance and procurement.  As a result of this teamwork, only those purchases that are agreed by the team will go forward for commitment.


By carefully scrutinising and priority-categorising each and every requisition will firm control be taken of expenditures.  This is a huge task but necessary when times are hard.  It goes without saying that illicit purchases evading the approved procurement processes are not only undesirable, they may also be manipulative and wasteful, and they are certainly indicative of indiscipline. 


Build your team, control your purchases, protect your cash flow and target profitability.



Next blog will discuss management techniques for controlling what you order.


Surviving the Downturn

Before the current economic downturn, it seemed that almost any reasonably feasible mining project received funding wherever it was situated in the world. But now, there simply isn't enough funding to go round; any that is directed towards mining is put towards sure-bet can't-fail projects (or projects that appear as such).  There is little remaining for other projects. 


Substantial mining companies may be able to live with this allowing them to concentrate on their better projects, shelving more risky projects until metal prices rise. Sure, budgets are trimmed but often at the expense of non-op costs and exploration cutbacks. Smaller mining companies are forced to scramble for crumbs at the investment table and many lose out - projects are shelved, companies lose reputation and money and venture investors head for the hills. 


So when will mining be back on track?  As the world economy gently grows in the next few years demand will slowly improve but it will take a substantial jump in metal prices for this to have a significant impact on mining investment towards any other than low risk projects with acceptable ROI. Using Copper as an industry-wide indicator, Infomine's five year Cu price graph doesn't lend confidence to the prospect of rising prices anytime soon.  Gold rose fleetingly over $2,000 per ounce and is now languishing around $1,200 with no serious prospect for a rally in the near future. (Kitco's 5 year chart).


Investment confidence has fallen in the developing world too, often through unscrupulous practices, exacerbated as the downturn bit and as corruption gained more focus in these arenas.  Smaller companies in high risk areas have little chance of finding serious funding even for good projects.  In Africa and Asia north of the Himalayas risks are significant and smaller companies have withdrawn - some larger companies are unable to make headway too (Oyu Tolgoi is a case in point). 


For the foreseeable future, mining suits multi-nationals - although they are adversely affected, they have largely adjusted to the present economic climate.  Everyone seems to be trying to find a place at the feed trough of mining investment funding.  It's not going to change any time soon.  


Those that survive this prolonged downturn will as always come out of it stronger, but the longer this continues the more mining companies will call it a day.  As this happens, supply will diminish and eventually outstrip demand.  Exploration expenditure is curtailed in times of economic difficulty too and as a result reserves diminish with a further medium-term consequential effect on supply and demand.


As all of these factors come into play, markets may then be swayed favourably but we are a long way from that possibility and there would have to be substantial impacts to bull the market. 


For equipment, materials and service providers to the mining industry - those that have not already moved on to alternative business ideas, that is - times are hard and 2014 was as difficult as many will have experienced since 2008.  


Only those with an edge can hope to survive as current market conditions continue - and this applies both to mining companies seeking investment and suppliers/service providers searching for diminished business opportunities. 


The name of the survival game is remaining afloat.  To do this costs must simply be lower than expenditure.  


One way of lowering costs is to spend less on administration, labour, exploration and materials and services.  All of these are major cost elements for mining companies and materials and services alone may be between 30-50% of total costs.  A 10% saving on both materials and services, direct and indirect, achievable in these times of austerity, goes straight to the bottom line.  A 10% saving on every $1 million spent on M&S is $100,000 additional profit.


M&S savings can be achieved in 3 ways:

1. Removing unnecessary purchases

2. Reducing quantities and ordering only what is economically viable, and

3. World-class negotiation


We will review these in more depth in future blogs


For more information, please contact us.







The Importance of 'FOCUS' in business

Another great video using VIMEO media and again employing Sparkol's Videoscribe software (see yesterday's blog) as an alternative and catchy medium for grabbing attention.  This was a top drawer presentation at Applied Industirial Technologies 90th annual shareholder meeting.


The message is clear: FOCUS.  Don't allow distractions to deflect your business from achieving your company's principal goals.


Messages such as this are important to remind us of our core objectives.  Profitablilty and shareholder value are key to this. Supply chain has an important part to play and directly affects corporate performance.  A negatiated saving for your direct materials directly impacts the bottom line.  


Chris Brodie has over 40 years experience in 'bigger picture' supply chain management and can help to direct your company to greater efficiencies and savings.


Contact us now for discussions on how we may help your business.