Modern Management in the Global Mining Industry by Adams Robin G.;L. Gilbert Christopher;G. Stobart Christopher;

Author:Adams, Robin G.;L. Gilbert, Christopher;G. Stobart, Christopher;
Language: eng
Format: epub
Publisher: Emerald Publishing Limited
Published: 2019-07-10T00:00:00+00:00

Why the Cost Culture Fails to Deliver Shareholder Value

Creating shareholder value involves cost control in the face of any given commodity price. However, as the previous discussion has demonstrated, the free cash flow generated from operations is just one of three legs in the value creation process. Attention has to be paid to capital gains or losses and to the alternative opportunities available to shareholders. Moreover, selecting an asset portfolio that lies inside the efficient frontier and adopting business practices along the lines just discussed that may keep it there are critical. None of these tools explicitly involves cost control as such.

This brings us to what I describe as the cost culture that is endemic in the mining-related industries which I have advised for the last 40 years. I regard this culture as the single largest barrier to effective management in these industries and even the root cause of their often questionable relationships with host communities and poor public image. I am certainly not arguing that companies should neglect cost control. No business can do that and hope to survive in a competitive world. I am arguing that this is not a business strategy. Rather, it is a routine operating imperative. It is a necessary but not a sufficient condition for success.

The dominance of the cost culture in management thinking stems from the early 1980s and replaced what can be termed the growth culture of the previous quarter century. In that period the industry’s primary concern was to expand production fast enough to meet rapidly growing demand associated with the rebuilding of Europe and Japan after World War Two. Later on, growth in demand associated with decolonisation and the Vietnam War became significant. In a highly influential 1972 report, the Club of Rome argued that limited resource availability would constrain economic growth in the decades that were to follow. It is doubtful that many mining companies ever believed the resource scarcity thesis but it certainly influenced the financial sector and may have been one of the factors enticing oil companies to enter the mining industry in the 1975–1980 period. Those heady days also featured accelerating inflation, so the penalties for cost mistakes pretty quickly eroded. If a mining company had cost overruns on its project or paid too much for an acquisition, it just needed to wait for a year or two for inflation to wipe out the damage.

The advent of a strongly deflationary policy environment in the early 1980s changed all this. Interest rates exceeded 20% for a brief period and remained high in real terms for the balance of the decade. Metals demand and prices fell and the industry was forced to cut exploration and development expenses dramatically, and wherever possible, delay projects. These cost reductions also extended to corporate overheads of all kinds, including those associated with price forecasting and price risk management. The outcomes massively exceeded expectations. It turned out that there was way more ‘fat’ in the industry’s cost structure than anyone had believed to be the case.

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