Adopting traditional cost control measures may not suffice to turn the sector around, say experts
Article by: Robert Bagatsing, Marketing Manager, Altaaqa Global CAT Rental Power
Robert Bagatsing is currently the group marketing consultant for Zahid Group, the parent company of Altaaqa Global CAT Rental Power. A graduate of Strategic Marketing Management from Harvard Business School, Boston.
Prices of commodities, such as gold, silver, iron ore, coal and copper, have been in gradual decline for the past several years. Analyzing a Bloomberg release in early December 2014, global market research firm Deloitte reported in its 2015 outlook on the mining industry that a string of several factors, such as a growing supply from new low-cost projects, a stronger US Dollar, a weak global demand and credit restrictions in China had pushed the prices of these commodities to what it called a “technical graveyard”. Copper, for instance, has been observed to be trading close to its technical support level of US$3 per pound, while iron ore prices are noted to be at a five-year low of US$75 per ton. Gold, reflected a related but separate 2014 Deloitte report, was also severely affected by the commodity price devaluation, falling from more than US$1,800 per ounce in 2011 to under US$1,200 in June 2013. The drop, observed market analysts, represented gold’s sharpest decline in 30 years. Owing to this extreme volatility, in addition to a below-par forecast on the demand front, escalating costs, a tough regulatory environment and a changing competitive landscape, investors have been shying away from the mining sector in recent years. In such a condition, said market experts, passively waiting for a recovery or resorting to conventional cost-control methods might not be enough to regain industry stability and, thus, stakeholder confidence.
Figure 1: Total returns by sector (Datastream through Deloitte)
Figure 2: Gold price trends (Datastream through Deloitte)
Though it may be challenging for mining companies to resist seeking solutions from what are called “standard financial levers”, such as reducing the number of workers, adjusting the cash flow, and regulating expenditures, industry experts sounded a caveat when they said that turning to conventional strategies would only push them into an unremitting cycle of cost cuts and cost creeps. Instead of plainly working around challenges, mining companies should employ rooted changes within an organization and should devote a keener attention on leveraging innovation, among other changes, to sustainably reduce costs, improve profit margins and increase productivity, which ultimately leads to a more encouraging levels of return on shareholder and stakeholder value. To fulfill this, industry thought leaders endorsed espousing autonomous mining solutions, such as mobile and modular innovations, by working closely with technology and service providers.
Figure 3: Falling prices of major metals (PWC through WSJ)
Increasing investment in mobile or modular innovations in these trying times for the industry may seem to be at variance with the status quo, but proactively making a headway towards the adoption of new technologies – new ways of doing things – will equip mining companies with a sustainable competitive advantage. Vis-à-vis proactive procedures of countering the prevailing challenges, there are real dangers in settling for reactive cost-cutting methods, because they are proven to be neither sufficient nor sustainable. To reduce costs more sustainably, mining companies must cease layering existing structures with marginal tweaks.
Thus, there is, at present, a pressing need for mining companies to be presented with cutting-edge technological solutions that will help them focus on productivity and optimize processes. In order for mining companies to be encouraged to invest in new technologies, products on offer should genuinely represent sustainable and viable economic and operational propositions.
Figure 4: Volatility in commodity prices (Datastream through EY)
Powering through challenges
One of the key requirements for a continuous mining operation is a reliable supply of electricity. Electrical energy is highly relevant in almost all the facets of a mining operation, including climate control, heavy equipment activation and workplace visibility, to name a few. It is imperative that a project location remain conducive to productive work under any circumstance, else a mining operation may encounter production interruption, which, in turn, would severely affect a company’s profitability and stability. For instance, during months of extreme temperatures, a project location’s climate should be controlled to ensure that the mine is neither too hot nor too cold for activity. Climate control during the summer or winter, based on industry research, takes a lion’s share of a mining operation’s electricity supply, curbing the power provision for other project functions. In such a case, with the knowledge that the spike in energy demand is merely seasonal, it would be highly counter-productive for a mining company to build a permanent power supply to provide for climate control. This is where mobile and modular technologies come into the picture.
Temporary power plants, for example, are designed to provide economical, dependable and safe power solutions to a wide gamut of industries, including mining and its allied sectors, metallurgy and tunneling. Instead of constructing a permanent, large-scale power station for isolated requirements, mining companies can opt to hire interim gensets, which represent a faster, more flexible and more cost-effective solution.
Owing to their modularity and configuration, temporary power plants can be delivered anywhere in the world, and can be tailored to any requirement of mining operations. They are able to fully function even in remote locations and despite the absence of traditional power infrastructure, such as sub-stations. They can be fully constructed and powered on in a matter of days, and can be ramped up or scaled down depending on the project’s usage pattern.
Because they are only being hired, rental power plants can fit any mining company’s budget. In opting for temporary power stations, a mining company can avert dealing with heavy civil works, intricate financing negotiations and years of waiting for the construction to complete. Instead of foregoing business opportunities and expansion prospects due to a lack of electrical power, with mobile power plants, mining companies can assuredly venture into them confident that they have a technology that can instantly bridge the gap in electricity supply when, where and as needed.
Though the forecast for the industry in 2015 are laden with challenges, the mining sector is still expected to be resilient, as mining remains to be a significant part of the value chain. Undaunted by the diminishing prices of commodities and operational losses, mining companies are revisiting their activities and channeling their focus towards improving existing operations and harnessing the potential of modern technologies. Of course, indications that the global economy is turning the corner also bodes well for the future of the mining industry.
Figure 5: Real GDP year-over-year growth forecast
As a viable electricity supply will always be one of the most crucial requirements for a sustainable and continuous operation, mining companies may find merit in thinking out of the conventional and adopting cost-efficient, mobile and modular technological innovations that will allow them access to reliable clean and quality energy.
Altaaqa Global CAT Rental Power, a global provider of temporary power solutions, will be at the 2015 Mining Indaba on 9-12 February at the Cape Town International Convention Centre, South Africa in Booth 4101.
About Altaaqa Global
Altaaqa Global, a subsidiary of Zahid Group, has been selected by Caterpillar Inc. to deliver multi-megawatt turnkey temporary power solutions worldwide. The company owns, mobilizes, installs, and operates efficient temporary global power plants (GPP’s) at customer sites, focusing on the emerging markets of Sub-Saharan Africa, Central Asia, the Indian Subcontinent, Latin America, South East Asia, the Middle East, and North Africa. Offering power rental equipment capable of operating with different types of fuel, such as diesel, natural gas, or dual-fuel, Altaaqa Global is positioned to rapidly deploy and provide temporary power plant solutions, delivering electricity whenever and wherever it is needed.