Q: What should mid-tier and big mining companies watch out for in terms of capital expenditure risks to their major projects in development?

A: In this climate, companies need to look at their execution quality when delivering projects.

There needs to be discipline when looking at timeframes and releasing capital, for example, by requiring certain project milestones to be achieved before capital is released.

AT Kearney’s research shows that during the resources boom of recent years, people resources were a critical issue affecting capital projects.

Now that the labour market has eased somewhat, miners should turn this to their advantage and be on the lookout for star performers – these are the people you want working on key projects.

Retaining top talent by transferring these employees from where work has been halted and redeploying them to projects that are still ongoing will help projects stick to timeframes and bolster the quality of work being achieved.

Cost blow-outs also typically occur as a result of changes to the scope of a project, so it’s useful to include a degree of flexibility in the supplier and contractor agreements.

For example, an alliance agreement will mean the risk associated with any change in scope is absorbed by all parties to the agreement, giving more flexibility if costs need to be re-allocated to accommodate the change.

Q: How can juniors watch their costs and how can they improve their chances of selling stakes in their projects?

A: Juniors need to think like big players in terms of discipline and process around costs.

For example, larger companies often have well-developed procurement functions which, in the boom years, wasn’t something that smaller companies needed to focus on.

However, with margins under pressure and demand falling, rigorous procurement measures and efficient business processes will be important.

Transparency around costs will also help companies looking to be acquired. A demonstrated capability in cost control will continue to be very attractive to investors, who are looking for stability in this environment.

Q: How can companies minimise capex risks facing projects aiming to supply the steel market?

A: The past year or so has shown that prices are highly variable for most commodities in the steel market, so the key is to plan for these fluctuations.

Project managers should be testing different price scenarios before projects are started.

This means working out revenue scenarios for different commodity prices – at the lower and higher end of the spectrum – and setting out plans to scale down and scale up, depending on costs and demand.

Projects should be scenario-proofed and plans should be in place according to each possible scenario.

Q: How can mining companies leverage their supplier relationships during these times?

A: Even in tough economic times, companies can still generate benefits from good procurement strategies.

The supplier relationship model will be of ongoing importance, and companies should look at manoeuvring these relationships into a more collaborative model, rather than the traditional transactional approach.

Flexible agreements with suppliers, particularly when it comes to the volume of commodities, are extremely important.

When times are tough and demand is slumping, collaborative relationships can be of mutual benefit.

There will, however, need to be a bit of give and take, and it’s important that companies ensure their suppliers will survive when negotiating on price.

Companies need to look at supplier risk management in two ways.

First, the risk from the suppliers themselves. Companies should ensure that they will be adequately serviced by their chosen suppliers and should look at their stability, especially in the current climate.

Second, companies should rethink current contracts and look at the mechanisms they may have in renegotiating contracts and fixed prices.

Even fixed prices can renegotiated, if there is sufficient long-term benefit to a supplier to do so – in any case, a conversation needs to be started to explore the options.

Significant savings can be achieved using an advanced approach to procurement, using levers that include:

• Volume bundling – this could be bundling across current projects or bundling across generations, looking at supply needs for future projects and leveraging current prices on the promise of future supply needs.
• Re-specification – projects often get initially costed using the biggest and best options, but it’s always possible to review the costs, change the specifications and ask ‘what can we live without?’
• Value partnerships – sharing risks and benefits with a supplier by entering a project-based partnership or strategic alliance

Q: How should companies approach contract negotiations and marketing for mining projects and what other measures are there to reduce exposure to raw material price?

A: Ideally, companies should lock in a supply arrangement, or at least have a list of potential customers who have indicated that a relationship is possible.

Companies should attempt to move away from transactional customer approaches and look towards an accounts-based or “preferred supplier” arrangement which is more long term.

This could be difficult when dealing with commodities as there is less need for customers to enter into longer-term arrangements.

However, if the company has a good account management and servicing history, customers are more likely to consider a longer-term relationship.

It all comes down to leveraging existing relationships.

When looking at ways of reducing exposure to raw material prices, companies should be looking to commodity risk management strategies.

It comes back to good scenario-based risk management.

Q: Do you expect to see many mining companies keel over from capex blowouts in the next 12 months?

A: The question isn’t so much whether we’ll see more capex blowouts, it’s whether mining companies will be able to maintain their profit margins.

There is enormous pressure on margins at the moment, and just as companies attempt to leverage their supplier relationships, so will they feel the pressure from their own customers.

We’re not seeing a scarcity in labour and equipment, so capex blowouts really shouldn’t happen.

But, if a company has made volume assumptions there is a real risk of loss if that volume, in reality, is lower than expected.

Q:What are some of the mistakes even some of the big miners are commonly making in terms of capex with their projects?

A: AT Kearney’s Excellence in Capital Expenditure Study identified a number of areas where companies could perform better.

For example, in human resources, companies should have a long-term plan for the deployment of people, assigning the right people to the right projects, who will have the biggest impact on net present value.

Cross-leveraging is also an area where companies tend to fall short. Only half of all companies we surveyed regularly leverage supplier relationships across projects.

Organisations should develop continuity plans across projects, and manage resources collectively rather than individually.

AT Kearney released the report of its study last week.

Key findings found half of all companies “seldom leverage supplier relationships across projects” and less than 20% “proactively reduce exposure to raw material price volatility”