Strategies on Capital Prudence,Cost Discipline and Non-Core AssetWed, 02/04/2015 - 09:44
Moderator: Alfredo Remy, Mining Leader of PwC Peru
Panelist: Salvador García, COO of First Majestic Silver
Panelist: Luis Chávez Martínez, Vice-President of AuRico Gold
Panelist: Arturo Bonillas, President of Timmins Gold
Panelist: Xavier García de Quevedo, CEO of Grupo Mexico
Remy began the panel by assessing to the way mining companies reacted too slowly to the drop in mining prices. He said that many companies began to tighten their belts a couple of years after the price drop trend began to be evident. Furthermore, the price of metals is not only going to climb only because of the mining market itself. Conflicts around the world, stimulus packages in Europe and Japan, and low oil prices have all impacted the cost scheme of mining companies. China has also reduced its growth objectives to 7%, which seems big, but for China, this is too low a rate and signs of a real slowdown. China also has a major stimulus package which will impact metals.
Remy than asked what indicators could therefore be seen as a sign of a real mining economic recovery. He stated that productivity was just such an indicator around the world as it dropped around the time as prices. Mining companies are focusing on increasing margins, which is part of improving their overall productivity. The ROI on invested capital has dropped over the years to just 5%, which is far too low to satisfy most investors. The impact of this is that most mining executives have now learned to leave aside anything that does not improve ROI, as we see from projects being abandoned and mergers or joint ventures being sought.
Luis Chávez Martínez began with a brief presentation to discuss the matter of Mexican companies with foreign capital and issues of capital prudence and cost discipline. For Chávez Martínez, cost discipline in the mining industry can be boiled down to productivity in operations. During the last upturn, AuRico Gold and many other companies did not imagine that there might be an economic downturn in the short term. Since this downturn has happened, the industry must now analyse what corporate strategies can work to help increase productivity while dealing with higher costs and lower prices. For AuRico Gold, a merger with Alamos Gold was the right solution to deal with this situation. Furthermore, AuRico Gold has divested mines in Chihuahua and Guanajuato, among other projects in Mexico, for which it received US$1 billion which went to its investors. Besides, the company has shed some staff and negotiated contractors, as part of a general capital prudence strategy. The two operations AuRico Gold maintained in Sonora and Ontario, Canada, were also managed closely to ensure they could provide steady cash flow. Overall, the AuRico Gold-Alamos Gold merger will help the company survive through the hard times.
Arturo Bonillas began by saying that Timmins Gold was a medium-sized company and could not match the track records of other panellists. The company is readjusting its plans to adapt to gold selling at US$1000 an ounce. The first question is how the company can finish 2015 while meeting all its financial obligations. However, Timmins Gold is planning ahead to 2021 to ensure it takes the right path. A company must decide whether to simply try and pay salaries or to try and thrive in the long-term. In 2014, there was an argument within Timmins that the company should close if it could not turn a profit in the short-term. However, Bonillas said that the company is flexible and can reinvent itself easily. Therefore, the company staved off any closing fears and based its future on seeking to create wealth in the medium-term by 2018. These changes included renegotiating contracts with suppliers and trained its people to create a long-term basis for Timmins Gold. This strategy will certainly be tested since the average global production cost for an ounce of gold is US$1,500 while the value is at US$1,200 and might drop as low to US$1,000, according to Bonillas.
García de Quevedo began by explaining that Grupo Mexico was very well placed to inform on these financial topics, given their producing mines in Mexico, the US and Peru, as well as with exploration projects underway in Argentine and Spain. Grupo Mexico makes ten-year plans that are periodically reviewed as the company’s exploration, production, and fiscal strategy have to be based on the long-term. Therefore, for García de Quevedo, the most important aspect for a company in fiscal distress is to focus on cost. To help reduce costs, Grupo Mexico has a central resource center which handles all transactions and costs for all of the company’s activities in the world. This allows the mining behemoth to track the costs and expense of every piece of equipment. Another tool works like a traffic light that tracks and alerts when a piece of equipment or a project is not hitting the fiscal targets it should be hitting. Despite being big, Grupo Mexico focuses on big and small projects alike, tracking how all these can contribute to its global reach and profitability. This attention to detail and costs helps the company know how it will invest and grow over the years. García de Quevedo also stated that numerous projects are competing among themselves to receive Grupo Mexico investment and many aspects are studied to decide where the company will invest. After this, project management is absolutely crucial to get the most out of a project. If it feels it needs to do so, Grupo Mexico will contract out leading companies in areas like engineering but the group will always very closely watch the fiscal conditions of each project it is involved in.
Salvador García pointed out that First Majestic has five operations in Mexico. “In all the years I have been working in the mining industry, this is not the worst crisis I have seen,” he asserted. He went on to inform about the situation of his company. During the upwards part of the cycle, he explained, companies grow and create non-essential job positions. Las year, First Majestic Silver examined non-essential positions and non-essential suppliers too in order to reduce costs. Garcia agreed with the fact that the size and scope of a company makes a difference. Juniors, for instance, survive on a da-to-day basis, so they cannot implement the same strategies as a large company in times of crisis. “This time of crisis is also a time of opportunity. We just need to think outside the box,” he said and added that the global situation invites companies to think about alternative, cost effective production methods.