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Mining Indaba, McKinsey plot way forward for African mining

Mining Indaba, McKinsey plot way forward for African mining

Photo by Bloomberg

8th February 2016

By: Martin Creamer

Creamer Media Editor

  

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CAPE TOWN (miningweekly.com) – All African mining companies can and should take steps to improve productivity and reallocate capital, while about half have the capacity to merge with or acquire companies.

On day one of the Investing in African Mining Indaba here, a jointly developed report from McKinsey’s basic materials practice and the Mining Indaba, “Creating Global Mining Winners in Africa”, detailed big moves in four categories that would help African mining companies regain their prominence.

The world’s largest mining investment conference and Africa’s largest mining event is taking place in Cape Town until February 11.

Taken together, productivity improvements and strategic moves that harness market trends such as mergers and acquisitions (M&A), capital and expenditure reallocation, would improve companies’ odds of moving from the mid quintile to the top quintile on the power curve by up to 31%, according to Lorenz Jüngling, partner and leader of McKinsey’s global energy and materials practice in Africa.

Once-leading performers in the global mining industry, African mining companies have been falling behind their global peers for the past decade due to declining productivity and return on invested capital.  

Despite market challenges that impact the sector globally, Africa has significantly underperformed. However, new research shows there are clear strategies that African miners can employ to considerably impact their success, though the pursuit of programmatic M&A, dynamic reallocation of resources, capital investment delivery and productivity breakthroughs.

McKinsey director and coauthor of the report, Michael Kloss, made the point that the downturn was a good time to spend and to buy and at least half of all African companies had the headroom to fund this growth based on debt to equity ratios.

The analysis showed that there were also plenty of targets in that 77% of mining companies accounted for just 30% of the industry’s market capitalisation in Africa.

To gauge the performance of 65 publicly listed African mining companies, McKinsey compared them to the economic profit performance to the world’s top 3 999 companies, all of which competed for the same capital.

By ranking companies this way, McKinsey produced “the power curve” of economic profit.

In the first half of the 2000s, African mining companies were ahead of their global peers in terms of economic profit, but from 2005, they began falling behind.

The study found that besides favourable geography, invested capital in Africa had actually grown over time, but the return on invested capital had been below average and declining.

Additional research from McKinsey’s MineLens Productivity Index indicated African mining productivity was dropping 5% year-on-year since 2004 compared with 3% for its global peers.

Investing in African Mining Indaba MD Jonathan Moore commented that the current market had forced the African mining industry to take a hard look at how it did business and the aspects that were most critical to its future success.

But looking ahead, Moore made the point that governments and companies were focused on developing strategies to invest in African mining beyond the current mining cycle.

In a capital restrained market, “big data” analytics were being used to understand how companies could boost their odds of scaling the power curve and beating the average.

“We found that by taking specific actions in productivity, strategic M&A and allocation of capital, African mining companies can boost their odds of moving up the power curve by a multiple of three or four,” Moore added.

To secure a more favourable business climate, companies should complement those moves with measures in four action areas: facilitating access to infrastructure; collaborating on regulatory frameworks; investing in local labour and community development and cultivating a local supplier base.

Moore advocated that the global mining industry should work together and individually to address the challenges.

By taking action now, they would create the fertile ground for individual successes that put Africa back on the map as one of the most attractive regions for mining globally.

Edited by Creamer Media Reporter

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