PERTH (miningweekly.com) – Despite a continued focus on capital performance across the mining sector, some companies and commodities have seen better results than others, a new report by advisory firm Ernst & Young (EY) has shown.

In its latest analysis, dubbed Make Working Capital Work for You, EY noted a small improvement in the sector-wide average working capital performance from 2013 to 2014. However, the advisory firm warned on Friday that the sector average masked significant differences between commodities and companies within commodity groupings.

“Our analysis reveals wide variations between companies within each commodity group, showing that while some miners have been very successful in freeing up extra cash through working capital, others haven’t made anywhere near the same gains yet. Mining companies who have focused on working capital have typically seen reductions of 30% or more,” said Wayne Boulton, report co-author and EY Oceania mining & metals advisory leader.

“For larger mining companies this can mean reclaiming hundreds of millions of dollars of capital back into the business.”

The findings indicated cash-to-cash (a measure of the cash conversion cycle) in the mining sector in 2014 was 38 days, down from 39 days in 2013.

On a commodity basis, the average cash-to-cash measure was lowest for iron-ore companies in 2014, at 23 days, and highest for platinum at 82 days. Copper, gold, aluminum and zinc were in the middle range from 39 days to 52 days.

Only three out of the ten commodity groups analysed, and 46% of the companies, reported a lower cash-to-cash position in 2014 compared to 2013.
 
“While innate operational factors and differences in the complexity of processes account for some differences between commodities, this shows some companies are effectively sitting on cash because of less effective working capital management,” Boulton said.
 
The EY report indicated areas where working capital has been released, including supplier payment terms, reconfiguring logistics and supply chains, changing maintenance strategies, and reviewing customer trade terms.

Boulton said that processes and systems across supply chain management, particularly in regard to spare parts inventories, was the single biggest area for gains to be made, but also the most difficult.

“Supply chain management processes have not changed fast enough, with some still seemingly working on a ‘production-at-any-cost’ basis that companies operated on during the peak of the mining boom. For example, we have seen remote mine sites with significant levels of inventory spares, all bought in the past 12 months. If production slows, those spares can be stuck in remote locations, hard to sell and expensive to move.

“During the boom, when scarcity and demand meant a single truck tire was worth more than a high-end sports car and miners simply couldn’t afford delays, it made sense to have a pile of spare truck tires. It doesn’t make sense today.”
 
Boulton expected more divergence in the working capital performance between commodities and individual companies to be evident in the next year as the differences in commodity price changes, reductions in capital expenditure programmes and the full impact of working capital improvement programmes already undertaken, come through.

“Even those who have achieved significant improvements still face a number of critical challenges if they want to squeeze more out of working capital. The next wave of improvements will likely come from cultural change and data analysis.

“Cultural change such that all employees who can influence working capital understand what they can do to better manage cash across inventory, receivables and payables as this continues to be an opportunity to deliver more. And few, if any, mining companies are using the vast amounts of data they have from their IT systems to gain better insights on the operational drivers of working capital.”