Value Creation in Mining 2019: Return to Strategy

For Mining Companies, It’s Time (Once Again) to Focus on Strategy

Counting on Commodity Prices Is Risky. Companies Need a Balanced, Holistic Strategy Focused on Future Growth, Continuous Productivity Gains, and Value Discipline in Projects, Says New Report from BCG

BOSTON—Amid growing economic uncertainties, mining companies need to develop value creation strategies that are independent of commodity prices and enable them to pursue value creation from multiple angles. So says a new report from Boston Consulting Group (BCG) titled Value Creation in Mining 2019: Return to Strategy.

Banking on rising commodity prices—which powered performance in the most recent cycle and has largely driven gains in the current recovery—is no strategy in itself, according to the report. “Instead, companies need to return to true strategy in the fullest sense,” says Gustavo Nieponice, a senior partner at BCG and coauthor of the report. “They need to secure future growth, be resolute about improving productivity, and manage current and future capital projects in a balanced, disciplined way.”

Bright Spots in the Recovery

The report analyzes the key drivers of total shareholder return for 63 leading mining companies. After the severe downturn from 2011 through 2015, when mining turned in the lowest TSR of any major industry, it experienced a welcome rebound. However, a sharp decline during the second half of 2018 has raised questions about how sustainable the recovery is—and what executive teams can do to respond.

Among the report’s other key findings:

  • In 2017 and 2018, revenues and margins grew simultaneously for the first time in seven years.
  • Higher cash flows and valuations shored up balance sheets, enabling companies to pay down debt.
  • Although cash reserves improved, project spending remained near decade lows.
  • Meanwhile, companies have been returning a growing chunk of excess cash to shareholders.
  • Exploration is on the rebound, particularly among juniors, which now account for almost one-third of all exploration spending.
  • Despite speculation to the contrary, M&A activity has remained subdued.

Although industry circumstances have improved markedly since 2016, companies cannot afford to be complacent. Since mid-2018, uncertainties in demand and prices, along with rising operating costs, have stirred up headwinds that are challenging the recovery.
Build Resilience, Pursue Profitable Growth

Recent industry and macroeconomic developments underscore the need for value creation strategies that help companies build business resilience while pursuing profitable growth. BCG research has consistently shown wide variation in TSR performance within every industry. “Some companies systematically outperform their peers in value creation,” says Thomas Vogt, an associate director at BCG and coauthor of the report. “What are they doing differently? In a nutshell, they understand the key drivers of TSR beyond commodity prices, and the tradeoffs required at different points in the cycle.”

The report emphasizes three main avenues for value creation.

Take productivity to the next level. To ensure that cash flows remain sustainable—and to keep up with rising costs—companies must continually and ambitiously adjust their productivity targets. A number of new and emerging technologies promise powerful new ways to unlock value—but as the authors note, developing a cohesive technology strategy that delivers hard benefits can be difficult. “You want to be sure that the business drives technological change, and not the other way around,” says Vogt. “A portfolio approach to digital and technology solutions makes sense. Adopt a venture capital mindset: take a range of higher- and lower-risk bets, and actively manage the portfolio of opportunities.”

Secure future growth. Ultimately, long-term value creation depends on profitable growth, whether organic or inorganic. As exploration activity picks up, companies should review their exploration strategies to ensure alignment with business needs for future production. They should also consider applying innovative technologies such as machine learning to improve targeting and discovery rates, and seeking efficiencies in exploration management. In M&A, companies must use a broad set of price and demand scenarios to evaluate deals. Every deal under consideration should have a clear and demonstrable value creation logic.

Seek value at every project stage. BCG has found that companies that apply lean principles to projects can reduce capital intensity (the capital required per unit of productive capacity) by from 8% to 17%. Improving construction planning and productivity and aligning incentives can generate another 9% to 23% reduction in capital intensity. “New capital projects should explore the use of forward-looking technologies to avoid building ‘new old mines,’” says Alex Koch, a senior partner at BCG and coauthor of the report. “At the same time, companies should stay focused on overall business value, considering project timing, construction, and future operability, in order to maximize long-term returns.”

Value Creation in Mining 2019 is the sixth report on value creation in mining sponsored by BCG’s Industrial Goods practice. The report is part of BCG’s Value Creators series, which applies BCG’s proprietary methodology to disaggregate the sources of value creation among top-performing companies throughout nearly three dozen leading industries.

A copy of the report can be downloaded Value Creation in Mining 2019: Return to Strategy.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or

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