While capex has declined from its 2012 peak, such spending remains elevated relative to cash flow from operations, limiting the cash available for distribution to shareholders. As a result, miners’ balance sheets have become increasingly strained.
At the same time, activist investors have responded to miners’ financial difficulties by increasingly targeting these companies for aggressive reform. This is especially true in North America, where shareholder activism is well developed.
To reassure generalist investors that they are committed to addressing their balance sheet problems, mining companies should develop a financing plan that can withstand a range of market scenarios—including swings in commodity prices, input costs, and foreign-exchange rates.
To prepare for possible attention from activist investors, miners can proactively perform a do-it-yourself “health check.” Such an assessment requires that they scrutinize themselves through the eyes of an activist, considering the kinds of steps that activists might take to unlock value at their company.
To re-earn the right to grow, miners must supplement existing initiatives with efforts aimed at pursuing the next level of productivity improvements. These include optimizing the full value chain, optimizing mine plans for value creation, improving productivity continuously, and aggressively committing to applying technology.
Once companies have addressed their balance sheet issues and re-earned the right to grow (or have maintained resiliency despite the down cycle), they should think about how to create new value in the future.
To be both a great company and a great stock, miners need a highly explicit and cohesive value-creation strategy. Formulating such a strategy starts with defining sensible TSR targets that take into account the profitability of a miner’s assets through the commodity cycle and the expected range of commodity prices. Moreover, the value creation strategy should connect the TSR target with three other strategies: business strategy, financial strategy, and investor strategy.
TSR is the ultimate measure of how the market evaluates a company’s performance. By putting the potential impact on TSR at the center of its evaluation of potential strategic moves, a company incorporates the viewpoint of investors into its strategic thinking.
Miners that use this approach stand a better chance of building up healthy supplies of capital and cash, as well as enhancing their strategic and financial flexibility. As a result, they can position themselves to act countercyclically by taking advantage of depressed prices for assets, equipment, and talent at a time when buyers are scarce.