Mining engineers ill-suited to budgets as firms urged to be savvy

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AS a price taker, South Africa’s mining sector is a victim of declining commodity prices, but it’s also generally acknowledged that it’s responsible for its own problems including a seeming inability to keep pace with other industries globally.

That’s the view of Paul Mitchell, a partner at auditing firm EY and a former mining engineer. It’s important to know he once managed mines because he also believes that in order to run more competitively, mining firms ought not to be giving engineers free rein when it comes to capital allocations.

Commenting on capital effectiveness, Mitchell said that mining companies had forgotten about how to manage sustaining capital. “Instead, it is a bucket that we give to mining engineers for their pet projects,” he said at a recent EY function on ‘navigating volatility’ in the mining sector.

“We don’t plan for it and we don’t manage it,” he said. “We do a sustaining capital budget and we expect it to be spent, but it needs to be run as a portfolio and across the group and not given to a mining engineer who doesn’t understand that. I can say that because I was one once,” he said.

Mitchell believes that mining firms ought to plan their capital budgets over a three-year period but review it quarterly in the same way that in the aeronautical industry engine maintenance is conducted on condition not on a calendar basis. “As a result, airlines have reduced maintenance costs 40% and the engines are running better than ever before,” said Mitchell.

It’s worth bringing to mind the comment of Roger Baxter, CEO of the Chamber of Mines, who at the EY presentation observed that a third of call capital spent in the mining sector over the past five years, roughly a third of it was written off, or impaired.

Mitchell also thinks there are pragmatic steps mining firms can take to make sure they manage their working capital efficiently. “We’re too good about paying [creditors]. Industrial giant GE runs a debtors’ average age of 100 days whereas mining firms pay vendors in 20 to 30 days.

“That is very generous,” said Mitchell. “The airline industry pays its fuel bills on average after 60 days whereas the mining sector pays for its diesel within a week,” he said.

Rio Tinto, the Anglo-Australian group said recently its working capital benefited $100m by employing a system of three-way matching invoices in which fraud and carelessness are avoided by matching invoices, a purchase order and a receiving order by its accounts department.

8 COMMENTS

  1. What an idiotic statement. When you get junior mining engineers with little practical experience to do your designs and projects get ranked on unrealistic/ questionable NPVs, its the lack of experienced mining engineers with production, planning and project management experience at board level that caused the trouble…

  2. Trouble with mining projects is that there are usually no half measures. The project is what it is, and needs a certain level of capex/ renewals and replacement capital to maintain infrastructure, efficiency and safe working conditions. I do not think that this article is correct, mines are not retail business where cashflow can be managed. Stretching creditors is a good idea though.

  3. “Mitchell believes that mining firms ought to plan their capital budgets over a three-year period but review it quarterly in the same way that in the aeronautical industry engine maintenance is conducted on condition not on a calendar basis. “As a result, airlines have reduced maintenance costs 40% and the engines are running better than ever before,” said Mitchell” I think Mr Mitchell’s commend is powerful and educational. I just hope that mining sector unions will take a cue from it. It is even more profound because Mitchell was a mining engineer himself. This is the kind of pains in the past he helped the industry pierced to poor mine workers. In all negotiations that I managed to read about it in media and those I have personally attended while working for trade union, I have heard shopsterward complaining about bad management decisions that engineers are making. Being a financial person myself, I will not hesitate to agree with him more, for a person being in highly specialised profession like mining engineers, they may not have knowledge for “value of money”, unless the South African mining engineers are far better the rest of the world, which Mitchel dispute in his article.

    • Mining is not the aeronautical industry. And the aeronautical industry does not have the same level of interference by unions that mining has to contend with, and is technically different. The shop steward that complains about “bad management decisions that engineers are making” does not have the same level of insight into the technical factors influencing the mining operations that a mining engineer has, and would probably be the first to complain when things go wrong and accuse the mining engineers of “not caring”and various other misdemeanours. All I have ever got from shop stewards is emotional claptrap not based on fact or technical constraints. The Merriespruit disaster was caused by capital been cut to maintain slimes dams- the rest is unfortunate history.

      • Whether you like it or not unions are part of civilised and free society. Actually workers rights are human rights. The best performing companies in South Africa and in the world over, care for their workers first, involve them in their day to day decision making processes. If you dare just when top performing companies in South Africa report is released take a look at them your wool will be removed from your face of ignorance. It is the same with top 500 Fortune companies. The idea that workers do not know anything is very misplaced to the ignorant people like yourself. Germany workers are the most unionised in the world and produces greater output at all times than any other country in the world. Not just huge output but masterpiece outputs. Because they are well recognised not taken as tools like in your tone. The issues Mitchel raised is about South African mining companies not being competitive like mining companies in World or in Europe. That statement is undisputed. If you so wish can I refer you to look for a company in America called South West Airline, Nedbank in South Africa, Woolworth etc. You will see in their financial statements labour has changed to human capital. Of paramount important what Mitchel is saying is that engineers should not just be given a free ride but closely monitored including budgeting processes. Even international financial agencies recognised labour as capital, you are the only one still behind whom recognised labour as tools and stupid, ignorant shop steward capable of causing trouble. I have worked for mining union for more than 10 years as financial person, I have wondered why workers always complained about wrong operational decision management made which led those companies into trouble not workers.

  4. This article definitely hit a nerve, if I look at the comments above. Reality is: everyone in the industry is in it for a quick buck, from the investors right down to the lowest skill worker going for his bonus. To be successful in mining you need sustainability and you will only get that if executive and top management incentives are paid on a rolling average to make sure Capex and working cost is spend when it should and not held back to increase profits just to be paid next month. Longer term views will ensure consistent production levels.

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