MINING company executive focused too much attention on production growth and reserve replacement because it was more interested in preserving itself than on investor returns – a claim at a recent conference that drew a reaction from at least one CFO.
“The reason mining companies want to replace the whole time is because you’ve got a bunch of well-paid executives sitting at the top that need a job to carry on. They can’t mine themselves out of existence. There’s just no incentive for that,” said Piet Viljoen, executive chairman of RECM, an asset management company.
Viljoen was commenting at the Joburg Indaba mining conference in a panel debate regarding balance sheet management. He shared the stage with a number of executives including the CFOs of Impala Platinum, African Rainbow Minerals and Harmony Gold.
But it fell to Kumba Resources CFO, Bothwell Mazarura, to attempt a riposte. Said Mazarura: “Piet, one of the things we found … is because our focus [is on] recycling the business and becoming more productive … one of the questions we get asked from investors is around life of mine”.
Viljoen said he was being “… a bit facetious”, but he was critical of mining company financial management which he said was insufficiently focused on returns notwithstanding the response to the commodity price correction between 2014/15.
“As an investor, I get very scared when I hear about growth and replacement ounces and for me that’s the scary part about mining,” he said. “I think that if one looks at a mine you can look at it as a project that goes down to zero at times and you can maximise returns from that project.
“But if you’re really focused on high returns on capital, you’ll probably do that and not worry about replacing it. Or build up a proper balance sheet so that you can replace it at an appropriate point in the cycle, not when things are going well because that’s when you start paying too much for them.
“So both on the investors side and on the management side there are all sorts of reverse incentives out there. On the investors side you’ve clients who want short-term returns and on the management side you’ve got people that want to look after their jobs that prevents rational capital allocation from happening.
“But what’s happened over the past five years and I can see it from this panel, at least we’re talking about the right things. I’m not sure we’re implementing them yet but at least we’re talking about the right things,” he said.
Boipelo Lekubo, CFO of Harmony Gold, said it was crucial for financial managers to be increasingly alert as the market had become more volatile. “We’ve all seen of late between the exchange rate and the commodity prices, between Trump and China, once one of them sneezes,” she said.
“We used to work with sensitivities where you present your budget to your board. We would work with the sensitivities of 5% to 10%. These days you can go anything up to 50% because your balance sheet at R14 compared to your balance sheet at R11.80 where we were at the beginning of the year is a totally different situation.
“So its critical for your finance executives to be on top of your cost of capital throughout the different stages of the cycle.”
Viljoen added that balance sheet sustainability was a function of a solid, predictable strategy. “As an investor … the strategy of the business should be coherent and executed consistently. Unfortunately that is also not really happening in the mining sector.
“Many of our biggest mining companies, in the time that I’ve been managing money, have had five or six CEOs and seven or eight strategies. That is just not sustainable. So one of the soft issues we generally look for in any company and specifically mining companies is: what is your strategy and is it sustainable. That’s key,” he said.
