It’s been a tough five years in the mining industry, but thanks to the unprecedented decision of the UK to leave the EU, miners may finally be feeling some relief. Investors looking for safe haven in the aftermath of Brexit have caused commodity prices to soar. As tracked by Visual Capitalist, post-Brexit activity caused a 14.3% increase in silver prices, 9.7% in platinum and a 6.8% bump in gold. The industry had already begun feeling a slow and steady rise in gold prices. Thanks to Brexit, we have seen an almost instant surge. But those of us who have been through a few cycles before wonder: Is this the start of a boom market or artificial inflation due to Brexit fears? If a permanent price increase, how will it impact the demand for gold?
The questions are endless and the uncertainty is immeasurable. Companies need to compare different what-if scenarios to determine what the best course of action is in order to make the most of this upswing without significant exposure to risk if the increase is only temporary. One thing is for certain: Brexit has changed the economic game and miners need to respond.
Mining companies must be prepared to pivot operations by examining both short- and long-term adaptability through the following four key drivers.
Drivers for Short-Term Adaptability:
1. Production Rates
The recent shift in commodity prices changed virtually every mine site’s cut-off grade. To maximize profit margins, companies will need to shift production rates. The first step is comparing NPV verses cutoff grade and production rate. This iterative analysis will be used to improve your production schedule in both your short and long range plans. By conducting numerous scenarios in real time with the latest data, you can minimize uncertainty and risk by being sure you’ve evaluated and understand the ripple effects of every option.
2. Cash Flow to Capital Expenditure
In an industry with high capital costs, a company’s capital expenditure ratio is an essential driver monitor. In an environment of low commodity prices, many companies set themselves up with a long term capex profile in order to maintain financial reserves. However, with prices rising and the potential to increase production rates, companies find themselves with increased free cash flow and the ability to allocate capital. This type of analysis requires visibility into the overall financial impact on P&L, plus a more detailed analysis into questions such as: How much should be spent? What type of investments should be made? When will the investment create returns?
Drivers for Long-Term Adaptability:
3. Reserve Calculation
We have all seen how essential reserve calculations are to a company. With a new price and cut-off grade, the corresponding metal value is updated. These new reserve calculations shift your life-of-mine plan, cash position and the overall company operating margin. Feeding this new data into your financial analysis is important to allow for better visibility into your mining plan, shortening your mine planning process, and keeping your board and investors updated on the overall company worth.
4. Acquisition Portfolio
When it comes to acquisitions, the foot has been off the gas pedal for many mining companies. Given lackluster capital expenditure ratios, majors have been holding off acquiring new juniors. If commodity prices continue to increase, companies should be considering whether the next step is to diversify the metals portfolio? Expand locations? Or invest in new technology at current sites?
Brexit has become a distinctive marker as the starting point of an upswing in commodity prices. It caused a significant surge in the market earlier than many expected. To make the most of this surprising turn, mining companies need to adjust to the current economic situation quickly to capitalize on opportunities the market now presents. To that end, the ability for companies to run real-time scenario analysis that provides visibility into the financial impacts of decisions across the enterprise – before decisions are made – has never been more essential.