How the development of financial resources can improve the bottom line
The economic slowdown has moved the focus of operational strategy from ‘getting tonnes out the gate’ to extracting high-margin ore. In times of high commodity prices, a focus on production can deliver the desired fiscal results and largely did for Australian operations. During this period, operational mining professionals have not been required to be sensitive to elements of cost versus financial return, which has created a culture of spending and a generation of mining professionals that are unfamiliar with the management of finance deliverables for which they are responsible. Basic economics teaches us that for every dollar spent in business, a return of more than one dollar must be realised to substantiate the expenditure as a rational decision. This begs the question of whether or not operational professionals have the knowledge to consider such a value proposition when approving expenditure in their area of responsibility. In the present climate, are those tasked with realising cost savings locking in value or merely cost cutting without considering the larger value proposition?
For those operations fortunate enough not to currently be in survival mode, the challenge is to use the present to prepare for the next boom. There were many challenges across the industry that we had not adequately anticipated or prepared for prior to the unprecedented boom. This became a hurdle to growth and efficiency and included, but was not limited to, infrastructure capability, system application, leadership development, water management and a socially responsible taxation of the minerals sector.
For Australian mining to remain globally competitive in the future, it will require meaningful engagement and integration of finance professionals into operations and the empowering of operational leaders with knowledge that will allow them to make value-creating decisions. Therefore, it is important that the sector has highly integrated teams of professionals with skill sets from multiple disciplines.
Building the bridge between tonnes, metal and the bottom line
Leaders within the mining industry come from various backgrounds and have diverse experiences and skills sets. They are often promoted because of a high level of competence in their chosen professional field. Once in a leadership role, they are responsible for an entire segment of the business and effectively become a business manager who is accountable for not only an element of production, but also human resources, health, safety and environment, and the financial performance of their department.
If leaders emanating from technical disciplines or an operational background have not previously received professional development in the base-level financial skills that are required for effectiveness in the role, it will be challenging in the current climate to ensure success. It is not uncommon for operational leaders, particularly at the coal face, to struggle with literacy, computer use and/or financial management skills. Overcoming this means that finance training has to be easily understood and highly relevant so as to transcend the challenges (and the general aversion some managers have to all matters finance).
Finance training needs to differentiate between the varying knowledge requirements appropriate to the different levels of the organisational structure. A cost centre manager does not need in-depth knowledge of profit and loss, balance sheets, cash flow statements or valuation techniques. To fulfil their responsibilities, they require knowledge and practical skills in budgeting, forecasting, cost and production drivers, purchasing and the value creation of each dollar that they spend. In addition, mid-career operational and technical professionals need to know how to translate financial reports and information.
The majority of finance training available to technical and operational professionals in the mining industry is delivered by third-party providers and concentrates on mine valuations and assessment of alternate investment options, but omits the fundamentals of financial management.
Ensuring that finance is easily understood and translatable to operational personnel so that they can get back to the job in which they add the most value without disbanding their financial accountabilities is a key objective. There is enormous power in having the people at the ‘coal face’ understand business strategy and the cost base as they are the ones making day-to-day decisions that deliver the bottom line. Therefore, identifying ways to communicate strategy and financial matters is imperative to achieving positive financial outcomes.
The business gains unique strength when finance teams are well integrated within the operation and therefore involved in everyday decisions. Value is created by finance professionals being ‘close to the tonnes’, not just sitting behind spreadsheets reporting historic numbers. Accountants need to cease seeing themselves as the ‘Beany’ and start to realise that they are ‘strategic business partners’ in order to position themselves within the business. The term ‘business partner’ is often used but is rarely effective in the manner intended, largely due to staff not understanding the scope of the role and not being provided with the support required in the transition. Systems have taken away a lot of the number crunching of the past, and this has freed accountants to make sense of the numbers. But in order to continue to make sense of the numbers, there must be a deep understanding of the business.
The drive towards simplicity within business administration needs to continue to include systems, processes and the way business is done to allow people to return to the primary function of the role where they add their optimal value. For accountants, this is not journaling; it is having a deep understanding of the operation in which they work and partnering with their operational colleagues to drive value.
Development is the key enabler in allowing finance professionals in the mining sector to be the financial translator and a true business partner that assists in locking in value.
While end-to-end operational training such as Mining 101 and Processing 101 is readily available, it does not necessarily link finance professionals to the intricacies of their role in mining. There is a training need that clearly articulates the operational nature of extraction, processing and transport and links it to commercial and financial impacts. For example, linking cost inputs with drivers at each stage of the process, such as a particular method of milling, the transportation of unprocessed material or the mining method.
The accounting environment can be challenging in the mining industry, starting from a technical application point of view through to a cultural fit perspective. Whereas most mining professionals are prepared for the challenges of remote living and fly-in, fly-out during their tertiary education, finance professionals are not. Hence, it is challenging to attract highly skilled finance professionals to remote locations and even more challenging to find the required personality type to navigate the often assertive and direct cultured industry, particularly for new entrants.
Training providers have an opportunity to deliver training to finance professionals in the mining industry that addresses the recognised challenges. Training requirements in finance are dependent on career stage and need to be relevant to the operational needs of the mining sector. New entrant finance professionals have a great need for basic information on mining operations, the processing value chain, the application of accounting standards to the mining process and cost inputs for the differing parts of the process. Mid-career finance professionals require development in mine valuation methodologies and mining processing complexities, including the relationship with profit and loss.
The development of finance resources would further assist finance professionals to realise benefits to the bottom line. It would also help with industry-driven interpretations of mining-relevant accounting standard changes (and commercial regulations) and the communication of their impact in a manner appropriate for technical and operational managers. Additionally, access to industry-created cost curve data for differing commodities would aid understanding by finance professionals.
Finance administration challenges for the industry
There is a level of flexibility in mine valuation that makes it difficult to make broad comparisons of project and investment options. The extensive adoption of a set of standards to guide and govern mineral valuation would further encourage investment by reducing risk factors. Reliable, materially thorough, understandable and comparable valuation is imperative for the industry to continue to attract investment for new projects and expand current operations. A significant step forward in this arena was the 1960s concept of the Joint Ore Reserves Committee (JORC) and the then development of the JORC Code, which is now widely applied and required by the Australian Securities Exchange (ASX) for listed companies (since 1989). The key is to have a broad understanding of the financial implications of the JORC Code application.
The VALMIN Code provides the principles for good practice in the assessment and valuation of mineral assets, but awareness in the mining finance and investment community needs to be broadened to reap the benefits of the application of these codes.
If done correctly, reporting can have an enormous impact on culture, operational focus, performance and, therefore, the bottom line, yet so many get it wrong. Financial reports such as profit and loss statements, balance sheets and cash flow statements are best kept standardised. Key performance indicators and cost reporting are not stagnant tools; they are live and should evolve to unleash their power. Over the last five years, there has been increasing demand not just for cost reporting at the end of the month, but for live cost information, localised value assessments and up-to-date information to enable a responsive operational strategy at a moment’s notice. Systems that adequately guarantee data quality and that are responsive and flexible, partnered with skilled finance professionals who understand their business and how to influence behaviour, are the enablers to this game-changing reporting.
Administrative and support service professionals have often perceived the AusIMM as a home for engineers, geologists and metallurgists, but not for human resources, accounting and health, safety and environment professionals. The realisation that the AusIMM can be and is a home for finance and economic professionals in the mining industry would assist in fulfilling knowledge base and development requirements. There is currently low awareness amongst finance and mineral economics professionals that the AusIMM has high-quality and relevant resources and training materials.
Mining professionals, both technical and administrative, in this generation are under unprecedented pressure due vto the reality of the current global demand for resources.
For Australian operations to regain their competitiveness, they need to reduce their cost basis and ask the rudimentary question ‘are my people trained with the finance basics and adequately empowered to lock in competitive advantage?’.
Our biggest resource is the human one, not the one in the ground.