Part 3 in series: Mining Projects from Scoping Study to Commissioning successfully for the benefit of your shareholders Part 3 in a series

Ensuring Board level decisions are formalized so that its objectives are managed, owned and can be measured.

This is Part 3 in a series of Articles dealing with critical issues to ensure that a mining company generates optimal value for its shareholders.

In Part 2 I discussed they key components by category and what needs to be addressed with some guidelines. These categories are:

• Commercial
• Legal
• People
• Technical

Broken down into subcategories.

I hope you will find this and the subsequent parts of this seies will be of value to you.

Board Level Processes

At board level, there will be discussions around corporate governance principles and the goals of the company. All too often, the results of these discussions are not formalised as a proper strategic planning process, with a number of steps detailing how the company is going to achieve its goals.

The leaders of the dysfunctional organisation think they have a planning process in place. Usually what they have is no more than a vague outline. Even worse, this outline doesn’t filter down through the company. This means that the people who need to implement the ideas struggle to fulfil the company’s objectives.

Creating a process whereby, the company’s objectives can be managed and owned, is essential for measuring or achieving success.

So why is this not done all the time in some companies?

Chasing Rainbows

Many organisations assume that everybody knows what they’re doing. This sparks the belief that, because everybody knows what they’re doing, everything’s going to turn out all right in the end.

The thinking is that the actions which people need to take go without saying. It runs something like this, “We know we know what we’re doing, and they know what their jobs are, so therefore it’s a waste of everybody’s time and energy to create all these detailed processes that have to be followed.”

When organisations make this assumption, then it makes it very difficult to achieve anything close to optimal outcomes, and it can cause a lot of delays due to having to take backward steps. The cost impact of this can be highly detrimental to the project.

For example, there are a number of gold mining companies that are established around older mine sites and deposits. After some years, they find that the ore body they were hoping would continue providing high grades of gold doesn’t contain as much as they believed it would.

As a result, the throughput goes down and the amount of gold produced goes down. So, the cash flow slows down and the share price slumps. There are companies whose share prices have dropped by 50% in less than 12 months because of such scenarios.

If they had based the commitment to go ahead on a planning process that identified both the risks and opportunities around how well-defined the ore body was, then they would not have faced this situation.

When you make the decision to commit capital to a new operation, then you’ve got to do your homework and your due diligence properly. You can’t just be enthused by the excitement of creating a new company or a new project.

Maybe you are temperamentally optimistic? Thinking that you have, quite literally, found the pot of gold makes it easy to get overexcited.

At that point, nobody wants to listen to the person who’s saying it would be a good idea to slow down and be a bit more cautious. However, in order to ensure you’re not just chasing rainbows, there are a number of points to consider.

You Have Only One Roll Of The Dice

?When thinking about strategic value creation, it is important to understand that the mining industry is unique. With mining, no marketing in the world is going to be able to increase the volume that you produce. Quite simply, you will never have more to take to market than is in the ground. This is why it is so crucial to focus on the value creation opportunity that is there at the beginning of the process.

When it comes to mining, you really do only have one roll of the dice to get it right.

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Case Study: Going Down

A major issue arises for a mining company when forward-looking statements made to the stock exchange are not borne out in reality. This is because investors and analysts attach a fair value per share to a company based on these forward-looking statements.

In the case of gold mining companies, these statements typically outline how much gold is expected to be produced as measured in troy ounces (oz), together with the AISC (All-In Sustaining Cost) per ounce. These factors, along with the expected market gold price, determine the viability of a mine to repay debt and provide shareholder returns.

In one recent situation, a listed gold mining company’s shares are now trading at a fifth of the price they were trading at just one year prior. This was the result of a change in forward-looking statements, declaring that the revised AISC will increase by 50% over the next financial year and that the actual gold production will go down by nearly 30% compared with earlier statements.

The effect on the share price is a result of less margin between the price of gold and the cost to produce it, the quantity produced and the market’s interpretation of what value there is to shareholders after servicing of loan facilities.

I am not suggesting that the underlying cause was a lack of planning processes. However, it can be said in general terms that a well-designed and implemented strategic value creation process and appropriate risk management are the best insurance against adverse outcomes of this nature.

Planning For Planning’s Sake?

?So, over-enthusiasm and a lack of detailed planning at the executive level are undoubtedly barriers to success. The problems don’t stop there, though. People at all levels are often reluctant to change their tried and trusted methods.

This reliance on “the way things have always been done” can make it feel as though planning is a waste of time, and that it is just “planning for planning’s sake.” It isn’t so much that managers don’t understand the value of having a strategic plan. It is simply that it often isn’t part of the management process.

Putting in place an integrated management process that ensures that we all pull in the same direction and that performance is measured is essential for project success.

Once things are up and running, it’s very easy to get side-tracked. There are often problems that emerge regarding the project, the resources, political issues, environmental issues, and a great number of other things. All of which can distract people from following the process.

Your planning needs to be live so that you can be flexible. It is crucial that you are able to incorporate unforeseen problems into the plan. It is equally important not to get thrown off course from the plan you have created.

Creating value begins with identifying potential opportunities and envisioning how these can be transformed into reality. Now that you are on your way and filled with enthusiasm, your focus needs to be divided so that risk is not ignored.

With the value creation planning process, you need to focus on the factors in the mining industry that constitute the greatest threats. By combining your planning with some risk analysis, you will be able to see what might prevent you from achieving your desired outcomes. This allows you to work out the steps you need to take in order to avoid those threats.

Understanding The Purpose And Power Of Process

Even if you have created a plan, this does not mean anyone is going to implement it. A lack of commitment often arises from a lack of familiarity and understanding of the power of the process as a tool to achieve end goals.

One great way to overcome this issue is to train a “champion” within the organisation. It is so important to have someone who can ensure the project feels like a collaborative effort and that people don’t feel isolated in their roles. The process needs to be effectively sold within the organisation so that you get ownership at all levels.

The Team That Creates The Plan Must Implement The Plan

Your planning process needs involvement at every level of the organisation. You can’t just have the CEO saying, “Okay, this is what we’re going to do.” Even if they’re very experienced and skilled within their field, they may not be aware that, when it gets down to implementation, what is being proposed is not practical, not possible, or simply not the best way.

People at all levels need the opportunity to have their voice heard. If they are not able to suggest alternative action plans that may result in quicker, more efficient and more cost-effective ways of doing things, then they are likely to feel frustrated and unmotivated.

If you give people the opportunity to be heard and to genuinely be part of the process and part of the team, then they’re going to want to get it right. This can readily be achieved by a number of mechanisms. Setting aside half a day for a workshop and getting groups within that workshop to address topics they have some ownership of is one simple and effective method.

By giving people this opportunity, they’re far more likely to think things through rather than just doing something a certain way because that’s how they’ve always done it. This particularly applies if they are aware there are potential repercussions. After all, if they’re making suggestions and proposing certain ways of doing things then they have a far higher level of accountability.

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Key Takeaways

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• Successfully creating strategic value that translates into shareholder wealth is far more about strategy, people, and planning than technical skills.
• Strategic value creation success requires a vertically integrated process across the board, ownership and a champion.

If your ultimate objective is to add more strategic value to your organisation, which in turn increases the market capitalisation of your company, then I can help you ensure it’s a win-win for everyone.

To find out how I can help your organisation, drop me a line or call. I am based in Perth, Western Australia.

Sten Soderstrom (FAICD, FEngAus, CPEng, MAusIMM)

DIR ID 036 62566 41832 63

[email protected]

0418918310