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February 05, 2016
Strategies to future-proof Latin American mining operations
By: Segran Pillay

China’s economic slowdown is weighing heavily on countries that depend on its growth, including miners in Latin America. Recent data from China shows that the downturn in real estate, combined with weak exports, has dampened growth of industrial output and investment—with disappointing industrial production growth of 5.7 percent year-on-year.1 As a result, the currencies of most commodity-producer countries exporting to China have been pummelled (see Figure 1). For instance, the Brazilian currency (the “real”) recorded a 136 percent depreciation against the US dollar (USD). Brazil sends 18 percent of its total exports to China with 4 percent counting as net commodity exports as a percentage of GDP.

Chinese slowdown impact on countries

Ironically the combination of a stronger USD and lower oil prices for freight costs have helped provide short-term relief for some miners. Recently a tier-one iron ore producer in Brazil shifted to a number-one cost position on global cost curves. 2, 3 How could this occur? Despite paying for labor, electricity and many other expenses in Brazilian real, the company was able to expand mines because it generates revenue in USD.

However, the upside provided by a stronger dollar and lower oil prices will be short-lived for Latin American countries dependent on export revenue. If lower commodity prices, supply-overhang in the market and flagging Chinese demand continue to be the “new normal,” the profitability of miners in Brazil, Chile and Argentina will most likely continue to decline.

Strategies to improve competitiveness
Instead of bowing to market fluctuations, leading miners are adopting technology to disrupt business models4. What’s more, end-use industries that rely on commodities as inputs5 are using technology to manage costs, while also reducing the need for these supplies. Approximately 64 percent of the iron consumed today in the production of steel and iron castings in the US is from scrap (vs 34 percent from virgin iron ore) up from only 53 percent in 1985.6

Now more than ever, miners have an imperative to assess operational efficiencies from pit-to-port and port-to-mill. Miners must also consider where and how they do business, such as taking a different approach to capital projects or rethinking the location of assets. For example, a tier-one miner implemented an automation solution with 3D mapping for its stockyard reclaimers. The radar technology provided controllers with a map of the ore stored in the stockyards, which increased the loading rate and efficiency of its stockyard operations.

Other operational efficiency strategies include:

  • Cost reduction

  • Deferred mine development

  • Outright mine closures

  • Reduced head office and operational personnel count

  • Divestment of non-core assets.7

In order to remain relevant in times of economic uncertainty, Latin American miners should adopt targeted strategies (see Figure 2) in four strategic areas:

  • Operational Excellence—Manage costs, increase productivity and optimize capital project management.

  • Fast-tracking the Change—Initiate business improvement programs and integrated value chain management.

  • Digitize Mine—Embed analytics and enable digital mine tactics.

  • Safety, Sustainability—Improve safety and sustainability practices and metrics.

Strategies Latin American miners must adopt

By adopting these strategies, Latin American miners will be better positioned with the capabilities needed to navigate the future, regardless of economic ups and downs.

Footnotes:

1 Mark Magnier, “China Economic Growth Falls Below 7% for First Time Since 2009,” The Wall Street Journal, October 18, 2015: D1. Factiva, Inc. All Rights Reserved.

2 Paul Kiernan, Rhiannon Hoyle “Why Miners Keep Expanding, as Prices Collapse,” The Wall Street Journal, October 22, 2015: D1. Factiva, Inc. All Rights Reserved.

3 “Supply Chain Impacts of Low Oil Prices,” Article in Metal Bulletin, May 2015. 

4 Theresa Ebden, “Digital Investment to Disrupt and Drive Mining and Metals Industry Over Next Three Years, Accenture Survey Shows”, Accenture, March 05, 2014,
https://newsroom.accenture.com/news/digital-investment-to-disrupt-and-drive-mining-and-metals-industry-over-next-three-years-accenture-survey-shows.htm

5 Moody's Investors Service Press Release, “Operating environment underpins ratings of Severstal and Gerdau” Moody’s Investors Service, 19 November 2015: D1. Factiva, Inc. All Rights Reserved.

6 Michael D. Fenton, “Iron and Steel Scrap,” (n.d.)
http://minerals.usgs.gov/minerals/pubs/commodity/iron_&_steel_scrap/360400.pdf

7 AME presentation to Accenture: Mining: To Infinity and Beyond, September 18, 2015

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