Creating mining winners in Africa
Once leading performers in the global mining industry, African mining companies have been falling behind their global peers for the past decade due to declining productivity and return on invested capital.
Advertisement
Despite market challenges that impact the sector globally, Africa has significantly underperformed. However, new research shows there are clear strategies that African miners can employ to considerably impact their success.
A jointly developed report from McKinsey’s Basic Materials Practice and Mining Indaba, “Creating Global Mining Winners in Africa” details big moves in four categories that will help African mining companies regain their prominence.
The categories include: pursue programmatic mergers and acquisitions, dynamically reallocate resources, deliver capital investments and seek productivity breakthroughs.
The research was released at the Investing in African Mining Indaba, the world’s largest mining investment conference and Africa’s largest mining event, held in Cape Town, South Africa from 8th to 11th February, 2016.
Global downturn
Commenting on the research, McKinsey director and co-author of the report, Michael Kloss said, “Given the global downturn in many commodity prices, including coking coal and iron ore, African mining companies may question whether now is a good time to spend.
The answer is ‘yes’. A downturn is a good time to buy, and at least half of all African companies have the headroom to fund this growth based on their debt to equity ratio to do it. An analysis shows there are also plenty of targets: 77 per cent of mining companies account for just 30 per cent of the industry’s market capitalisation in Africa.”
To gauge the performance of 65 publicly listed African mining companies, McKinsey compared them to the economic profit performance to the world’s top 3,999 companies, all of which compete for the same capital.
By ranking companies this way, McKinsey produces “the power curve” of economic profit. In the first half of the 2000s, African mining companies were ahead of their global peers in terms of economic profit. However, from 2005, African companies began falling behind.
Besides favourable geography, invested capital in Africa has actually grown over time. But the return on invested capital (ROIC) has been below average and declining.
Additional research from McKinsey’s MineLens Productivity Index (MPI) indicates African mining productivity was dropping five per cent year-on-year (YOY) since 2004 vs three per cent for its global peers.
Mergers and Acquisitions
According to Lorenz Jüngling, partner and leader of McKinsey’s Global Energy and Materials Practice (GEM) in Africa, “All African mining companies can and should take steps to improve productivity and reallocate capital, while about half have the capacity to merge with or acquire companies (M&A).
Taken together, productivity improvements and strategic moves that harness market trends (M&A, capital and expenditure reallocation) would improve companies’ odds of moving from the mid quintile to the top quintile on the power curve by up to 31 per cent.”
Jonathan Moore, Managing Director of Investing in African Mining Indaba said: “The current market has forced the African mining industry to take a hard look at how it does business and the aspects that are most critical to its future success.
Looking ahead – governments and companies are focused on developing strategies to invest in African mining beyond the current mining cycle.
In a capital restrained market, it is notable that we have one of the most influential representations from the investment community that we have seen to date.
Moving up the power curve of economic profit
How can African mining companies improve their odds of moving up the power curve of economic profit?
An analysis aims to deliver a fact-based answer to this question. “Big data” analytics were used to understand how companies can boost their odds of scaling the power curve, in other words, what they can do to beat the average.
It was found out that by taking specific actions in productivity, strategic M&A, and allocation of capital, African mining companies can boost their odds of moving up the power curve by a multiple of three or four.
To secure a more favourable business climate, companies should complement these moves with measures in four action areas that include, facilitating access to infrastructure, collaborating on regulatory frameworks, investing in local labour and community development and cultivating a local supplier base.
Advertisement
It is believed that the global mining industry should work together and individually to address the challenges discussed above.
By taking action now, they will create the fertile ground for individual successes that put Africa back on the map as one of the most attractive regions for mining globally.