Commodities cycle spins to consolidation

Have we got the intellectual muscle to ride the cyclical downturn?

It was the kind of discussion that ends a party.

At a weekend social gathering I found myself debating whether the state’s resources sector was well positioned for the downturn that was already hitting the industry.

Without any specialist knowledge of the sector beyond my role as a business newspaper editor, I am quietly confident that Western Australia is home to the kind of knowhow, both in intellectual property and management expertise, required to successfully shift from a boom phase to one of consolidation.

The challenge, of course, is for management to recognise the need for change.

My optimistic view was questioned, however, by a consulting professional who was dismayed by the result of visits to operations in WA, especially in mining, a field they had not dealt with significantly before coming to Perth from Europe. This person found numerous examples of management that had taken its eyes off the ball in terms of cost and appeared reluctant to address the issue. Hardly the sign of an industry prepared for change forced upon it.

It might sound contradictory, but I don’t doubt this view; in fact I think it reaffirms my thinking.

WA resources managers have not had their eyes on costs. Why would they? Their key performance indicators have been growth-focused. With commodity prices at high levels, getting tonnes shipped as soon as possible was the aim. A good example is Sandfire Resources, which went from discovery to production in four years.

Just a few months of production can have a significant impact on a project’s long-term prospects.

Another example that springs to mind is Northern Star Resources’ acquisition of the Paulsens gold mine. Even though the cost of that acquisition more than doubled during the negotiation period, the final price was repaid from cash flow in seven months.

Worrying about cost – be it capital or operating – is important; but in a boom, getting ore out of the ground and onto a ship can be more profitable than improving efficiency.

In my view, WA is better off having those mines working and the ore making its way to markets in Asia. Even if demand falls, most miners will prefer to keep their operations running on the back of sunk capital costs.

This is where I believe we can afford to be optimistic with regard to resources. Of course, our miners will have to be more productive as they shift from a growth focus to a cost focus, but I believe that we have the intellectual tools and manpower to achieve this.

Perhaps a generation of growth-focused managers will need to be culled, but I have worked in many businesses where various levels of lower management have recognised where savings could be made, yet few at the top have listened. At some point the owners of the business seek to change that and new managers with new ideas replace the old ones.

That is not catastrophic, that is business.

But not all growth-focused managers are blind to the potential to switch to cost reduction and efficiency. I believe that the wave of talented management that has arrived in WA with our high level of migration will help us through this period. The talent pool – both within companies and consulting firms – has been significantly deepened and, as the sector contracts, better people will be retained ahead of those who can’t adjust.

But WA’s net gain has not just been in talented people. Over the past decade, technological change has placed a vast array of new tools in the hands of management. Some of it is new science, some of it has been tried and tested in other industries before being adapted to mining. Be it process automation, new exploration technology or advances in management systems, the people controlling mines today have far more information to work with as they make big decisions.

This new era won’t come without pain. People will lose their jobs. But WA in 2015 will have far more permanent jobs than existed in 2005, many of which will be smarter roles than those of a decade earlier. That is the boom’s legacy.