Growth (and costs) in Mining

Key Takeaways

‍

Over the last few decades the industrials sector, including metals and mining have been relatively stable in terms of sector-wide change. Recently however, it has found itself undergoing a period of transformation, characterised by global economic uncertainty, commodity price volatility, intensifying regulatory pressures, and a recalibration driven by investors to focus more on environmental sustainability.

Fundamentally, these factors are driving up costs and putting more intense pressure on cost and revenue management as a means to sustain operations, whilst enabling operators to take advantage of growth opportunities.  

Historically, mining companies relied on conventional cost management approaches, primarily focused on operational scaling and efficiency gains in labor and material costs. However, these traditional methods are no longer sufficient to maintain competitiveness in an industry experiencing quick, multi-faceted change. The ability to manage costs flexibly and strategically has emerged as a key differentiator between sector leaders and laggards. The inherent challenge lies in identifying which cost levers to activate and when, based on specific operational contexts and market conditions. To maintain and enhance competitiveness, metals and mining companies are having to look beyond surface-level adjustments and consider a more integrated approach that leverages a range of cost levers across various functions—often simultaneously to generate returns.

The ability to manage costs flexibly and strategically has emerged as a key differentiator between sector leaders and laggards.

Leveraging Cost Levers for Maximum Impact

Operating in one of the most complex and capital-intensive sectors, metals and mining companies find that efficient cost management can be the determinant between market leadership and survival. With multiple cost levers available across various functions, companies need to be strategic in their deployment to maximise the impact. Identifying which levers to pull and how to combine them to achieve both immediate and sustainable cost advantages lies at the heart of this change.

Cost management in this sector demands a multi-dimensional approach, balancing short-term actions with longer-term strategic changes. Immediate gains can often be achieved through tactical measures such as renegotiating supplier contracts or optimising equipment maintenance schedules, deeper and more lasting improvements frequently require wholly more transformative steps. Involving significant investment and a fundamental rethinking of traditional business models.

A well-orchestrated approach aligns cost optimisation initiatives with broader business objectives, such as digital transformation, sustainability goals, and innovation in product and process development. The first step is taking atmospherics, an assessment of their current cost structures, leveraging advanced analytics and benchmarking against industry best practices to pinpoint inefficiencies and opportunities.

Second is understanding the deployment of cost levers—whether they should be flexible and adaptive, considering both internal and external factors. Market conditions, commodity price volatility, regulatory environments, and technological advancements can all influence the effectiveness of specific cost levers. For instance, during periods of high commodity prices, optimising procurement and supply chain strategies can deliver substantial cost savings and protect margins. Conversely, in downturns, more aggressive measures such as workforce optimisation and lean operations might be necessary to safeguard financial stability.

The key to leveraging cost levers for maximum impact lies in an integrated approach that combines quick wins with strategic investments. For example, a company might initiate short-term levers like renegotiating procurement contracts or cutting discretionary spending to generate immediate cash flow improvements. Simultaneously, it could invest in longer-term initiatives, such as process automation or supply chain restructuring, which may require more time to implement but offer substantial benefits in terms of cost reduction and operational efficiency.

Companies must also consider the interdependencies between different cost levers. Actions taken in one area can have cascading effects on others. For instance, improvements in supply chain efficiency can reduce operational costs by minimising inventory holding and logistics expenses. Similarly, advancements in R&D can lead to the development of more cost-effective processes or the discovery of alternative materials that lower procurement costs. The choice and combination of cost levers will vary depending on a company's unique operational footprint, market position, and strategic priorities. Mining firms operating in high-cost regions may focus on automation and digital solutions to reduce labor and energy costs. Conversely, companies in emerging markets might prioritise supply chain optimisation and local procurement strategies to mitigate risks associated with global logistics and currency fluctuations.

Ultimately, the ability to leverage cost levers effectively requires a mindset shift from reactive cost-cutting to proactive cost management. This means not only looking for ways to reduce costs but also identifying opportunities to reinvest savings into areas that drive growth, innovation, and sustainability. By taking a comprehensive and strategic approach to cost optimisation, metals and mining companies can better navigate market uncertainties, enhance their competitive position, and build a foundation for long-term success.

Immediate gains can often be achieved through tactical measures such as renegotiating supplier contracts or optimising equipment maintenance schedules, deeper and more lasting improvements frequently require wholly more transformative steps. Involving significant investment and a fundamental rethinking of traditional business models.

Cost Levers in Metals and Mining

1. Procurement

Procurement is a dominant cost lever in metals and mining, typically accounting for 60% to 80% of the total cost base. Direct spending, particularly on raw materials and services, constitutes the majority of expenditure. Optimising procurement can unlock savings of 5% to 8% or more in highly commoditised markets, with potential savings rising to 8% to 12% through more flexible contract renegotiations.

Short-term levers:

• Renegotiate contracts with suppliers based on current market conditions
• Benchmark costs to identify savings opportunities
• Cut long-tail spending
• Eliminate nonessential external services (e.g., travel and entertainment)
  

Medium- to long-term levers:

• Implement demand management, particularly in service contracts
• Explore alternative material sourcing to lower costs (e.g., less expensive alloys or recycled materials)
• Conduct rigorous supplier qualification reviews
• Replace underperforming suppliers to enhance overall procurement efficiency
  

2. Operations

Operational costs in metals and mining are also substantial, especially in large-scale operations involving significant manual labor or intensive material handling. Potential savings of 5% to 10% are achievable in smaller, automated setups, while larger, manual operations can realise savings of up to 15%+ when capital expenditure initiatives are implemented.

Short-term levers:

• Minimise material losses through better planning of cleaning and changeover operations
• Reduce the cost of poor-quality outputs by analysing and mitigating losses
• Optimise maintenance efficiency through improved prioritisation and planning
• Enhance logistics planning, maximise equipment utilisation, and optimise transportation routes
  

Medium- to long-term levers:‍

• Increase automation, particularly in high labor-cost regions
• Implement lean production systems, in-line sensing, and automated testing and quality control
• Remodel processes to reduce energy or material usage and increase throughput
• Shift maintenance activities from reactive to preventive and predictive modes
  

3. Supply Chain

The complexity of supply chains in metals and mining varies widely depending on the operation's size, scope, and geographic reach. Optimising the supply chain can generate savings of 10% to 15% in complex, global networks, whereas simpler, more localised supply chains may yield savings in the range of 5% to 10%.

Short-term levers:

• Increase delivery pack sizes
• Run more full-truck loads
• Optimise direct shipments to customers
• Review in- and outsourcing procedures
  

Medium- to long-term levers:‍

• Consolidate or relocate warehouses to more strategic locations
• Rethink the entire delivery network
• Explore alternative transport methods (e.g., switching from truck to rail or barge)
  

4. Marketing and Sales

While marketing and sales expenditures in metals and mining are typically lower than in other sectors, targeted strategies can still yield meaningful savings and even enhance top-line growth. Savings of 5% to 10% are common, rising to 10% to 15% when companies adopt alternative service models and customer segmentation strategies.

Short-term levers:‍

• Review sales force effectiveness
• Re-evaluate customer segmentation to push more clients into lower-cost service categories
  

Medium- to long-term levers:

• Establish inside sales setups
• Enhance customer service through digital channels
• Develop alternative go-to-market strategies

6. General Expenses

General and administrative expenses are an often-overlooked area where companies can achieve significant savings. Typically, short-term actions can yield savings of 5% to 10%, with longer-term strategies delivering up to 20%.

Short-term levers:

• Outsource non-core functions
• Eliminate redundant services
• "Rightsize" departments based on current operational needs

Medium- to long-term levers:

• Establish shared service centers
• Offshore administrative functions
• Streamline end-to-end processes through automation

Optimising the supply chain can generate savings of 10% to 15% in complex, global networks

An Integrated Approach to Cost Optimisation

Achieving marginal cost reductions is not sufficient or efficient. To thrive, management teams need to rethink their view of costs not just as a burden to minimise, but as a strategic lever to enhance competitiveness and fuel growth. This involves repositioning the company on the industry's cost curve (Exhibit 2) by optimising asset utilisation and reducing the impact of fixed costs.

‍

By adopting a comprehensive, integrated approach that evaluates and addresses cost levers both individually and collectively from a high-level perspective, companies can potentially double their savings—achieving reductions of 10% to 20% or more across a wider range of expenses. This ensures cost-cutting in one area does not inadvertently increase costs or reduce effectiveness in another, aligning cost management initiatives with the company's broader strategic goals.

A broad-based, integrated approach enables substantial cost savings through several key mechanisms:

Cost Optimisation Across Functions and Units: Streamlining one part of the value chain can lead to cascading savings across multiple functions. For example, simplifying product specifications or reducing technological complexities can create efficiencies in procurement, production, and supply chain management, as well as in overhead and administrative functions. By postponing customisation until the latest possible stage in the production process, companies can utilise common components and processes to serve multiple markets or business units. Additionally, standardisation and simplification in support functions such as finance, HR, and IT can unlock significant productivity gains by harmonising the services provided across departments.‍

Balancing Costs and Service Levels Throughout the Value Chain: Reevaluating customer segmentation and adjusting service levels accordingly can result in savings that span from procurement of raw materials to the final stages of distribution. An integrated approach brings together teams from marketing, product management, and supply chain to optimise product lines that meet customer needs without over-engineering. This collaboration can also drive more strategic decisions regarding "make" versus "buy" options, ensuring that each product is manufactured and delivered in the most cost-effective manner.‍

Laying the Groundwork for Automation and Streamlined Processes: Achieving cost alignment across all functions and business units, guided by a clear strategic vision, sets the stage for automation and process simplification. This reduces systemic complexity and associated costs, especially in cross-functional cost centres like IT, procurement, and R&D. By simplifying and scaling processes and systems, companies can remove bottlenecks and redundancies, resulting in a leaner and more agile organisation.‍

Embedding Continuous Improvement and Building Capabilities Across the Organisation: A company-wide initiative that focuses on cost efficiency can transform organisational culture by integrating cost management into everyday activities. A formal continuous improvement programme ensures that cost awareness remains a priority even after the initial push, fostering ongoing savings and efficiencies. Progressive companies also invest in upskilling their workforce to sustain these improvements, embedding a mindset of continuous cost optimisation that delivers long-term benefits and keeps the organisation agile and responsive to future challenges.

Fundamental Enablers for Comprehensive Cost Optimisation

To achieve meaningful and sustainable cost reductions, metals and mining companies must implement a holistic strategy that addresses three critical areas. These fundamental enablers, when properly leveraged, can transform operations, streamline processes, and drive significant efficiency gains across the organisation.

1. Operational Excellence and Asset Optimisation

This enabler combines the principles of asset productivity enhancement and complexity reduction. It involves maximising asset utilisation through lean manufacturing principles, robust operating practices, and maintenance excellence. Simultaneously, it focuses on simplifying operations across the value chain by streamlining product lines, rationalising production technologies, and consolidating R&D platforms. By increasing throughput, spreading fixed costs over larger output, and reducing complexity, companies can effectively lower per-unit costs and improve resource allocation. This approach leads to more consistent operations, focused R&D efforts, and streamlined production, ultimately driving both cost savings and operational performance improvements.

2. Agile Operating Model and Organisational Efficiency

This enabler addresses the need for a lean and efficient organisational structure. It involves flattening hierarchies, reducing reporting layers, eliminating unnecessary processes, and empowering lower-level employees with P&L responsibilities. Additionally, it includes consolidating functions and adopting more efficient work practices. By minimising hierarchical levels and unnecessary processes, companies can create leaner structures that enhance overall organisational efficiency. This results in a more agile organisation with improved coordination and significantly reduced costs through the elimination of redundancies. The focus is on creating a flexible and responsive organisational structure that can quickly adapt to changing market conditions and operational needs.

3. Strategic Resource Allocation and Capital Management

This enabler combines strategic capital management with broader resource allocation principles. It focuses on making informed decisions about where to allocate both financial and human capital to drive cost efficiency. This involves prioritising high-return, quick-payback investments and adopting a cost-centric approach to all resource allocation decisions. Companies must optimise key performance indicators such as return on investment and asset turnover while also ensuring that human resources are deployed in the most effective manner. This approach ensures that all resources, including capital, talent, and technology, are being used effectively to support cost optimisation initiatives across the organisation. By aligning resource allocation with strategic cost management goals, companies can drive sustainable cost reductions while also improving service delivery and operational effectiveness.

Implementing these three enablers requires a coordinated, end-to-end approach that spans the entire organisation. When successfully deployed, they work synergistically to simplify operations, enhance asset utilisation, optimise resource allocation, and create a more agile organisational structure. The result is a leaner, more efficient organisation capable of achieving substantial and sustainable cost savings. Companies that effectively leverage these enablers position themselves to navigate market uncertainties with greater agility and maintain a competitive edge in the dynamic metals and mining industry.

Applied in Practice

Case Study 1: Industrial Minerals Company

A $18 billion specialty chemicals manufacturer achieved a 8% reduction in operating expenses through an integrated efficiency enhancement programme. Confronted with declining profitability due to increased global competition and higher raw material costs, the company initiated a sweeping overhaul:

• Redefined the supply chain network to reduce complexity and enhance flexibility.
• Implemented a robust performance management system to ensure cost discipline and accountability.
• Optimised product lineup to reduce overlaps and improve margins.

Result: The company transformed into a leaner and more responsive organisation, capable of quickly adapting to market changes and customer demands.

Case Study 2: Global Metallurgy Company

A leading base metals base metals and metallurgy organisation, undertook a major operational overhaul in response to rising production costs, regulatory challenges, and volatile commodity prices:

• Developed a new supplier management framework and renegotiated long-term contracts to stabilise input costs.
• Introduced advanced predictive maintenance technology to minimise downtime and extend equipment lifespan.
• Launched a series of initiatives to optimise energy consumption and reduce carbon footprint, aligned with sustainability goals.

Result: The company saved $80 million in operational costs over two years and achieved a 12% increase in output efficiency, utilising the same infrastructure and workforce.

Programmes of this magnitude are inherently challenging and require careful planning, strategic trade-offs, and strong leadership. Successful transformations balance uncertainty and risk with potential returns, necessitating flexibility in the approach to adapt to unforeseen circumstances. Companies must navigate the delicate balance between aggressive cost-cutting and maintaining the flexibility needed for future growth. Key success factors include:

1. A compelling case for change paired with clear, transparent, and frequent communication to ensure organisational buy-in and minimise uncertainty.
2. Strong, clear targets and incentive structures that directly link individual performance to the broader goals of the transformation program.
3. Willingness to challenge the status quo, without protecting certain processes, systems, or cost centres from scrutiny and potential overhaul.
4. Consistent prioritisation of resources towards high-impact, high-value initiatives, and critical enablers, ensuring that efforts are concentrated where they will make the most difference.
5. Rigorous execution management led by a dedicated transformation management office to oversee progress, track milestones, and facilitate timely and effective implementation.

By focusing on these enablers and managing the transformation process effectively, companies in the metals and mining industry can unlock substantial cost savings, drive growth, and strengthen their competitive position in an increasingly uncertain global landscape.

As the sector continues to evolve, cost optimisation will remain a critical priority. Forward-thinking companies will view it not as a one-time initiative, but as an ongoing process of adaptation and improvement. By doing so, they will build the resilience and agility needed to succeed in an increasingly complex and competitive global market.