Wrong way

From boom to bust… 5 catastrophic mistakes every mining CEO is about to make

One of my favourite quotes:
“Good judgement is the result of experience and experience the result of bad judgement.” ― Mark Twain
 
But I like this one better:
“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.” — Warren Buffett
As a mining CEO, you are likely to have been in this industry long enough to have seen both the good times and the bad, as have I. Isn’t it funny how during the good times we can barely recall the bad ones and vice versa? During the last couple of decades the cycles have been fairly long and many of our younger colleagues have never experienced the opposite phase in the cycle.
Given that these cycles can last for many years, you may not get a second chance to get it right.
So, after over two decades in the game, here are my observations:
  1. Allowing the boom to create a false sense of security, masking the underlying problems.
  2. Not building resilience – the business is not designed to withstand bad times.
  3. Not utilising the boom time to prepare. The bust is too late.
  4. Not having an early warning system.
  5. Not having multiple levers to pull beyond cost cutting.
Let’s take a closer look.

1. Allowing the boom to create a false sense of security, masking the underlying problems

The boom times are definitely more enjoyable, that’s for sure. But they come with their own challenges of tight supply chains, which in turn drives operations cost up. Fortunately, despite this, there is still plenty of positive cashflow and hitting or exceeding quarterly targets  is easy.
In fact, it’s so easy we start splashing cash around like crazy. These aren’t necessarily once-off commitments, but often longer term ones, because, hey, this party isn’t going to stop anytime soon!
As the margin is nice and big, poor practices go unnoticed, because, well, we’re making money so we must be pretty good at this game, right?

2. Not building resilience – not designing the company to withstand bad times

During the boom times there is rarely much focus on business efficiency. Ever noticed how many new Real Estate agencies pop up during housing booms and disappear right afterwards?
Like I said, it’s not a natural human trait to imagine and prepare for bad times during the good times.
  • We tend to hire anyone with the right qualifications because we have vacancies to fill, paying little attention to cultural fit. There’s little time or considerations given to onboarding and training. This doesn’t do much for our desired company culture!
  • Business processes get overly complex, less effective and definitely less efficient.
  • We have money we can invest into technology and since software has become all about SAAS, we jump onto yet another new platform and soon we’re almost inextricably committed for the long term.

3. Not having an early warning system

Most mines we have worked with have had tonnes of data and very little information. Often confused as being the same thing, it definitely is not. The lack of an early heads-up will leave you with little time to prepare when the party’s over (see also The Only Metrics And KPIs A Mining CEO Should Care About).

4. Not utilising the boom time to prepare. The bust is too late

The solution, as you will have guessed by now, is to use the more prosperous times to get ready for the inevitable bust. These are the items when it makes sense to invest into Business Improvement (BI) and in fact, make them strategic initiatives, with a specific goal to make your company more resilient. Doing so will also reward you with the benefit of becoming more profitable during the boom. And if done correctly, after a few months this whole effort will have paid for itself, generating a significant recurring ROI.
However, when the downturn hits, it will be much more difficult to find the money and time because now the margins have shrunk. Financial commitments made during the up times now become liabilities.

5. Not having multiple levers to pull beyond cost cutting

Failing to invest in business resilience during the high margin times will give you very few options other than drastic cutting costs when commodity prices go south. While this might be enough to save your business from more dire consequences (unlike the hapless Real Estate agents), when the inevitable boom returns cost cutting always leaves mining companies on the back foot and unable to cash in and recover quickly. Cost cutting, by its very nature, is a destructive practice.
Wouldn’t it be nice to be able to pull other levers instead?
Investing in improving your business holistically (leadership, culture and people, processes and tech that’s relevant) in preparation of such events will give you far more options to exercise.
When your people truly understand the operation they’re running they can look at their Constraints Analysis and Value Driver/Cost Driver Tree structure and quickly run a bunch of what-if scenarios. These will allow them (and you) to take laser-focused actions that are specific to your business and circumstances at the time, all of which will have far more positive impacts.

Conclusion

The key points for a mining CEO to consider in order to avoid catastrophic mistakes during boom and bust cycles:
  • Allow the boom to create a false sense of security, masking underlying problems.
  • Build resilience and design the company to withstand bad times.
  • Utilise the boom time to prepare for the inevitable bust.
  • Implement an early warning system to anticipate and respond to downturns.
  • Invest in holistic business improvements during prosperous times.
  • Avoid relying solely on cost-cutting measures and invest in more effective options.
  • Focus on leadership, culture, processes, and technologies in line with your mission and strategic intent.
  • Foster a deep understanding of the operation and utilise constraint analysis and value driver/cost driver tree structure to drive laser-focused actions.
By keeping these points in mind, mining CEOs can navigate the industry’s cyclical nature and position their companies for long-term success.
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