Keeping six months’ stock of essential supplies, considered wasteful a year ago, now seems like a good idea. From Moneyweb.
The shutdown of the deep level and non-essential mines to stop the spread of the Covid-19 virus last month has forced mines to re-examine their supply chains.
Last week, in response to the 21-day lockdown, Anglo American and AngloGold Ashanti issued a statement clarifying their business survival strategy. “In general, we are targeting inventories of three to six months on primary consumables, while recognising we have the support of strategic partnerships with key suppliers who themselves are maintaining inventories in the respective regions for many critical items.”
While everyone is hoping the lockdown lasts just three weeks, it now seems prudent to plan for much longer periods. Hence, holding three to six months’ worth of inventory may become the new normal.
The next issue to be confronted is where to source supplies to avoid an over-reliance on a single producer, such as China.
Research by Accenture shows 94% of Fortune 1000 companies anticipating supply chain disruption as a result of Covid-19. Well, that’s already happened.
Risk Planning 101
Companies’ risk assessments cater for all sorts of potentialities such as drastic changes in exchange rates and commodity prices, even political upheaval, but few anticipated a pandemic of the kind unleashed on the world three months ago.
The staggering disruption caused by the global lockdown will require far greater supply chain resilience against future disruptions, which essentially means having a plausible Plan B and Plan C. This might be easier said than done, given China’s massive pricing advantage over other countries, an advantage that is likely to be extended as China powers up its factories at a time of reduced global demand. Instead of price gouging, hefty discounts will likely be on offer in the months ahead.
Much of SA’s mineral production finds its way to China. Kumba sells more than half its iron ore output to China, with most of the rest going to Japan, South Korea and Europe. In February, chief executive Themba Mkhwanazi said the coronavirus outbreak in China forced a halt to steel production, prompting “proactive discussions” with customers in China and elsewhere to minimise the impact on sales. That was before other countries went into lockdown.
The Covid-19 lesson is clear: spread your customers as well as your suppliers to avoid over-reliance on a single country or market. This is Risk Planning 101, but many companies seem to have forgotten it.
Sibanye Stillwater’s senior vice-president for investor relations, James Wellsted, says the group sources most of its supplies locally, so it suffered little disruption from the Chinese economic shutdown. This is partly a legacy of apartheid-era sanctions which spawned a muscular local mining supply sector.
Lockdown extension risk
Perhaps the biggest risk facing SA is the government deciding to extend the lockdown, even in some relaxed form which would allow mines and factories to slowly ramp up production.
The Minerals Council has warned of irreparable damage to the mining industry if the lockdown is not lifted on April 16. Mines say they are able to pay workers’ salaries for the duration of the lockdown, including contributions to medical aids and pension funds, but that arrangement becomes less certain should there be any extension of the lockdown.
Last week Impala Platinum issued force majeure letters to all contractors and consultants, legally notifying them that their contracts had been suspended. Similar letters had been issued to suppliers, while offtake agreements to refine concentrate on behalf of other mining partners had also been suspended.
For thousands of mining supply businesses and contractors that rely on the big mining houses, these are worrying times. Mines’ first duty is to their employees and payment of their salaries, which leaves contractors and suppliers wondering whether their services will be required once the lockdown is lifted.
Those mining groups that managed to build cash war chests and reduce debt in recent years are better prepared to withstand the lockdown crisis.
Gold Fields reduced its debt from about $1,7 billion to $1.33 billion since late 2018, and expects to reduce it further this year by $300 million to $400 million. It has about $600 million in cash and more than $1.5 billion in undrawn debt facilities. “As a result, management believes that the Group has sufficient liquidity to withstand an interruption to our operations for a considerable period of time, but that notwithstanding, we will continue to work towards minimising the impact of Covid-19 on our employees, mines and offices,” says CEO Nick Holland in the latest annual report.
AngloGold Ashanti is responding to the lockdown crisis by implementing cash conservation measures, such as prioritising capital spending and reducing non-essential expenditure. At the end of 2019, it had $463 million in cash, $2 billion in debt and revolving credit facilities. It says it is well positioned to weather the current market uncertainty.
Similarly, South32 is reducing controllable costs, such as its ongoing share0buyback scheme. Several groups have suspended exploration and capital projects to conserve cash. For Harmony Gold, cash preservation is key, which means it has suspended its exploration and capital projects for the time being.
African Rainbow Minerals’ (ARM) joint venture, Assmang, has received authorisation from government to operate its stations at Khumani and Beeshoek mines in the Northern Cape for shipment to Saldanha Bay. Transnet has reactivated the rail and port export system from the Northern Cape to the port of Saldanha, allowing for the export of about 40% of usual volumes.
Coal and iron exports are vital for the generation of foreign currency, which explains why many of the mines in these sectors are able to continue producing.
If there’s any silver lining in all this, it is that our creaky national infrastructure suddenly looks up to the task: no power outages, and seemingly abundant rail and road capacity.
All it needed was for the economy to be shut down.