The impact of production inefficiencies on free cash flow at a producing gold mine, South Africa
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Date
2018
Authors
Pienaar, Donovan
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Free State
Abstract
The South African mining industry is currently facing operational, political and economic challenges which threaten to render a large proportion of the operations unprofitable. Over the past few years, the gold and platinum sectors have faced the greatest challenges, and as a result have struggled to meet investor and market expectations. Although a vast number of challenges exist beyond the control of mining companies, such as fluctuating and low commodity prices, volatile exchange rates, declining ore grades, labour relations issues and policy uncertainty, it should not be forgotten that there are factors over which the operations do have control. One such factor is production output and effective mine planning. The current study focusses on one such deep-level gold mine which faces operational challenges, particularly in maintaining a stable production profile which meets monthly and annual targets. The aim of the study was to identify the main causes of production inefficiencies and operational delays and demonstrate how the production profile is impacted by these delays. The study utilised historical data which recorded the reasons for every single lost blast which had occurred over the past 5-year period spanning from 2013 – 2017. By conducting a Pareto analysis on the lost blast data, it was determined that only a small group of production delays (5 groups) accounted for the majority (~77%) of lost blasts and production delays. Furthermore, the majority of these losses and delays were as a result of human behaviour and ineffective scheduling of work to be done. The study further measured the compliance to the mine’s annual budget plan, which measured the percentage of areas planned to be mined, versus the actual area mined. The compliance investigation revealed that over the 5-year period, the monthly compliance to the budget plan, which focusses on a specific area planned to be mined, varied from 1.28% - 35.75%. These figures are relevant as they have an impact on the amount of gold mined, as well as the economic operational life of the mine. Regression analysis on the same data set revealed that a moderate negative correlation existed between the percentage compliance and the months of the year, indicating that although the compliance was low to begin with, it generally regressed as the year progressed. Analysis of past production performances revealed that the mine struggles to meet its annual production targets. However, in spite of this, the mine has always remained cash flow positive over the 5-year period analysed. That being said, on a number of occasions the mine was not able to meet their annual free cash flow targets, where in other years, the free cash flow targets were surpassed by a considerable margin. Further analysis revealed that a favourable gold price was to thank for reaching financial targets and highlighted how dependent the operation was on a gold price higher than that budgeted for. These facts are alarming, as the literature study indicated that investors are drawn to businesses which can deliver stable and profitable cash flows over an extended period of time, thus ensuring a favourable return on their investment. As it currently stands, the mine in question is one such operation which relies too heavily on outside influences (such as gold price) to meet their targets. It is recommended that the primary causes for production delays be taken seriously in an attempt to reduce such delays, which would improve the mine’s production profile, and in so doing, ensure a stable and positive cash flow for the operation.
Description
Dissertation (MBA (Business Administration))--University of the Free State, 2018