How Can A Mine Stay Ahead Of Unforeseen Financial Challenges?

Mining financial risk modelling is a major challenge for nearly all operations in the industry. Cash flow often looks amazing during peak times, but the long-term survival of a mine as an ongoing business hinges on how it handles the bad years.

Dynamic cash flow modelling is a common tool for mines that want to reduce these kinds of risks, especially the unforeseen ones. Let's look at how a dynamic approach can help you avoid shortfalls and keep your business humming along even in the worst of economic times.

Commodities and Volatility

The centerpiece of this approach in the mining industry is creating a model of how the commodities market works. A major dynamic element here is volatility. When prices go through the roof for something like coal or iron ore, the odds are against it staying there.

Consequently, you need to be able to model what your cash flow will look like when the market comes back to earth. Particularly, you need to be able to model what the worst scenario could look like. A coal mining operator, for example, needs projections of cash flows for a scenario where high energy prices lead to a crippling recession. It needs to know what its cash flow will look like when both prices and demand crater.

Identifying Major Risks

A mine can have several major risks. For example, what happens if heavy rains wash out access roads into a mining pit? It could take months to restore the roads and recover vehicles and equipment lost during the event. Likewise, the mine itself could suffer damage.

Will your business have sufficient cash flow to survive such an occurrence? Can the company meet payroll long enough to make it to the other side of the disaster? If not, does the company have enough financing and liquidity to bridge the event by other means?

You should have a list of the potential adverse events your mine might face. Also, there should be a plan in place for each scenario. You should know how much you'll need to trim operating costs and where in the business those cuts will occur.

Multiple Scenarios

A company should also be able to forecast what will happen if multiple scenarios hit at once. For example, what happens if a profitable mine shuts down due to key equipment failures during a recession? A dynamic model should prepare your business for existential threats so you can have sufficient cash flow to ride them out. 

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