(Kitco News) - According to Ernst & Young, the mining industry needs to revamp its business models if it wants to reverse a decade-long trend of decline in productivity.

In a mining report released Thursday, titled Productivity in mining: A case for broad transformation, EY notes mining companies chased production growth at the expense of productivity on a volume and cost basis.

"Companies caught in the race to capitalize on high commodity prices are now facing a number of business model challenges," said Bruce Sprague, EY's Canadian mining and metals leader. "Operation expansion and inefficient use of labor and equipment are all compromising productivity."

Sprague added that there are no easy solutions; highlighting cost-cutting exercises, minimal process and technology improvements are not enough to circumvent the damage that has been done.

In the report, EY describes productivity as a gain that "should be measured as a form of optimization, i.e., the highest ratio of output to input, which could in fact mean achieving higher productivity with lower input."

The report highlights labor productivity as a major piece to the decline, which they attribute in part to the increasing complexity of operations, but more so to inadequate skills brought on during the boom time.

Another issue is capital productivity, according to EY. Part of the list includes long lead times between investment and production, ineffective portfolio management, issues with capital allocation decision-making, resource nationalism, as well as others.

EY points out that miners have been successful in the short-term with conventional cost-reduction strategies but stresses that a long-term approach that will benefit overall productivity, and not near-term profit.

While the report is not bullish on the direction of miners at the moment, it does note change is possible.

"Creating sustainable change requires broad business model transformation," said Sprague. "That means looking closely at mine plans, reassessing mining methods, making changes to equipment and considering opportunities for automation."

The report comes to a five-step conclusion for miners to conduct the overhaul EY believes is necessary.

They said it begins with a clear strategy based on a broad set of value drivers followed by an operating model that is aligned with the strategy. It also includes integration and alignment across the value chain through process integration, standardization of work procedures and lastly, aligned planning, budgeting and performance measurement

"Understanding all systems and processes is essential to ensure companies make informed decisions. Only then can miners create lasting change," said Sprague.

Courtesy: Kitco News