Mining data for profits… Literally
Data-Driven Insights
Profitability lies deep inside your company’s operational data
In earlier Chief Financial Partner articles, we highlighted the importance of planning in the current economic environment.
· Read: Why You Should Build Your Company to Thrive in This New Interest Rate Environment
· Read: Why You Should Embrace KPIs to Avoid Surprises in Your Quarterly Results
In this article, I delve into one of my proudest Excel modeling experiences. To begin, let me just admit what is obvious to those who know me. I am a finance geek and I get a kick out of shining moments of insights derived from data.
This is why building insightful forecasts matter to me and to my employers. Everybody values efficiency. In asset intensive industries, this becomes even more critical because of the high cost to play. When I was the chief financial officer of Foresight Energy, developing a new mine could cost up to $425 million and take 2 to 4 years to complete. Key to our decision to allocate capital was the expected return from that capital and the time we would need to recover that investment. Return on Assets (“ROA”) and Payback Period are broadly adopted ratios and both have a predominant role in a good KPI report for good reason. The key in delivering on expectations is in the execution. To take a play from one of Jerry Seinfeld’s finest lines, anyone can measure ROA. The hard part is delivering ROA. The question is – how?
The financial model we used at Foresight connected our revenue and cost of expense forecasts to the actual mining plan. And this is exactly the reason why this model was one of my proudest analytical experiences. Through good analysis, we understood that each shift needed 75 feet of advance to extract the volume we needed to hit our budget. (Development advance rate measures the speed at which underground mine development progresses). We also set targets for the yield we obtained once we extracted the product and separated it from the refuse. Combined with other inputs, these two variables provided the basis for our cashflow forecasts and for the ROA we expected to achieve.
The same two variables were impacted by hundreds of other factors. Our labor schedules were created with an eye towards making the most efficient use of our mining equipment. The actual workflow (i.e. mining processes) set out a pace and sequence of mining activities, which we measured with detailed time studies to maximize the efficiency of the crew and their equipment. This same analysis also encourages and increases safety by eliminating risky shortcuts.
We also planned our entire maintenance cycle to maximize availability, performance and reliability. Read a related article on how to maximize Overall Equipment Effectiveness.
Our robust financial forecast allowed us to understand the tradeoff between operating decisions, especially as it pertained to risks and opportunities to our cashflow targets. More importantly, as CFO, I could tell halfway through the month how likely we were to hit our numbers based on how closely we hit our advance targets. It is no surprise that Foresight’s cost structure was the absolute best in the industry. Our cost of goods was nearly 50% lower than the mayor players in our space. In a commodity industry, this mattered greatly, and it was one of the main reasons why Foresight was able to double its revenues organically in the three years prior to its IPO. For a much more detailed explanation of our business model, take a look at Foresight’s IPO prospectus on file with the SEC at: https://tinyurl.com/FELP-IPO.
There is a high degree of certainty that the factors that drive asset efficiency in mining are completely different than they are in your industry. But if you operate in a capital intensive industry, these tools will allow you to better align your capital with your operating realities. They allow you to understand your true business drivers. Instead of just recycling last year’s KPI report, consider carefully what drives each of those KPIs. If they don’t provide you insight into the health and efficiency of your assets, it might be time to revisit your forecasting and reporting processes.