Dynamic cash flow modelling can be critical in the mining industry. Particularly, it is important to making sense of a mining firm's risk exposure and profit potential. Let's look at why and how mining financial risk modelling should incorporate dynamic models.
Volatility
One of the hardest things to deal with in the mining world is the volatility of the commodities markets. Even if you don't sell directly into the futures markets, folks buying from you will usually set their prices based on prevailing bids among futures traders. Consequently, the price can be quite volatile. If you're not using dynamic cash flow modelling, you may end up projecting profits that evaporate when the market suddenly moves. Worse, you could miss out on profitable opportunities during dynamic upswings.
Cyclicality and Seasonality
Many mined products are cyclical or seasonal. If there is a multi-year recession in key industries that use something like iron as an input, for example, that will influence a miner's cash flow.
There are often second- and third-order effects, too. A business in a down cycle probably doesn't want to go on a hiring spree, for example. Similarly, it's important to schedule maintenance around seasonal trends. You probably don't want to have the equipment in your best mines down for service during peak season. Knowing your cash flow situation can affect those decisions.
Financing
If you need to finance equipment or acquisitions, the bank will have questions about the long-term prospects of your operation. Dynamic cash flow modelling does more than just consider near-term shifts. It also allows you to explore potential worst-case scenarios. These can help financial institutions make decisions about whether to loan an operation money and at what rates.
Reports and Projections
Like any business, a mine needs to be able to report its finances. However, a mine also faces the challenge of making projections in a dynamic environment. Demand can evaporate due to macro events like recessions and wars. Similarly, supply can dry up due to bad weather or equipment failures. You need to be able to project your organization's finances credibly and with an eye toward possible risks.
Accounting and Auditing
Projections often inform interpretations of accounting numbers. In some cases, discrepancies that exceed certain parameters can trigger internal audits, too. Your cash flow model will give you a good idea of what the numbers should be, and you can take action if something seems to be off.
Contact a professional for more information about dynamic cash flow modelling.