Economic Value Added Analysis for Mining Companies

Abstract

Creating sustainable long-term value is always the aim for every mining company. However, the global mining industry finds itself in a difficult position where volatile prices, subdued markets and rising costs are forcing a short-term planning focus for survival, which may be in conflict to long-term value creation. To ensure short-term survival and long-term value creation from Mineral Resources extraction, mineral resource management (MRM) practice was developed two decades ago with an emphasis on creating optimum value for stakeholders including shareholders. MRM identifies economic value added (EVA) as the appropriate measure that integrates short-term and long-term value creation in contrast to profit; a short-term value measure. Notwithstanding EVA being a true measure of economic value, its application and reporting in the mining industry are doubtful. This paper analyzed whether mining companies have been creating true economic value for shareholders over and above the normal profit reported in income statements. EVA was calculated for four international mining companies from 2007 to 2017 and compared to reported profit. Analyses of whether mining companies have been creating true economic value for shareholders in both good and bad economic times was done. EVA has proved to be a true measure of value that mining companies should report on. This study also found that even though profit was generated by mining companies in most of the analysis period, in contrast, EVA was not created. Furthermore, it was also found that cost-cutting measures improved profit without creating EVA. In addition to the traditional measures that are always reported by mining companies, EVA should also be reported to see whether the value is being created.