Value creation, commodity prices and effective operating working capital management in the platinum industry
Willemse, Conan Joseph
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Wealth creation is a commonly known concept in the business world that leads to the key focus of organisations: to create long term and sustainable value therefore maximising shareholders’ wealth. An aspect of value–based management, which is an instrument to measure wealth creation, is when capital is invested at returns greater than the cost of capital. The management of an organisation are obliged to utilise value–based concepts to ensure sustainable wealth is being created. Organisations in the mining industry are bound to the cyclical demand of its product, which evidently affects wealth creation. It is therefore critical to adapt to the condition of the market to ensure sustainable wealth is created throughout the cycle. In essence, sustainable value creation can be measured by how effective and timeous strategies are executed throughout the cyclical commodity market to optimise wealth creation. Specifically, operating working capital management, which is one of various aspects that can be managed to ensure sustainable wealth creation, can be evaluated to determine an organisation’s effectiveness. An attempt was made to determine whether mining organisations manage wealth throughout the commodity price cycle by managing operating working capital effectively. The research was limited to a specific division of the mining industry, namely the platinum producing organisations. A comparative analysis was conducted amongst the platinum producers on data from the platinum category of the Johannesburg Stock Exchange (JSE) for ten years from 2001 to 2010. The results of the comparative analysis illustrate that these organisations manage operating working capital differently, which evidently distinguish the leaders in the industry. It will be of great value for all platinum producers to have benchmark information available to identify new value creating opportunities.