After a deep five-year slide, the mining industry started to recover in 2016, aided by significant increases in commodity prices. In 2016 and 2017, the median total shareholder return (TSR) of the 63 leading mining companies in our study was 41% and 23%, respectively. Such performance contrasts starkly with that of the prior five-year period (2011 through 2015), when the industry turned in the lowest median TSR of any major industry and suffered double-digit declines across all major measures.

Yet by mid-2018, the rebound began to face headwinds. (See Exhibit 1.)

Recovery: A Work in Progress

Consider developments in each of the key drivers of TSR.

Revenues, margins, and cash flow grew. In 2017, revenues and margins grew simultaneously for the first time in seven years, and they did so again in 2018. (See Exhibit 2.) Cash flow from operations also increased. Higher cash flows and valuations bolstered companies’ balance sheets, enabling companies to pay down debt. Meanwhile, after declining for several years, unit costs started to creep upward again.

Capital allocation was cautious. Companies have become more prudent in their capital allocation practices, despite the significant growth in cash reserves over the past two years. (See Exhibit 3.) Most operating cash flow was directed either at completing capital projects begun during the boom years or at undertaking more modest expansion and replacement projects. As project spending has declined, so has the capital intensity of projects already under way. Companies have also returned an increasing proportion of excess cash to shareholders, a shift that accelerated in 2018.

Exploration is on the rebound. Since hitting a low point in 2016, exploration budgets have been growing, though they remain well below their 2012 peak. Juniors are once again playing a bigger role, now accounting for almost a third of total exploration expenditure. (See Exhibit 4.) So far, however, discovery rates have yet to recover. From 2002 to 2012, the number of giant and major discoveries declined, despite a tenfold increase in spending, and discoveries were generally lower grade. This trend appears to be holding: while unit discovery costs are declining, they remain high by historical standards.

M&A activity remains subdued. Although asset prices bottomed out in 2015, the anticipated rebound in M&A activity has yet to materialize. The number of deals valued at more than $1 billion has declined; and among the major producers, divestments outnumbered acquisitions. A few acquirers, however, struck pay dirt: Northern Star Resources, an Australian gold producer, and Albemarle, for example, took advantage of poor market conditions and did particularly well.

But after a promising start, 2018 proved to be another challenging year. Concerns over future demand have dampened valuations, sending TSR into negative territory. In the second half of 2018, prices for several commodities retreated. While supply deficits have occurred in some minerals (such as high-quality iron ore), supply shortages anticipated elsewhere have generally failed to materialize. Macroeconomic headwinds, such as slowing Chinese growth, are exerting pressure on prices, leading to uncertainty in future pricing. Operating costs are also once again creeping upward.

Moving Forward: The Critical Decisions

Industry circumstances have improved greatly since 2016. Yet these positive signs do not warrant complacency. Mining companies need to develop value creation strategies that will deliver attractive returns throughout the cycle, independent of commodity prices. BCG research has consistently shown that TSR performance varies widely within every industry, including mining. Clearly, some companies systematically and consistently outperform their peers in creating value; they understand the key drivers of TSR and how to activate them holistically.

Take Productivity to the Next Level Through Technology

Continuing the productivity journey is one way to maintain the robustness that is an essential precondition for profitable growth. Among the many lessons of the last cycle is the importance of bolstering the sustainability of current cash flows. Costs will inevitably go up; in fact, they already have, as economic activity has heated up. And although successive rounds of implementing cost reductions can be wearying, the task is never done.

Productivity efforts should target new levels of ambition, and technology can go a long way toward helping companies achieve these new levels. New technologies—in particular, data analytics and digital technologies—offer an excellent way to improve the economics of mining operations.

New technologies apply across the value chain, from exploration to logistics. Though all of them are fairly new, these technologies are maturing at very different speeds. At one end, radical nascent technologies (such as robotic swarms) promise previously unimagined improvements in access and safety, as well as reduced environmental impact. At the other end, upgrades in processing equipment (such as the new generation of high-pressure grinding rolls) are already delivering dramatic gains in energy efficiency and throughput.

These technologies promise powerful new ways to unlock value, whether by optimizing existing operations or by spurring productivity in more transformative ways. Virtually all of them involve digital applications that support data collection for monitoring, tracking, analytics, and modeling. Integrated operations centers (which are becoming increasingly easy to implement) bring real-time operational data to one location. Companies can now make better decisions along the end-to-end path from resource to market, and as a result can cut their unit operating costs by 25% or more.

The challenge of developing a technology strategy. Developing a coherent strategy for testing and applying new technologies can be difficult. The best approach is to start with a clear view of the problems to be solved and the potential value of solving them. Taking a user-centric view of the mining value chain (that is, considering the pain points that people within the organization experience) will help ensure that the business drives technological change, and not the other way around.

From there, companies should develop a portfolio of digital options, one that contains a mix of higher- and lower-risk bets, reflecting the maturity of the technology at hand. Mining company leaders should adopt a venture capital mindset and actively manage the portfolio, focusing on efforts that promise asymmetric returns and culling those that are unlikely to deliver an attractive minimum viable product (MVP).

To enable a digital transformation to take flight quickly, companies must establish a digital culture, adopt digital ways of working, and acquire and develop the necessary talent and skills to succeed. In the mining industry, the talent needed to deliver on a digital strategy is in short supply. Mining companies must compete with a host of other industries and companies to attract and retain individuals who can deliver real benefits by successfully matching technology opportunities with business needs. (See It’s Not a Digital Transformation Without a Digital Culture, BCG Focus, April 2018.)

Secure Future Growth Options

In the long term, success depends on growth, whether organic, inorganic, or a combination of the two. Companies with attractive projects and sufficient funding capacity are well positioned to pursue a countercyclical growth strategy.

Make the most of exploration. Now that exploration activity is picking up, it’s important for companies to craft a clear exploration strategy, grounded in value, in the volume of ore needed to fulfill long-term goals, and in the financial attractiveness of in-house exploration compared to acquisition of more advanced deposits and projects. Companies can use various strategies to improve their odds of discovering new reserves. For example, they can pursue a balanced portfolio of mineralized districts, view frequent drilling as an essential activity, and balance the proportions of greenfield and brownfield exploration to hedge against risk.

Companies should evaluate exploration management for efficiency and effectiveness, at both the managerial level and the in-field level. They should also consider applying innovative technologies, such as machine learning, that have shown promise in improving targeting and discovery rates. (See Tackling the Crisis in Mineral Exploration, BCG report, June 2015.)

With M&A, measure twice, cut once. M&A can be an attractive means of replenishing resources, reserves, and the project pipeline—and can thus be a powerful value generator. BCG research has shown that deals made in a downturn create more value than deals made at other times. Serial acquirers are particularly successful in downturns. Companies have often acquired juniors for less than the internal cost of discovery and development. And mainstream ores aren’t the only place to look for deals.

To manage the associated risks, companies should identify comfortable deal sizes and evaluate potential deals with a broad set of price and demand scenarios. Companies should explicitly define and assess the full strategic benefit of any deal. Unpacking the various sources of value and risk in a transparent and comprehensive way supports better-informed decision making.

Take a Value-Driven Approach to Project Evaluation, Selection, and Execution

For most mineral commodities, there is no pressing need today for additional supply. Nevertheless, aging mines must be replaced, and existing mines expanded, as economic realities allow. Last cycle’s hard lessons with regard to large capital projects—notably those pertaining to cost and schedule overruns—remain highly relevant.

Given the short supply of landmark projects, companies should apply the principles of lean design to their projects. In our experience, accurately framing the project, selecting the right scope, and striving for the minimum technical solution can reduce the capital intensity (capital required per unit of productive capacity) by from 8% to 17%.

By improving construction planning, properly aligning incentives, and boosting construction productivity, companies can reduce capital intensity a further 9% to 23%. The more sophisticated digital methods now available—including building information modeling (BIM) and dynamic schedule optimization and forecasting tools—are proving their worth in these areas.

New mine construction provides a good opportunity to prudently implement forward-looking technologies. However, this effort entails looking into the future, an inherently uncertain exercise that conflicts with the way in which companies have traditionally evaluated and approved mining projects. It is tempting to choose established technologies during the design stage, but these technologies may be a decade out of date by the time production begins. Mining executives must of course balance certainty of delivery against the uncertainty of building for the future, but they should resist the urge to embrace the ostensibly lowest-risk option without fully evaluating the impact of doing so.

Consider New Approaches to Social and Policy Challenges

Relationships between governments and the industry, which historically have often been strained, are complicated by shifting political and economic dynamics. These dynamics may change more rapidly than leaders on both sides realize.

In the near term, nationalistic measures complicate operations and planning. In the medium to long term, advances in automation and digital will reduce the need for human labor. Meanwhile, some emergent technologies promise to significantly lessen mining’s environmental impact, potentially tilting public opinion in its favor.

As companies consider their exploration and operational strategies, in both the near term and the long term, they need to recognize shifting priorities and politics that are likely to weaken what were once effective incentives to governments. For their part, governments need to consider not just the value of foreign investment but also the fact that the costs of the new technologies to mining companies are significant and may influence mining companies to reach different decisions than they might have in the past.

Navigating fragile political and social landscapes is difficult but crucial. Going forward, economic, social, and political sustainability will be as much a matter of good relationships as of self-preservation—for both sides.

A Reliable Path to Long-Term Value Creation

The industry now appears to have reached another pivotal point, as commodity prices once again come under pressure. Whether the stall that began in mid-2018 is a temporary pause or augurs something worse in the offing is uncertain. Indeed, uncertainty is a defining characteristic of the current global economy.

The lessons of the downturn—chief among them, that banking on rising commodity prices is not a strategy—indicate that it’s time for a return to strategy, in the fullest sense.

Companies must keep expanding their profit margins to build resilience in their businesses. Continuing their productivity journey is one clear path to this goal.

Over the long term, however, profitable growth matters; indeed, as BCG research has shown, profitable growth drives most long-term value creation. Although there is no imminent need to add capacity, mining companies must think ahead and build options for the future, through exploration and development as well as through M&A.

The history of mining is a history of bold (and often countercyclical) moves. Such moves are still necessary. But they must be made following a dispassionate and rigorous assessment—and not only because this is the most reliable path to long-term value creation. In a growing, increasingly interconnected world, stakeholders have a bigger say in value creation than ever before.