As the industry now stands in the middle of what appears to be another bull run for some commodities, the next 10 years will see the continuation of rapid change in the industry against a backdrop of declining ore body grades, decreasing availability of tier one assets, and continued focus on shareholder returns.
To thrive amid this volatility, companies must rethink the traditional mining model, according to Deloitte Touche Tohmatsu (Deloitte Global)’s 10th annual mining report, Tracking the Trends.
This article first appeared in Mining Review Africa Issue 3 2018
“The last 10 years have seen the roller coaster of highs and lows in the mining sector.
“During this time, we have seen an emergence of innovative companies adopting transformative practices.
“Change is coming and mining companies must find ways to remain relevant,” says Deloitte global mining leader Philip Hopwood.
According to Deloitte Canada Americas mining leader Glenn Ives, over the past decade, commodity prices reached historic highs and historic lows, mining companies engaged in both significant acquisitions and consolidation and operational realities shifted irrevocably in the face of a digital revolution.
Ives states that unlike previous cycles, mining companies appear to have learned from the lessons of the past.
Bringing digital to life
Hopwood notes that in recent years, mining companies have come to realise that value, like beauty, may be in the eyes of the beholder. Once measured by how well a company extracts resources, the industry’s value proposition may be shifting to how well a company acts on information to optimise production, reduce costs, increase efficiency and improve safety.
It is becoming clear that success isn’t truly about adopting the latest applications (apps) and technologies, which will continue to evolve.
Instead, it’s about embedding digital thinking into the heart of their business strategy and practices to transform the way corporate decisions are made.
Overcoming innovation barriers
Mining executives understand that innovation is necessary for the industry to transform.
This isn’t confined to just technological innovation; it includes the adoption of more innovative approaches to engaging with stakeholders, re– envisioning the future of work and identifying the commodities that will be in greatest demand going forward.
Part of the reason is because mining companies continue to face a number of organisational barriers to innovation.
Firstly, mining companies are traditionally averse to taking on new risks that may impact their cash flow or license to operate or reduce their propensity to pursue transformational innovation.
Secondly, mining companies’ propensity to favour short–term cash flow generation often works to the detriment of creating longer– term net present value.
Thirdly, mining companies often lack a clear vision to guide and enable longer–term transformation and fourthly, mining companies are historically inclined to operate in isolation.
The future of work
Hopwood notes that as the digital mine becomes a reality, the nature of work is poised to change dramatically—at both the mine site and in the back office.
He explains that while digital solutions will augment human performance by empowering people at all levels with information to enhance their performance and insights to drive better decisions, they will also cause upheaval.
As automation becomes more prevalent and technology transforms the nature of work, organisations will also be forced to redesign certain jobs.
At the mine site, manual workers will need to learn how to integrate technology into their job functions.
The image of mining
The fourth trend Hopwood describes is changing public, employee and customer perceptions.
He notes that despite the significant contribution of the mining sector to the world’s economy, the industry’s reputation remains somewhat tarnished in many countries due to perceptions that mining companies contribute to environmental damage, cause negative community impacts and engage in dubious practices abroad.
He explains that to rebuild trust with employees, investors, communities, governments and the public, many leading mining companies are embarking on efforts, such as taking decisive public stances around corporate social responsibility, adhering to voluntary sustainability standards and passing shareholder resolutions regarding increased disclosure on climate change.
Transforming stakeholder relationships
To expand local employment opportunities, increase tax revenues and meet increasing community demands for improved infrastructure and greater environmental protection, many governments of resource–rich countries continue to put pressure on the mining industry.
As a result, mining companies in many jurisdictions still face considerable obstacles to investment ranging from high royalty rates, permitting challenges and uncertain tax rules to growing requirements for local beneficiation.
Finding sustainable solutions is another pressing issue and emerging trend. With each passing year, water has become a more critical issue for the mining sector.
As ore grades decline more water is needed to extract the same amount of ore – pushing up water requirements in the industry.
At the same time, water demand is rising globally, driven by population growth, industrial development, expansion of irrigated agriculture which increases per capita water consumption.
Changing shareholder expectations
For decades, mining companies’ behaviour largely hinged on prevailing market realities. While lower commodity prices traditionally heralded retrenchment, cost cutting and risk aversion, a rising price environment often signalled a period of over–spending, sometimes to the detriment of long–term corporate value.
Shifting corporate direction to meet shareholder demand for short-term returns can contribute to the long-term detriment of mining companies.
Instead, performance measures should reflect varied objectives to create value for multiple constituencies—including customers, employees, suppliers, and communities—not just shareholders.
Reserve replacement woes
Hopwood notes that thanks to intense cost cutting, a focus on fundamentals and a commitment to portfolio simplification, the fortunes of many mining companies are on the rebound.
Yet this tentative turnaround cannot remedy the supply constraints that currently plague the industry.
Ongoing grade decline, resource depletion and supply disruptions are resulting in a similar trend for copper, which is expected to fall into a deficit in 2018.
According to the ninth trend new skill sets are needed to help drive transformation.
There is little doubt that the mining sector is in the midst of a transformation.
Heightened scrutiny from governments, communities, investors and other key stakeholders mandates new forms of cooperation and collaboration.
To repair broken relationships and tarnished reputations, miners must also explore ways to operate more sustainably. These drivers make it clear that companies will need to make substantive cultural shifts.
Commodities of the future
Hopwood notes that given how inextricably socio-economic trends link to commodity demand, executives have long had to double as futurists.
He adds that to assess which commodities to invest in and which to divest, miners need to keep their fingers on the pulse of fluctuating consumer demands, global demographic and economic shifts and the effects of environmental change.
In recent years, they have also had to track a rapidly–evolving trend, the emergence and adoption of new technologies.