Mining companies continue to contend with price volatility, geopolitical turmoil, rising costs, declining grades and a general lack of access to financing, according to advisory firm Deloitte’s ‘Tracking the Trends 2015’ report. Nevertheless, there is evidence of recovery in 2015 if miners can successfully address the top issues facing the industry.
Nevertheless, the mining industry has always been subject to cyclicality. In a world where volatility has become the norm, the key for future success lies in determining not how to ride the sector’s typical waves, but how to accelerate resurgence from a down cycle, something Deloitte’s ‘Tracking the Trends 2015’ report looks at in-depth.
These are the following 10 issues that the report has outlined as key concerns for mining companies in 2015:
1. Optimising for operational excellence
Sustainable productivity improvements have become a key focus for mining executives across the world, since a commodity price rally has become unreliable. Furthermore, mining companies have undertaken substantive cost reductions and are now moving forward with more streamlined cost structures.
In South Africa over the past year, this is evidenced in major platinum players, such as Anglo American, who have begun simplifying their portfolios by divesting non-core assets and shutting down marginal operations. Now, they are turning their attention to wringing more productivity from their organizations by heightening their focus on operational excellence.
Suggestions: To achieve operational excellence, Deloitte suggests using analytics to monitor key aspects of operations and to reduce costs where possible. Tackling energy costs is also essential, and mining companies should embrace innovation and rely more on renewable energy sources. Transparency is another key issue, according to the report, which will help with enterprise-wide accountability and strategic decision-making. Furthermore, the report recommends streamlining balance sheets and eliminating excess expenses.
2. Innovation is the new key to survival
As unexpected pressures mount, incremental improvements are no longer sufficient to cope with escalating labour issues, higher costs and lower ore grades. Therefore, many organisations are becoming innovative, helping to reduce capital, people and energy intensity while boosting mining intensity.
To reap these rewards, however, mining companies must overcome their traditionally conservative tendencies. By breaking this mindset, mining companies can free themselves to adapt practical applications that already exist in other industries and apply them to fit their current needs. A truly innovative mindset, however, will see companies adopt an entirely new design paradigm that leverages new information, mining and energy technologies to maximize value
Suggestions: Companies need to embed innovation into the corporate strategy, even if it starts small. Miners should consider modular technologies, which allows companies to think big, but test small and scale fast. Mining companies should also consider leveraging emerging technologies and should consider entering alliances or joint ventures with technology providers and other companies already taking steps to harness organizational intelligence. Lastly, operational realities need to be considered, since fundamentally altering industry realities, innovation often threatens the status quo.
3. Reducing power project costs
Energy supply shortages are becoming more pronounced in the industry, and demands on energy are increasing worldwide at a rate that traditional energy sources are struggling to keep up with. Renewables have been historically seen as overly-expensive, unreliable and unproven, but this is changing. As the benefits of renewable energy come to outweigh its risks, the groundswell of adoption is only set to rise.
Suggestions: To make intelligent changes on either the supply side or the demand side, companies need to manage energy as a portfolio within the organization. Companies looking for alternatives to traditional fossil fuels should also consider their full range of options—along with the viability of hybrid systems—to determine which solution makes best sense.
Companies should avoid underestimating the time commitment required to obtain local permits and approvals and negotiate with key stakeholders by starting early and communicating often. Finally, to help defray the up-front costs associated with building renewable energy facilities, mining companies should explore all available financing options.
4. Dwindling project pipelines
In an effort to boost shareholder value, control runaway costs and return to productivity, companies across the sector are shutting down marginal projects, rationalizing portfolios and divesting poorly-performing assets. Several of the major companies have decided to narrow their focus to only a small handful of commodities, leaving the development of other commodities to more specialized producers. As a result, project pipelines have begun to dwindle.
Exploration activities are also declining, and given the amount of time it takes to move from exploration and development to production, this exploration slowdown could create a supply imbalance in the next decade or two. This will only be exacerbated as current reserves are depleted, and could ultimately tip the industry back into another unsustainable production cycle.
Suggestions: Mining companies need to find a better balance between meeting short-term investor and analyst expectations and maintaining project pipelines capable of replacing depleting reserves and meeting long-term demand. There are also opportunities for companies to create strategic partnerships with other mining firms to share risk and capital while leveraging each other’s skills and infrastructure.
As mining companies look for ways to produce more economically, they may also choose to shift from global towards more local production. Furthermore, it may make sense for major and mid-tier companies to consider investing a small portion of their portfolios in greenfield exploration, and if the market is nearing the bottom of its cycle, timing of these investments may be particularly ripe for companies willing to bet against current trends.
5. Financing’s great disappearing act
With global mining stocks down 43% since 2010, equity investors remain wary of the sector. As a result, 2013 marked one of the worst years in history for new mining listings. Chinese investors, once the industry’s prime financiers, have become extremely selective in their capital investments. And traditional lenders cooled off on the industry years ago, and have yet to return in any great number with anything approaching favorable terms, according to the report.
While this situation is difficult for large and mid-tier producers, it is proving fatal for a huge swath of junior miners and mining services companies. The loss of explorers, in particular, could vastly alter industry production forecasts—and even global economic performance—especially as most major miners no longer engage in their own exploration. Insurmountable financing hurdles may end up taking a more severe toll than many miners currently imagine.
Suggestions: Given the dire state of the industry’s access to funding, it may be time for mining companies to more actively seek out foreign investors. Companies should also consider ways to rationalize operations, such as pooling talent resources to reduce salaries, sharing infrastructure, partnering to develop adjacent properties or similar projects, and consolidating. Many distressed
companies are already exploring less traditional alternatives, such as offtake deals, royalty and metal streaming arrangements, equipment financing and high-yield debt. With so many distressed assets in the junior and mining services space, private equity interest in mining is also bound to pick up, at least in the short-term.
6. Survival of the juniors
Many junior companies have been pushed into survival mode. To remain afloat, some juniors have decided to cut deep into their organizations, waive current expenditures and launch new dividends, all while trying to maintain the integrity of their investor reporting systems. Juniors are also desperately casting around for new sources of capital.
“Juniors are still mired in cost containment and productivity improvement initiatives. Given how close some companies are to the wall, they’re actively seeking strategies to lower their cost profile. Companies are still struggling to raise money and we’re sure to see more retrenchments in this area before these issues are resolved,” says Christopher Lyon, Deloitte Chile mining leader.
Suggestions: The report suggests that juniors need to get their assets in order: “Preparatory steps may include commissioning an independent asset valuation to determine fair market value; preparing disclosures around mineral rights, environmental issues and available reserves; and identifying the most favorable times to approach the market.” Junior companies also need to consider all their options, as “flexibility is becoming the name of the game.” Juniors should also prepare for the upside, and management should already be taking a longer view of the market, preparing their systems and positioning for the upside.
7. Seeking new skillsets and a new generation of talent
Despite shifting market conditions, demand remains for a range of specialized skills which are still in short supply. This is occurring in the board room where directors are now expected to accept greater responsibility, in the offices of senior leadership who are tasked with developing more inclusive teams, and even at the operational level where new types of skills shortages are emerging.
The generational divide in the industry doesn’t help either. Senior resources are competing with juniors for entry-level jobs, pushing the younger generation away from the industry. To draw these people into the fold, mining companies must consider ways to make the sector more attractive. The educational sector may also be contributing to the industry’s skills gap due to the fact that such institutions may not offer the percentage of indigenous workers that many countries insist that mining companies should hire.
Suggestions: Organizations with diverse teams tend to outperform those without, but committing to a diversity agenda requires strong leadership sponsors, a willingness to uncover unconscious biases and a plan for long-term change. Mining companies should also explore new systems, since working to both develop and attract people with greater diversity and wider skillsets, particularly in the technology arena, will increase the global talent pool.
To compete for talent in high demand, companies should also treat recruiting like marketing, extend recruiting targets to new and more global talent pools, and use big data tools to locate and assess high-quality candidates. Finally, companies should make more targeted training investments in an effort to attract a more diverse group of people to the sector, bolster the skillsets in highest demand and foster greater parity among educational institutions in both developed and developing nations.
8. Addressing the issue of geopolitical uncertainty
Mining companies face rising regulatory, geopolitical, economic and technological uncertainty. To succeed in this volatile environment, they will need to step up their forecasting, scenario planning and risk management capabilities if they hope to navigate the volatility augured in years to come. While the energy industry seems to have made these strides, mining lags. With volatility the new norm, however, embracing uncertainty and finding ways to manage it will be key to success.
Suggestions: In regions where civil and tax laws regularly shift, companies can work to build closer relationships with representatives at all levels of government in an effort to foster an environment that supports consistent application of the laws. By leveraging the resources of national and global mining associations, miners can help to influence government policies that may affect the sector, build more effective working strategies with government representatives and coordinate industry response to key regulatory issues.
To counter unprecedented levels of volatility, enterprise risk management (ERM) should extend beyond the development of a risk management framework and methodology, and miners should also consider further integrating ERM with other management systems. Finally, with sound scenario planning methodologies, mining companies can identify a wide set of divergent but plausible futures and devise strategies to respond to each scenario.
9. Rising stakes around stakeholder engagement
Although mining companies have made significant strides in their dealings with local communities and many handle it quite well, many companies still lag at effective stakeholder engagement. This is partly due to the fact that the number of stakeholders keeps growing. There are also frequently fundamental conflicts between various stakeholder interests.
Despite these complexities, mining companies must find ways to enhance stakeholder engagement and better manage constituencies. Failure to improve engagement can result in more than project delays, cancellations, terminations of licenses and mine closures. It can also spark active anti-mining sentiment. To avert these outcomes, miners must find ways to proactively address disparate stakeholder demands and create win/win platforms.
Suggestions: Given the varying needs of different stakeholder groups, mining companies must not only identify all affected parties but understand what matters to each and create a shared vision. To prevent the dissemination of misinformation, companies should also formalize their communication strategies. Social media is aslo increasingly becoming the tool through which communities engage, and by using data analytics to mine social media feeds, companies can gain a better understanding of community concerns and how they are perceived, and use this information to appropriately redirect their activities.
As in the governmental arena, mining companies can benefit by leveraging the resources of national and global mining associations in their negotiations with local communities. Companies that run foundations or engage in other means of official giving should make sure their corporate giving practices align with their stakeholders’ priorities. Finally, mining companies should aim to consult with all affected stakeholders to plan mine closures.
10. Engaging with government
Some governments are backing away from their previous hard line regulatory stances due to the decisions by mining companies to close marginal mines and put some sites into care and maintenance, which will affect local employment levels and raise concerns around the industry’s ongoing ability to support escalating community demands. Some governments also appear to be making greater efforts to accommodate the industry.
Yet, while some governments are working to accommodate the industry, “others are backing miners into a corner. Unfortunately, these governments may be in danger of killing the goose that laid the golden egg if their policies force companies to defer their investments or exit a country entirely,” said Tim Biggs, Deloitte UK mining leader.
African governments, for instance, continue to demand concessions from the sector. Burkina Faso, Ghana, Namibia and the DRC all take automatic stakes in mining companies, while Zimbabwe, Kenya, Tanzania and Mozambique require stipulated percentages of indigenous ownership in mines. As a result, companies should be thinking about more strategic ways to deal with governments, manage regulatory risk and make strategic investment decisions.
Suggestions: Miners can strengthen their negotiating power by tangibly demonstrating the extent of their social and economic contributions and thereby building better government relationships. Another option is to relocate to regions where mining is supported and put greater weight on the advantages of operating in mining-friendly regions. For those who cannot relocate, understand the imperative to engage in the public arena if they hope to influence government policy and contribute to a better political/social climate.
In cases where local communities and NGOs may be driving government policy, mining companies should share their perspectives with government officials as well. Finally, companies should consider ways to leverage mobile communications and social media in an effort to foster two-way dialogues with investors, industry analysts, community organizations, media and the public at large.
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