Minerals, Mining & Metals

It’s a general opinion amongst analysts that the best strategy for mining companies in the current environment is a flexible one. It is widely predicted and warned that the survivors and the winners will be those that learn to manage volatility by coming up with responses to a range of possible market scenarios.

Unfortunately, mining companies are more often influenced by short-term outlooks, as evidenced by the “almost haphazard and spontaneous” rush to expand capacity when commodities were hitting record highs two years ago.

Then, when commodity prices fell recently in the wake of the downturn, companies began preaching cost containment, cutting across the board and shedding non-core as well as high-quality assets, halting production, scaling back work forces, shrinking their head offices and putting deals on hold.

Industry leaders agree that in an industry as notoriously cyclical as mining, more than ever before, organisations must have sufficiently flexible strategies to weather both market upswings and downswings. This will require of Mining and Metals industry to bolster flexibility and advance planning for various potential risks and scenarios so as to survive and excel.

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Deloitte advised firms to resist the urge to ignore fundamental challenges because they find themselves in a more comfortable position as the market firms.

Covering over the cracks on critical issues will not make them disappear. Instead, organisations need to take active steps to strengthen their business fundamentals.  Therefore, its really tricky for companies to decide if they should ramp up production that was curtailed during the downturn.

Is the demand from growing economies like China sustainable.?  Specialists speculate that stockpiling by emerging nations is unsustainable and maybe artificially inflating prices and other experts point to underlying demand likely to resurge as China, India and other countries continue to modernise.

There are ten generally agreed, holistic issues which top mining companies will face:

  • The spread of sustainability – the pressure on companies to earn a social license to operate;
  • Shortage of available capital, which in turn puts a damper on growth;
  • Risk to the mining industry from climate change, which is becoming an increasingly important consideration ‘Extreme mining’ – the search for the industry’s new frontier, which at the moment appears to be under water;
  • Hesitation over consolidation, as the need to merge still exists but the desire does not. “Where buyers are in fact actively trying to take advantage of lower market valuations to acquire quality assets, sellers are attempting to ignore the stock market on the belief that they are being undervalued—making it nearly impossible to find a middle ground,” (Deloitte)
  • Government intervention; The mining sector faces an uncertain future. Increasing and unpredictable government intervention across the globe is adding further complexity to a sector that is already heavily laden with risk. From a likely windfall levy in Peru, through to through to potential classification of certain minerals as strategic and/or introduction of a new mining tax regime in Africa. A wide variety of government interventions pose a real threat to commodity prices, corporate valuations and, most critically, investment in the global mining sector. For the most part, interventions are motivated by financial and political pressures.
  • The threat of higher taxes, restrictive regulation and indigenisation looms large over an industry already grappling with the risks normally associated with exploration
  • Not to forget Miners in resource risk North Africa – West Africa already reeling from weak commodity prices and now facing a new threat as Ebola spreads through regions Disruptions that have affected movement and food production within countries coupled with the diversion of governments to fight Ebola are making it more difficult for mining companies to operate normally.

Observations and opinions

There is also a new trend in the mining industry where majors are divesting out of emerging markets like Africa. AngloGold from gold assets in Ghana, BHP iron ore assets in West Africa, Norilsk nickel assets in South Africa.

This provides opportunities for junior miners to invest and create space for indigenisation. However, funding for mining projects remains a challenge as commodities prices continue to plummet to new lows. In some instances, the new entrants do not have experience in running the mining operations at efficiencies required to remain profitable.

In South African the Minister of Mineral Resources has assured investors and stakeholders that the government would act on finalising outstanding mining legislation and deal with uncertainty in the mining industry.

Delivering a keynote address at the opening of the “Investing in African Mining Indaba” in Cape Town, Zwane said the South African government had been hard at work to improve regulatory efficiency through the integration of the applications for mining and related rights, water use and environmental permits. He said that the recovery of commodity prices signalling market rebound needed to be entrenched and supported by stakeholders working in concert to ensure the sustainability and resilience of the industry.

In periods of low commodities prices, high volume-low value mineral operations (such as manganese, iron ore, coal, etc.) tend to suffer due to high logistics costs, which results in the mining operation being non-profitable and in some cases leading to closure.

New mining operations in Botswana, Waterberg South Africa, Mozambique and Congo Brazzaville have been put on the back burner as it were due to either lack of road/rail infrastructure or logistics costs that are prohibitive at these low prices.

This raises a question of mechanisation, which in developing economies is met with resistance from labour unions as unemployment is usually at unbearable levels. In time this will result

All that said, the mining industry remains the most contributor to development in emerging economies in general. In many instances contributing as much as 10% or greater to the Gross Domestic Product. As result this industry cannot be ignored and new approaches and methods will continue to be sought by all stakeholders.

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