Mining trends To help organizations take a forward-looking approach to their business planning in the face of new market realities, Deloitte's mining practitioners from around the world have identified 10 of the top issues emerging in the global mining sector, presented in order of priority:
1. Securing local supply: Is the demand from growing nations sustainable? As foreign companies buy into domestic markets, companies are facing unprecedented competition in their own backyard. On the one hand, industry stakeholders speculate that this stockpiling is unsustainable and may be artificially affecting prices. On the other hand, experts point to the astonishing underlying demand likely to resurge as China, India and the other emerging nations continue to modernize. As well, geo-political pressures around foreign ownership may influence government regulations and shift the business landscape in different ways across jurisdictions. Given the plausibility of numerous scenarios, mining companies need the strategic flexibility to adapt.
2. Commodities, currency and costs: The rollercoaster ride continues. Commodity prices have recovered remarkably quickly to a strong level, making the mining sector more buoyant than people had expected. While it's encouraging to see prices rebound, more than ever before, commodity prices have revealed themselves to be fickle masters and companies must explore ways to hedge against currency and commodity volatility.
3. Ramping back up: Success hinges on effective demand management. Faced with plummeting demand, lower prices and capital constraints over the past year, many organizations shut down locations to avoid holding inventory, put exploration on hold and reduced the flow of new projects to a trickle. In the face of changing market realities, these same organizations must now seek to ramp production back up. However, until mining companies understand what is driving demand, they will have difficulty thinking ahead of the curve, planning exploration and development investments, as well as differentiating themselves in the global commodities marketplace. Central to this challenge is also a looming talent shortage in critical areas that are crucial to successful exploration, operations and investment planning.
4. The spread of sustainability: Earning a social license to operate requires an integrated approach. In the face of heightened regulation, more vocal investor activism and changing consumer expectations, sustainability now encompasses the creation of business processes that benefit all stakeholders. Mining companies increasingly need to collaborate with governments, communities and non-governmental organizations. As well, shareholder and regulatory pressure for improved transparency and disclosure is mandating a more mature governance approach.
5. No easy money: The cost of capital dampens growth. Mining is an exceptionally capital-intensive industry. Therefore, when the debt markets shut down and equity deals started falling through last year, the mining sector was disproportionately affected. In the wake of the global financial crisis, equity financing has lost much of its lustre. As well, liquidity challenges on London's AIM have slowed deal flow through this market, and while the Toronto Stock Exchange (TSX) has been recovering, equity financing mostly remains confined to classes of commodities, such as copper, gold and silver. Although the credit markets are opening slowly, financing remains difficult to attain, pitting organizations in a battle against each other to gain access to capital.
6. Contending with a changing climate: The risks to the mining industry are rising. For many years, mining companies considered climate change a purely environmental risk that could potentially hamper productivity due to unpredictable drought or flooding. Those days are over. Beyond the environmental impacts of climate change, the issue poses real risks to the mining industry more broadly, including: physical operations, financial risks, strategic risks related to accounting for uncertainty, supply chain risks and litigation risks. Companies must continuously refine climate change strategies if they're to keep pace.
7. Extreme mining: Searching for the industry's next frontier. With each passing year, the easy-to-reach deposits are depleting, forcing mining companies to consider more extreme locations, such as following the oil and gas industry's lead by exploring the feasibility of commercializing underwater mining. Keeping pace with this shift requires mining companies to invest in powerful technology to access difficult-to-reach reserves and navigate complex geological structures.
8. The valuation abyss: The need to merge still exists, but the desire doesn't. Burned by the breathtaking drop in value across the world's markets, many would-be acquirers are hesitant about entering new deals. 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're being undervalued-making it nearly impossible to find a middle ground. With the notable exception of China who has continued to engage in a considerable number of transactions throughout the downturn, the pace of mergers and acquisitions in most areas of the market is likely to remain slow.
9. Big brother is watching: Government intervention takes a toll. In some countries, shifting tax and royalty policies target the mining sector and eat into profitability. And with so many governments short on cash following the global recession, this may become a larger risk going forward. Moreover, in some emerging nations, the risk of corruption remains. In September 2009, for instance, police in the Democratic Republic of Congo (DRC) sealed off a copper mine owned by Canada's First Quantum Minerals Ltd., forcing the company to halt construction and lay off 700 employees.
The shutdown followed a decision made by the DRC government in August 2009 to cancel First Quantum's contract. However, this prospect of government intervention is present in all regions around the world, including Canada. To anticipate and hedge against this kind of risk, mining companies will need to engage in more sophisticated scenario and response planning.
10. No bridge to cross: Infrastructure costs are on the rise. As mining organizations move into more remote regions, lack of infrastructure threatens to endanger operations, forcing companies to bear the costs of infrastructure development. If the trend continues in this direction, mining companies may find themselves investing in and managing an entirely new class of assets. While this move may support local communities in some areas, it also mandates considerably more collaboration with government stakeholders around the world.
This is an edited article provided by Deloitte. For a more detailed discussion of the top issues emerging in the mining industry and suggested courses of action, the full report "Tracking the Trends 2010: A look at 10 of the top issues mining companies will face" is available by visiting www.deloitte.com/ca/mining-trends.
