At this time last year, many mining and metals companies were hunkered down and focused on trying to maintain strong balance sheets while waiting for a turnaround in the sector. Over the last year we saw a glimmer of hope. EY’s Canadian Mining Eye, which tracks mid-tier and junior companies, saw incredible gains in 2016 which was a significant turnaround from 2015. It proves that, after a slow sector for many years, there is movement and change underway.
As the biggest risks in the sector shift, mining and metals executives must also shift their perspective on priorities. Cash optimization rocketed into first place on EY’s most recent Top 10 business risks facing mining and metals report. Last year, it wasn’t even on the list. While many are reluctant to say we’re on an upswing, last year’s biggest risk – switch to growth – is no longer the most pressing concern. Mining and metals companies need to walk the fine line of making cost reductions that don’t erode value while offering the biggest bang for the buck, but also preserve the cash they do have.
As mining companies look to hold on to cash, traditional models for raising capital are rapidly changing – and access to capital moved up one spot to the second biggest risk on our list.
The number of streaming deals has nearly doubled in the past two years. There were also a large number of royalty agreements, offtake and forward sales as well as divestments of non-core assets in order to free up capital. Investors will likely remain selective and look for low cost, de-risked projects in which to invest.
Meanwhile, joint ventures is new to the list this year. We’re seeing a lot more companies entering into joint ventures to help use the cash, resources and technology that stakeholders have but also mitigate potential risk. The downside is if these ventures turn sour they can end up consuming more resources and money than intended. Any company considering one must also complete thorough due diligence.
While the sectors biggest risks have changed, others stay the same. Productivity, social license to operate and cybersecurity are all included in our list – and they appear year after year. These issues need to be addressed at the boardroom level, and decisions need to be part of a strategic plan, where priorities build on each other to improve operational excellence. Cybersecurity, in particular, has seen budgets limited but, as we have noted in this column previously, the cost of doing nothing in this space could ultimately cost much, much more.
The one topic that touches every corner of the sector, and is now almost a cliché term, is innovation. Without a doubt the mining industry is in need of disruption – from the way resources are taken out of the ground, to operating mine sites more efficiently, to how to finance projects. Innovation is happening, just in small doses. Going forward, the pace of innovation may be forced to speed up as the ‘old’ way of doing things becomes obsolete.
As we’ve seen in 2016 with incredibly volatile prices, nothing is certain in the mining sector. By taking a snapshot of where things stand and understand where to focus their energy, companies will be better positioned to deal with the changing tides.
Jim MacLean is EY’s Canadian Mining & Metals Leader