Deloitte has just released a comprehensive Report on Trends in the global mining industry. It highlights how international market shifts are forcing Canadian mining companies to fundamentally change the way they do business. Last year, the Report says, Canadian mining companies were most concerned with securing supply, managing commodity price volatility, and ramping back up in response to rising demand. For 2011, top priorities are attracting financing, finding new supply markets, and engaging local stakeholders in an effort to secure a license to operate.
The Report goes on to say there are several factors are at play. As demand grows from emerging economies, the flow of commodities is increasingly moving to non-OECD nations. China's voracious appetite for commodities, for example, is causing a spike in new deals. Thanks to its ability to influence demand and control the market, that country is beginning to impact global commodity prices. This dictates a growing imperative for mining companies to understand their underlying value propositions so they can be positioned to attract maximum interest from China or other acquirers.
The Report explains, however, that although the developing economies' strong appetite for commodities is sending demand signals to the mining industry, these are being muffled by the difficulties of obtaining permits for new mines and finding skilled labour.
Deloitte's North American Mining Leader Glenn Ives and Jurgen Beier, partner in the company's Canada mining practice, outline the Top 10 Trends and Challenges mining companies will face next year.
As emerging economies around the globe continue their rapid industrialization, demand for commodities is skyrocketing. Yet at the same time, numerous countries are taking steps to safeguard their own supply by curbing the export of natural resources and shutting down some traditional supply markets. According to a new report released by Deloitte today, this is doing more than affecting commodity prices. It is changing the way mining companies do business.
Over the past 18 months, the axis of the world has shifted according to Deloitte's third annual global mining report, Tracking the Trends 2011: The top 10 issues mining companies face in the coming year. As demand grows from emerging economies, the flow of commodities is increasingly moving to non-Organization for Economic Co-operation and Development (OECD) nations. The report explains, however, that although the developing economies' strong appetite for commodities is sending demand signals to the mining industry, these are being muffled by the difficulties of obtaining permits for new mines and finding skilled labour.
"Market forces today are far from typical," says Philip Hopwood, Global Mining Leader, Deloitte. "Increased governmental intervention in the form of mining industry nationalization or new tax and royalty regimes, coupled with inadequate infrastructure and a dearth of skilled talent, have made it exceptionally difficult for companies to build new mines or expand existing ones to boost available supplies. "These trends are creating a supply shortage that challenges mining companies to rethink their operational strategies."
China's voracious appetite for commodities causes spike in new deals
While much of the world was hunkered down, waiting for recent economic storms to pass, Chinese acquirers were looking at foreign mining targets. As the report explains, in 2009 alone, the country entered a record-breaking 33 deals, with a combined value of US$9.2 billion in 2009 alone; almost three-quarters (73%) of Chinese companies, meanwhile, expect the pace of deal-making to continue. Currently, as the report explains, though mining companies continue to face difficulty attracting financing, the gap is now being plugged by Chinese and other international investors, fuelling a much more active transactional market than last year.
"China is the 800-pound gorilla in the room. Thanks to its ability to influence demand and control the market, the country is beginning to influence global commodity prices," explains Jeremy South, Global Mining M&A Leader, Deloitte. "For many mining companies, this ongoing trend dictates a growing imperative to understand their underlying value drivers so they can be positioned to attract fair value should the Chinese, or other acquirers, come calling."
Business priorities and challenges have changed over the year
While a number of industry fundamentals have remained unchanged, the relative ranking and focus of key trends presented by Deloitte in 2010 have shifted. For instance, last year companies were most concerned with securing supply, managing commodity price volatility, and ramping back up in response to rising demand. This year, top priorities are attracting financing, finding new supply markets, and engaging local stakeholders in an effort to secure a license to operate. The report also highlights that government intervention around the world has increased in the past year and is currently on the rise in the form of new taxes and royalties, more stringent anti-corruption legislation, and rising expectations related to environmental protection.
The top 10 issues mining companies will face in the coming year
To help organizations take a forward-looking approach to their business planning in the face of these new market realities, Deloitte's global network of mining professionals have identified ten of the top issues they believe will influence the global mining sector most in the coming year, presented in order of priority:
1. The fickle face of financing: International investment fuels the sector - In many industries, the effects of the recent financial crisis continue to linger. This is particularly true for those mining companies that fell victim to the associated dearth of debt and equity financing. To shore up balance sheets and prevent funding crises, many companies halted operations, cut back on production and instituted other, often onerous, cost-cutting measures. Now that the dust has settled, the companies that remain standing tend to be leaner-and meaner. Yet financing remains a dicey proposition, even for the strong players. In particular, project finance is being provided largely by the resource-hungry nations of North Asia and is frequently attached to offtake obligations. Traditional lenders in many developed nations, on the other hand, have either abandoned the mining industry or continue to impose commercially-unviable terms. While some private equity firms and pension funds have been eying the sector, few are stepping forward with firm financing commitments. Even major companies have had to enter strategic partnerships in a bid to finance new projects. However, despite these altered fundamentals, mining sector growth continues apace, supported by the entrance of new financiers, including Asian buyers and sovereign wealth funds.
2. When supply can't match demand: Volatility is the new normal - The rapid expansion of a middle class across India and throughout Asia, Latin America and Eastern Europe is also fuelling considerable demand. This has served to keep commodity prices at least steady or rising on everything from coal, copper and iron ore to gold, silver and rare earth metals. Yet in an attempt to meet burgeoning domestic requirements, many emerging market economies continue to curtail commodity exports. In 2010 alone, Russia reduced coal exports, India increased its export duty on iron ore and China cut back exports of rare earths. Typically, mining companies would respond to this simultaneous rise in demand and fall in supply by ramping up production. The problem is that market forces today are far from typical. Due to governmental intervention in the mining industry, companies are struggling to obtain new permits and licences. Coupled with inadequate infrastructure and a shortage of skilled talent, it has become more difficult for companies to increase available supplies. As a result, prices continue to rise and are being passed on to end-use consumers who have no choice but to pay. To remove these bottlenecks, some mining companies are looking at ways to access reserves from non-traditional locations-such as Mozambique, Botswana and Mongolia. To succeed in these efforts, however, mining companies need a large enough portfolio to play in these emerging markets.
3. Securing a social license: Engaging stakeholders takes centre stage - Whether it takes place in developed nations or emerging economies, mining activities affect local communities in myriad ways. Given these realities, it is no surprise that mining companies typically put considerable advance thought into a range of social issues-from land use, water use and environmental performance to worker safety. Yet this advance planning has had to expand radically in recent years. As mining companies move into remoter regions, they find themselves cast in the role of providers of such basic community services as water, electricity, health and education. In addressing these expectations for sustainable development, companies are coming to realize that they must do more than ensure appropriate mine safety and environmental controls. They also must engage with key stakeholders and involving influential NGOs at every stage of the mining lifecycle-from exploration, mine development and operation to closure, post-closure and future land use. By encouraging collaboration, this type of engagement promises to deliver long-term sustainable advantages-positioning local communities to plan for future land use after mine closure while granting mining companies the social license they need to operate.
4. New taxes, new regulations and new governments: Political agendas to the fore - Political gyrations have long affected mining companies given the sector's global footprint. Yet, over the past year, government intervention appears to have reached new heights. Five primary agendas are driving this intensified activity, including: the plugging of government deficits brought on in the wake of the global financial crisis; the assertion of nationalistic and competitive claims such as when the Canadian government recently quashed BHP Billiton's bid for Potash Corp.; attempts to fight corruption such as the new UK Bribery Act which supports a "zero-tolerance approach" toward companies that offer inducements to foreign governments in return for preferential treatment; the promotion of transparency such as the new Dodd-Frank Wall Street Reform and Consumer Protection Act in the U.S., which requires all U.S. and foreign companies registered with the SEC to publicly report how much they pay governments to access their oil, gas and minerals; and the championing of higher environmental standards as new governments come into power in large resource countries and advocate for more stringent environmental enforcement.
5. How to invest more strategically: Hint, you'll need a long-term plan - Barely two years ago, a large proportion of mining companies were financing growth on the back of debt, as credit markets melted down and capital became increasingly scarce. To extricate themselves from these compromising cash positions, companies took drastic measures such as divesting non-core assets, renegotiating lending terms, halting production and adopting rigorous cost cutting programs. Roughly 18 months later, those efforts have paid off, as mining companies today are more efficient and frequently cash-rich. This, however, raises a new concern: how to deploy available capital effectively. Some companies are rising to the challenge and forging ahead with projects previously considered marginal. Others are debating returning excess capital to shareholders. Others have launched a spate of renewed merger and acquisition (M&A) transactions, most evidently highlighted by BHP Billiton's $40 billion failed bid for Potash Corp. This current environment is acting as a type of wake-up call for mining companies that, until now, have failed to articulate their value propositions clearly. Faced with the potential for hostile takeover activity, companies have discovered that their notional valuations may not properly reflect their true underlying value. This realization should impel mining executives to take a good, hard look at their portfolios, processes and plans and articulate a long-term strategy that takes into account key performance indicators, emerging market forces and a range of potential future scenarios.
6. The lost generation: The war for talent rages on - In Canada, the Mining Industry Human Resources Council (MIHRC) estimates that over 60,000 people employed in the mining sector are expected to retire by 2020. As the mining industry ramps back up in response to growing demand, talent shortages will become more pronounced. For example, by 2020, the MIHRC says the industry will need an additional labour force of 100,000 people to maintain current levels of production. Although other industries face similar levels of retirement, they often have large pools of skilled labour from which to draw. However, low participation in the sector over the past several decades has left a serious talent gap. While there are older workers wrapping up their careers, and younger workers attracted to the industry thanks to its growth prospects, there is a noticeable lack of experienced middle managers. As a result, mining executives have taken strides to draw new workers to the industry, enter partnerships with educational institutions and encourage higher levels of migrant or temporary employment. Yet none of these activities will attract the 30- to 50-year-old generation. As the talent gap widens, mining companies will need to get more aggressive and innovative about talent retention by better engaging these key employees. Given the exceptional mobility of today's skilled labour, mining companies will need to innovate. Customized work arrangements, encouraging internal transfers instead of exits and offering more formal coaching are just some of the possible solutions.
7. At the end of the rainbow: Maintaining the search for that elusive pot of gold - Mining companies are no strangers to the global competition for resources. Yet even by industry standards, comfort zones are being breached. In search of quality assets, mining companies have extended their reach to some of the world's most precarious regions, including Mongolia, Guinea, the Democratic Republic of Congo, Mauritania and Afghanistan. To be sure, geographic expansion is not the only risky proposition mining companies are undertaking in their quest for growth. For example, some companies have picked up activity around their dumps in an effort to extract a greater percentage of metals and minerals. Others continue to explore the feasibility of cutting-edge mining-under ice, under water or within volcanic sulphur mines. This activity has two primary drivers: market demand and boundless optimism, which require companies to find new ways to manage risk as they continue to wander farther afield.
8. A tough environment: Climate change disclosure and adaptation are getting harder - The impacts on companies from climate change, water scarcity, land degradation and declining biodiversity are set only to rise. Indeed, because of these trends, regulators, investors and other key stakeholders increasingly expect heightened disclosure. In the absence of global reporting standards, however, this creates a significant challenge for mining companies. The failure of the Copenhagen Accord to set clear targets for the international reduction of carbon emissions has left individual countries or groups of countries to create regional and domestic schemes of their own. As a result, literally hundreds of climate change regulations and policies now exist internationally. And this is only half the story: Beyond measuring and reporting on environmental impacts, mining companies must also address climate change in the context of their overall enterprise risk management programs. From torrential rains and winter storms to population growth and water shortages, shifting climatic conditions introduce new business risks. To adapt effectively, companies must integrate environmental risk assessments into their overall risk management framework.
9. Working with no backbone: Inadequate infrastructure hampers growth - It can seem sometimes like the worldwide infrastructure shortage is targeted directly at the mining sector, given that mines cannot operate without access to adequate transportation and secure supplies of both water and energy. Seen in its larger context, however, it becomes clear that inadequate infrastructure stands to affect businesses in virtually every sector and individuals in all walks of life. Many government stimulus packages introduced following the global financial crisis tried to allay some of these concerns, yet it will be decades before key industries like mining will begin to reap the benefits of these investments. In the interim, financial losses are mounting. To address these critical infrastructure gaps, some mining companies are exploring ways to build out core infrastructure in the locations where they operate. They are entering partnerships to construct railways and ports, investing in power plants to secure the supply of electricity and evaluating investments in sources for alternative energy generation. While these solutions introduce risks of their own, many mining companies find themselves choosing between the lesser of several evils.
10. Rethinking industry fundamentals: Exploring new revenue opportunities - Although the business of mining has itself stayed fundamentally unchanged over time, the context in which mining companies operate has shifted radically. Today, companies must contend with a slate of new issues that never existed in the past-particularly in the context of pending water shortages, energy shortages, and the need for enhanced environmental stewardship. Yet although these issues raise new risks, they also present new opportunities for companies willing to think creatively. Ways mining companies can transform current risks into rewards include: turning coal into carbon offsets, providing the energy of the future (electricity and nuclear), investing in renewables, and recycling waste.
For a more detailed discussion of each of the Top 10 issues that Deloitte's global network of mining professionals believe will influence the mining sector most in the coming year, the full report is available at www.deloitte.com/ca/mining-trends/.