Doing Business Beyond Borders

Canadian Mining Journal is pleased to provide you with its first Business Beyond Borders issue: a comprehensive and insightful look at Canadian mining companies working abroad. Corporate Social Responsibility is naturally the underlying theme of the issue but in addition to CSR and its determining impact on the success or failure of many projects around the world, CMJ is also pleased to feature a series of articles written exclusively for this issue by the Canadian Mining and Metals Practice Team of Ernst & Young. The Team’s experience and understanding of conducting business in foreign lands is second to none and CMJ is pleased to include The Team’s comments to this issue. Rounding out the Business Beyond Borders theme are two profile articles featuring Barrick Gold Corp, one of the country’s leading offshore miners, and BioteQ Environmental Technologies, a small company taking big steps into the international market. In all, we trust you will find this issue informative and worthwhile.

Here’s what the experts say about working offshore

As we bring 2010 to a close, it’s clear that growth has been the theme of the year. By putting the global financial crisis behind us and moving closer to economic recovery, we’re witnessing the return of confidence in the mining and metals industry. Strong earnings over the last six quarters have left balance sheets in a healthy position much faster than expected, and mining and metals companies are once again aggressively pursuing expansion. And they’re not just looking for opportunities within their own countries, their reach is extending globally. With growth the key to future competitiveness and in high demand by shareholders, companies are acquiring new and diverse resources offshore.

With capital near impossible to obtain during the global financial crisis, many companies delayed capital expeditions and weren’t spending on exploration (the research and development (R&D) of the mining industry) as a means to conserve cash. The most profound effect of the global financial crisis on the industry is that the world has lost as many as two years of growth in the supply of the scarce resources. By putting off R&D investments, companies have inevitably stimulated a growing supply shortage with increased commodity prices forthcoming. Despite the lack of capital in 2010, growth remains an imperative in an industry that is forever dealing with depleting assets.

Although the industry is seeing a rise in confidence and growth, new global opportunities introduce new risks with the ability to hinder revival. Ernst & Young’s annual report, Business Risks Facing Mining and Metals, uncovers emerging challenges that are becoming more acute as the growth agenda returns. Wrought with cost, consolidation and capital risks in 2009, this year supply-side capacity issues dominate the risks list for mining and metals companies. In this issue, our Canadian team addresses some of the risks and trends currently affecting the mining and metals industry.

Despite a strong outlook for the sector, banks are still generally unwilling to lend, and capital allocation is surfacing as the number one risk for the sector. Price volatility, cash flow, risk appetites and availability of capital during the recent financial crisis have all made decisions on how to allocate capital and drive growth more complex. Since debt is still unattainable to many, we’re witnessing transactions coming together in unique ways, including joint ventures and strategic partnerships, particularly with Asian investors and sovereign wealth funds. As recent mining and metals transactions — including Red Back/Kinross and Goldcorp/Andean Resources — illustrate, a number of companies are allocating capital by acquisition via “friendly” equity deals.

Resource nationalism has also climbed the risk list in 2010, as the resilience of mining and metals makes the sector a target of global governments to replenish national treasuries. Mineral-rich countries are now working to ensure they are extracting sufficient rent for the right of mining companies to exploit their resources. This global increase in resource nationalism threatens to diminish interest in certain international jurisdictions as it places a large cost burden on mining and metals companies and can influence the stay-or-go debate in times of depressed margins. Since mining is a long-term commitment and a relatively inflexible investment, changes to government rents have the potential to force management to curtail expansion, limit or reduce exploration or abandon new projects.

Another re-emerging industry concern worth addressing is the advancing skills shortage. Concern with the availability of skilled workers looms over the recovering mining and metals industry as mine production ramps up to meet renewed demand. Today, employment cutbacks following from the economic recession pose new problems as companies reabsorb the workforce. Although companies are beginning to restore previously eliminated positions, a large number of industry workers appear to have exited the sector completely. Faced with the additional threat of an aging population, the Canadian mining and metals industry alone is predicting a labour shortfall of between 60,000 and 90,000 by 2017. And the challenges aren’t specific to Canada. With less than 1,000 mining engineer graduates per year on a global basis, and an increased competition from global companies for skilled talent, this is an ongoing risk the mining industry needs to address head on.

Despite the many risks involved when investing beyond our borders, there are many strategic advantages for Canadian mining and metals and multinationals looking to invest in Canada. Relatively speaking, Canada has a stable domestic economy and has been the best performer among the G-7 in gross domestic product growth over the 2005-08 period and is expected to remain so through 2009-10. Our financial institutions are some of the strongest in the world, and are the least likely to require a government bailout in the event of a major economic downturn. The North American market is serviced through a well-integrated transportation system, which is among the world’s best, making the infrastructure access risk more manageable. Automated permit ports, transponder identification systems and joint processing centres are being tested and deployed for easy movement of goods. Not to mention our trade agreements within North America, close historical ties to Europe, and close proximity to the Asian market, which uniquely position Canada to gain from the long-term potential of global economies.

It’s clear that the global mining and metals industry is entering a new era of both challenges and opportunities. But what does this mean for Canada’s mining industry? There has been, is and will be intense competition for Canadian-based assets, whether they be from Canadian or internationally headquartered multinationals. With 59 TSX-listed companies with a market capitalization of greater than $1 billion as of September 30, 2010, Canadian companies remain a significant global player in the industry. Both successful risk assessment and risk taking will be the key to successful growth. Companies who will fare best in today’s mining and metals business environment will do so because they are best able to optimize the risk and reward equation for the strategic and operational issues that accompany foreign investment.

CMJ