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Challenges facing the mining industry reach unprecedented levels


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22 December 2011

‘Volatility is the new stability’ for the mining sector according to Tracking the Trends, a new report from professional services firm Deloitte, which looks at ten of the top issues affecting the global mining industry in 2012.

Tim Richards, Deloitte’s Australian Mining Leader, said that while many of the issues covered will be familiar ones, their increasing prevalence in what is a rapidly shifting social, economic and political environment means the challenges confronting the mining industry are rapidly approaching an unprecedented level of extremity.

“The mining sector is facing a perfect storm of converging global forces,” Mr Richards said. “The unrelenting rises in the cost of doing business, unprecedented commodity price volatility and an ever-tightening regulatory environment mean mining companies will increasingly need to seek out unconventional solutions if they are to overcome these challenges.”

Mr Richards said the looming skills shortage, the cost of doing business and increased capital project risk were just some of the major challenges facing the mining industry on both a global and domestic front.

Labour shortages

“The simple truth is there are not enough workers to meet the demands of our projected industry growth.  The report predicts capital expenditures in the Australian mining sector are likely to reach AUS$55.5 billion for 2010-11, before rising to AUS$73.7 billion in 2011-12. Globally, it’s estimated to reach US$113 billion in 2011, 50% above the previous year. Given the acute shortage of key talent, delivering on all these projects may prove impossible.

“Each year, the skills gap extends to a wider range of functions – from capital project designers and mining geologists to truck drivers and machine operators.  It’s time for mining companies to tackle this issue in a more systematic fashion and pursue longer-term, farther-reaching and perhaps less conventional solutions or they risk the chance of imminent operational disruptions.”

Deloitte’s recent report A New Immigration Paradigm also suggested that if governments and business were to address the skills shortage, they needed to seek out innovative solutions that moved beyond their own borders and engaged foreign governments, such the introduction of a skills visa.

“Our biggest mines are located in more remote regions and the industry needs to find a way to give these locations more family appeal.  There are many workers who are prepared to fly in/fly out of a mine site for a period of time, but most won’t be prepared to do it forever. As our recent discussion paper Where is your next worker? suggested, if the industry starts working with these remote communities to provide things like schools, hospitals, reasonable housing and the infrastructure families need and expect, they are more likely to achieve a stable workforce,” Mr Richards said.

The cost of business

Mr Richards said that with commodity prices surging to all-time highs, accelerated production has become the mantra of most mining companies.

“High commodity prices are driving shortages in equipment, labour and other key inputs, pushing costs up. This means mining companies must walk a tightrope between ramping up volumes to meet demand and containing their costs.

“Many mining companies can absorb the effects of these cost increases but that is not a sustainable business strategy.  Eventually prices will fall but production costs are unlikely to decrease by an equivalent proportion,” Mr Richards said.

“While commodity prices are peaking, most mining companies won’t feel pressure to introduce cost cutting measures, but forward thinking companies who can implement long term cost efficiency measures now will realise a huge benefit and sustain the resilience of their operations going forward.”

Increased Capital Project Risk

Mr Richards said the number of capital projects across the global mining industry was on the rise as the gap between supply and demand continued to widen, however, executing these projects become more difficult every year.

“Escalating costs, talent shortages and competing infrastructure builds will make it very difficult for mining companies to complete their capital projects on time and on budget. These types of cost and time overruns can create significant risks for miners, including the danger of scaring off potential investors.

“The impact of rising costs is forcing many companies to go back to the market to raise more funding and, in the face of missed project deadlines and cost overruns, those funds are becoming increasingly difficult to come by,” he said.

NB: See our media releases and research at www.deloitte.com.au


The Top Ten Issues:

The cost of doing business: What goes up does not always come down. With commodity prices surging to all-time highs, accelerated production has become the mantra of most mining companies and costs are going up across the board. The report offers some strategies for getting costs under control: understand cost drivers, improve capital project management, enhance energy efficiency, lock in supply, and spend to save.

Commodity price chaos: No price stability without great transparency. Have commodity prices been reset at a higher level or are we at the top of a bubble that’s about to burst? Indisputable indicators to help answer this question are sorely lacking. Making informed decisions in this highly uncertain environment requires a level of forecasting many companies lack.

The battle to keep profits: Government taxes target the mining sector. The bid to increase national revenues now extends beyond the introduction of new tax legislation. To maximize investor returns and manage political uncertainty, companies must engage more consistently in financial modelling when choosing jurisdictions and engage at a political level to help influence government policy.

Restless stakeholders: The demand for heightened corporate social responsibility. Industry stakeholders are finding themselves subject to higher levels of activism than ever before. To meet the demands of a broad stakeholder base, mining companies will need to integrate risk-based corporate social responsibility strategies and develop and track key performance indicators with the same diligence they use to track production.

Labour pains: Bridging the precarious talent gap. There simply are not enough people to power projected mining company growth, and each year skill gaps extend to a wider range of functions. Steps companies can take to find willing workers include applying science to workforce planning, introducing industry-level cross-training, and building a global culture.

Capital project quandaries: Project risk rises as the supply/demand gap widens. As commodity prices fluctuate and the gap between supply and demand widens, the number of capital projects across the globe is mounting in the mining sector. Mining companies must now focus on managing risks that could interfere with their ability to meet steady-production objectives.

Non-traditional financing: New sources of funding require new levels of knowledge. Despite the cash companies have on hand, finding sufficient capital to fuel growth remains difficult. The key to success in these efforts hinges on the mining companies’ ability to build the relationships they require to gain access to foreign markets, while gaining better insight into those regions.

The big get bigger: Risk multiplies as companies diversify. Dwindling access to deposits, deteriorating grades, spiking global demand and lofty commodity prices have heightened mining companies’ appetite for geographic and economic risk. Yet few companies possess the internal skills to grow their capital project portfolios aggressively or to operate in unfamiliar regions.

Volatility is the new stability: Planning for the unforeseeable. Although “black swan events” are by definition rare, high impact, and hard to predict, they are finding their way onto corporate agendas. Preparing for these unanticipated surprises is likely to require more of a creative license than mining companies are accustomed to exercising.

Legislative Olympics: Countries compete to become the world’s toughest regulators. Nations around the world have been ramping up their regulatory initiatives, and many are increasingly focusing on the mining industry, heightening the need for mining companies to review their regulatory compliance procedures.

Last Updated: 

Contacts

Name:
Tim Richards
Company:
Deloitte Australia
Job Title:
Lead Audit Partner and Mining Leader – Western Australia
Phone:
Tel: +61 8 9365 7248, Mob: 0437 009 416
Email
atrichards@deloitte.com.au
Name:
Phil Hopwood
Company:
Deloitte Australia
Job Title:
Partner, Global Mining Leader
Phone:
Tel: +61 3 9671 6461
Email
phopwood@deloitte.com.au
Name:
Eileen Kerrigan
Company:
Deloitte
Job Title:
Corporate Affairs & Communications
Phone:
Tel: +61 3 9671 6910, Mobile: 0412 499 683
Email
ekerrigan@deloitte.com.au

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