Published: 13 March 2013
It is important for mining companies to take more sophisticated portfolio allocation decisions because of on-going macroeconomic issues, commodity price volatility, waning short-term demand from industrializing nations and restricting access to capital on favourable terms, according to the Deloitte Touche Tohmatsu Limited (DTTL) Tracking the trends 2013 report, which provides an analysis of the top 10 trends that are expected to impact the mining sector.
This is the fifth year for Deloitte to launch this annual publication. Beyond highlighting key industry indicators, this year's version shares a range of responses companies can adopt to prepare for shifting industry realities.
"As commodity prices decline and global economic uncertainty persists, it is harder for mining companies to predict future demand patterns. Companies are deferring their expansion projects in the face of waning Chinese demand, yet world demand promise to increase dramatically in the coming years," said Mr. Philip Hopwood, Global Mining Lead, Energy & Resources, DTTL, "With cost pressure mounting and talent shortages on-going, companies must assess the viability of a more complex series of options. Investments will be necessary to enable companies to weather more severe volatility."
The report has identified top 10 trends along with proposed solutions to handle some prevailing challenges:
- Counting the costs: For the second year, the high cost of doing business tops the mining industry trends. Energy and water shortages in manage of the world's mining provinces, together with new taxes, royalties and environmental mandates, are putting costs pressure to mining companies. To get costs under control, mining companies must pinpoint their cost drivers, automate, improve asset efficiency with analytics, improve their operating model and streamline the supply chain initiatives.
- Managing demand uncertainty: China’s deceleration of growth, combined with the widening gap between its official global demand data and observable reality, has adversely affected commodity prices and investment decisions. Rather than halting production and risking an inability to meet future demand, mining companies should consider applying game theory to enhance their scenario planning to guide their capital project decisions.
- Capital project deceleration: Tightened margins and on-going press to pay shareholder dividends have prompted mining companies to defer new capital expenditure. However, the report suggests that the correct response may be less about freezing projects or waiting until commodity prices and government intentions settle and more about making disciplined investment decisions through such measures as project rationalization, improved capital efficiency, data analytics and project delivery quality assurance.
- Preparing for the M&A storm: As a result of limited debt financing, mining companies are looking for other capital-raising alternatives, including mergers and consolidation. This has encouraged a move toward "proactive and rescue M&As," with transaction volumes likely to rise into 2013 and Asian investors remaining frequent providers of development capital. To improve the odds of transactional success, the report suggests engaging in more comprehensive due diligence to assess potential partners and planning in advance for the integration.
- Governments eye the mining prize: Governments around the world are exercising several forms of resource nationalism, from mining industry privatization and expropriation to windfall taxes, resource taxes and export controls, making it harder for mining companies to accurately forecast production schedules, understand long-term risk profiles or develop models to guide decision making over time. Miners need to work to strengthen their relationships with national governments, diversify their commodity mix and geographic area of focus, and demonstrate the industry’s value to local governments and citizens.
- Combatting corruption: Mining companies are already adopting global transparency standards to counter the risks posed by corruption, but they will need even more responsible practices in the face of heightened regulatory scrutiny, both of themselves and their partners, suppliers, service providers, vendors, agents and intermediaries. Combatting corruption will require the adoption of strong corporate practices and procedures, including third-party relationship management, internal compliance programs, and investigation readiness.
- Climbing the social ladder: Corporate social responsibility extends beyond impact assessments and now requires meeting the expectations and demands from Non- Government Organizations (NGOs) and other relevant stakeholders, and operating with higher levels of transparency and sustainability. Mining companies will need to commit to a higher level of responsible behavior by embedding sustainability into their internal metrics, their capital project methodologies and their negotiations with local communities, governments, NGOs and regulators.
- Plugging the talent gap: While the immediate pressure on the labor force has temporarily eased in some jurisdictions as mining companies postpone projects or reduce production, the looming skills shortage in the long run remains chronic. Mining companies should tackle the skills shortage by strengthening their team’s skillset, re-training existing workers to fulfil different functions, recruiting from non-traditional labour pools, sponsoring university programs, and engaging in workforce planning.
- Playing it safe: The dangers associated with mining are on the rise, particularly as companies move to more remote and less hospitable regions. To better understand the factors that cause safety incidents, mining companies should implement predictive modelling and apply new analytical tools and technologies to existing processes to improve preventative maintenance, identify at-risk segments and improve safety outcomes.
- At the IT edge: Despite demonstrated willingness to innovate, many mining companies fail to leverage back-end technology, such as data analytics or properly integrating disparate technology platforms following an M&A. To improve operations while reducing costs, they should revisit their IT strategies and consider investing in programmable logic controllers (PLCs), supervisory control and data acquisition (SCADA) systems, manufacturing execution systems (MES), business intelligence systems, data analytics and advanced manufacturing systems.
"With recent declines in commodity prices and global economic uncertainty persisting, it is extremely difficult for mining companies to predict future demand patterns and commodity prices with a high degree of accuracy. In the face of waning short-term Chinese demand, some companies are deferring their expansion projects; yet in the medium to long term, world demand still promises to increase dramatically," said Mr. Jeremy South, Global Mining Advisory Lead, Energy & Resources, DTTL, "With cost pressure mounting and talent shortages on-going, companies must assess the viability of a more complex series of options. Furthermore, traditional debt and equity markets are not supporting mining projects, allowing Chinese groups to play an active role in asset development."