Mining industry must balance rising short-term volatility against critical investments needed to meet long-term demand
New York, NY, 29 November 2012 — A series of immediate challenges facing the global mining sector – including rising costs and increased demand uncertainty – should not deter miners from making investments today to fulfill future global commodity requirements, according to a new report from Deloitte Touche Tohmatsu Limited (DTTL) released today. Tracking the trends 2013, which provides commentary and analysis of the top 10 issues most likely to impact the mining sector in 2013, predicts the companies that will thrive into the future will be those that set a solid strategic direction and hold the course amidst shifting industry realities. The annual report also provides a range of responses that companies can adopt to prepare for shifting industry dynamics.
Now in its fifth year of distribution, the DTTL report notes that an ever-increasing wave of volatility — including declining commodity prices, mounting cost pressures, the persistent Eurozone debt crisis and China’s economic slowdown — has led some companies to put projects on hold while others have pursued richer deposits and higher yields through projects in some of the world’s toughest geopolitical and operational environments. Coping with such a challenging situation requires a sophisticated level of analytic capability that many mining companies fall short on.
“The endemic factors impacting the global mining industry pose serious implications for meeting future demand and profitability,” said Philip Hopwood, DTTL Global Mining Leader. “In the face of shifting industry dynamics, mining companies must determine where to focus during volatile times. An often overlooked way to improve their operations and reduce costs is to ensure they get the most out of existing and emerging information technologies.”
“For the second year in a row, mounting costs tops the list of the key issues affecting the mining industry” added Glenn Ives, Americas Mining Leader, Deloitte Canada. “This is expected to worsen in the short term as commodity prices continue to dip, workers demand higher wages and regulatory costs rise. But rather than halting production in the face of shareholder demands for more immediate returns, miners should be making investments today to meet the expected long-term demand for commodities,” he added.
Here are the top 10 issues the mining sector is expected to face in 2013, along with some responses companies can adopt to deal with them:
• Higher costs: This remains the number one trend for the second year in a row. Currency volatility, high operating costs, and lower grades are affecting decisions around continued production, expansions and the delinking of corporate equity from commodity prices. 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.
• 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: Although mining executives are hesitant to authorize new capital expenditures at a time of tightened margins and ongoing pressure to pay shareholder dividends, the report suggests 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.
• Increased M&A volumes: As a result of limited debt financing, some mining companies are seeking to enter deals pre-emptively with partners of their choice through “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.
• Resource nationalism: 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.
• A new level of responsible behavior: 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.
• Skills shortages: 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 fulfill different functions, recruiting from non-traditional labor pools, sponsoring university programs and engaging in workforce planning.
• Analytics to improve safety outcomes: 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 modeling and apply new analytical tools and technologies to existing processes to improve preventative maintenance, identify at-risk segments and improve safety outcomes.
• Getting the most out of emerging — and existing — technologies: 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.
The DTTL report concludes that mining companies that proactively resolve these endemic issues will be better able to meet future commodity requirements despite today’s volatile conditions and are likely to increase their role in the advancement of local communities, support of undeveloped economies and growth of jobs and skilled talent around the world.
To view the report, please visit www.deloitte.com/ca/mining-trends.
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