Tracking the trends 2012

Deloitte report: Difficulties afflicting the mining industry are rapidly reaching an unprecedented level of extremity

Moscow, December 16, 2011 - The Deloitte Touche Tohmatsu Limited (DTTL) Tracking the trends 2012 report, launched in Russia today, provides an analysis of the top 10 trends that are expected to impact the mining sector at an accelerated rate in 2012.

The shifting social, economic, and political trends are affecting the mining sector at unprecedented levels of extremity, forcing mining companies to incorporate more complex scenarios into their strategic planning, according to the report.

“The factors influencing the global mining industry are moving to a new level of extremity, impelling companies to consider more sweeping scenarios than ever before,” said Philip Hopwood, Global Mining Lead, Energy & Resources, DTTL. “Mining executives must look beyond the traditional scenarios they have used in their planning. They must be willing to seek unconventional solutions to their conventional challenges if they truly hope to resolve some of the industry’s most endemic issues.”

“The energy and resources industry is strategically significant to Russia’s economic well-being,” commented Russell Banham, CIS Energy & Resources Leader. “The release of tracking the trends 2012 is a timely reminder of the key challenges facing the mining sector, especially in the current uncertain market conditions. How the local mining industry and government responds to these challenge will fundamentally impact Russia’s economic performance in the medium and long term.”

The top 10 trends as identified by the report are:

• 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 modeling 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.
• Labor 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.

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