Ongoing commodity weakness with little sign of respite, and a negative investment environment ahead, has created a continued poor market for mining yet tax burdens and stakeholder expectations remains just as high as during the boom.
This has created an extremely negative market as mining struggles through the bottom of the cycle.
“It’s an interesting time in the mining industry, just as during the super cycle, people imagined prices would go up forever, people now imagine the market will never recover,” Philip Hopwood, Deloitte’s Canadian and Global Mining leader said.
“Neither extreme is true, but cycle times are lengthening, which means it could take years to adjust to current market forces — but it’s still a cycle.”
As such miners are continuing to look ahead, building the foundations for the next upswing.
Going lean: Operational excellence remains front and centre According to Deloitte, miners are looking outside the industry to adopt best practices, a move that has been regularly advocate3d by BHP chairman Jac Nasser, who recommended looking to the automotive industry for best operational practice.
“In an effort to achieve true operational excellence, industry leaders are leveraging best practices from other industries and tackling difficult issues, including labour relations,” Deloitte stated.
Innovation: Preparing for exponential change The mining industry is in one of its greatest eras of technological change since the Industrial Revolution. The integration of automated and remote operations, as well as the rise of the Industrial Internet of Everything is changing how miners do business.
“Innovation is a critical theme for miners,” Deloitte explained. “However, many mining companies remain at the early stage of the adoption curve — placing most of their innovation focus on technological optimisation of old techniques rather than looking for new ways to configure and engage externally.
Deloitte laid out how miners can prepare for this evolution, stating, “short-term strategies miners should consider adopting include: enhanced innovation, collaborative ecosystems, digital workforce engagement, and improved asset management, aligning work processes with energy availability, 3D printing and modularisation.”
China’s transition: Looking for the silver lining
Of course, the driver of the last great boom is one of the major concerns is still an issue in 2016, despite its rapidly shrinking demand levels and a shift from a heavy production into a services and consumer economy.
“Given China’s influence on the global economy, miners should take steps to understand the global impact of the country’s domestic market trends — particularly as the Chinese Government follows an increasingly interventionist path,” Deloitte said in its report. “Concerns over currency weakness may spur Chinese enterprises to buy overseas assets over the short-term — including natural resources.
“To prepare for these incipient shifts, it would be worth miners considering extreme scenarios, developing plans relative to China’s investment initiatives and leveraging Chinese expertise in areas such as design, construction and financing.”
Adjusting to the new normal The days of the boom are gone, and will never be reached again, and as the market goes through a period of readjustment it will eventually find its level. Speaking at the Stockbrokers Association of Australia Conference, China Metallurgical Industry Planning & Research Institute’s president Xinchuang Li told Australian Mining that the bottom was reached, and there would be a plateau ahead.
“Commodity demand — particularly out of China — is down,” Deloitte explained, “but production is not falling. In fact, some producers have ramped up output to reduce unit costs, consolidate market share or avoid the costs associated with shutting down older mines.”
Preparing for inevitable change The mining industry is undergoing a period of somewhat forceful transition, as the old ways of doing business no longer suffice as the importance of social licences to operate become higher and sustainable business practices and energy development becomes prevalent.
The global move towards renewables has threatened the outlook for thermal coal. Although fossil fuels are likely to continue playing a critical role in the global energy mix, the move to alternative power sources is inevitable.
Changing the nature of stakeholder dialogues Earlier this month Rio Tinto chief exec for coal and copper, Jean-Sébastien Jacques, called for greater transparency in mining, and a change in the way miners work with communities.
Speaking at a Bloomberg Address in Sydney, Jacques said “licence to operate issues make or break mining companies in the future”.
“The weight of increasing stakeholder expectations can cost a company like ours time and money if not managed well.
“Society demands more and more transparency, openness and rigour in environmental performance and impacts.
“There is no doubt it is getting harder to bring new projects to life, brown or green field, and the winning mining company of the future will manage licence to operate issues with excellence,” he said.
Deloitte agreed, listing this as one of the major issues for 2016. “Old tactics no longer work. Instead, a new form of stakeholder engagement is needed — one that can demonstrably meet the demands of multiple groups,” it said.
“Miners should align their investments with the underlying needs of their disparate stakeholders to fully maximise opportunities.”
Starved of finance, miners struggle to survive The mining investment market is set to implode over the next three years.
Mining investment in Australia is set to decline sharply over the next three years, resulting in 20,000 job losses.
A new report by BIS Shrapnel – Mining in Australia 2015 to 2030 – predicts the current state of contraction to continue in mining, falling a further 58 per cent over the next three years.
“Attracting capital has become harder than ever, as segments of the industry continue running at a loss. In response, companies will likely continue to seek out alternative sources of financing — even when the terms aren’t entirely in their favour,” Deloitte explained.
Tax challenges will impact yesterday’s management To keep pace with the evolving tax environment, companies should take steps to understand the financial implications of these new tax rules, assess their operational and corporate structures, take a fresh look at their management and engage with government stakeholders — especially where tax rules related to stability or production agreements threaten to change, Deloitte stated.
The M&A paradox: To buy or not to buy Mergers and acquisitions always occur at the top and the bottom of the cycle, and currently mining sits in the trough of the market variation.
However despite predictions of a pick-up in mining M&A, deal values and volumes continue to run lower than expected. “In fact, the most active deal flow in recent years has come from divestments and rescue-type deals; to take advantage of these opportunities, miners may want to consider buying counter-cyclically and thinking twice before divesting,” Deloitte said.
An expanded view of corporate and personal welfare Safety is always key on any mine site, and this will not change “Industry risks related to both safety and security continue to grow, to enhance their safety records and security postures miners may want to strengthen their safety procedures,” it said.
Source: Australian Mining