Deloitte 2013 Mining Trends

Deloitte’s Tracking the Trends 2013 report makes two things clear: companies need to be more strategic, but must continue to invest.

Before companies decide where to locate themselves and which projects they should pursue, they should take a wider range of factors into account, including shifting legislative and political realities, community expectations, infrastructure needs, the risks associated with corruption and fraud, talent requirements and the availability of key resources like energy and water. Considering these issues requires a level of analytical capability that many companies currently lack, Deloitte’s report states.

As the more comfortable and convenient locations get mined out and miners are forced to deal with falling grades, companies are increasingly moving to remote locations. Deloitte’s report lays out how doing so intensifies many existing challenges.

Take skills shortages, for example. That trend is continuing and is not expected to be resolved any time soon.

“With mining companies postponing projects or slowing down production, the immediate pressure on the labour force has eased in some jurisdictions. This won’t last,” Deloitte’s report warns.

Furthermore, many people do not want to relocate to remote regions, with younger people specifically resisting the idea of raising families in mining towns or while subject to fly-in/fly-out arrangements. The report further warns that mining companies need to be increasingly strategic in their plans to access the necessary labor forces. While many companies, especially majors, have used more attractive wages to help alleviate such problems, according to the report, at some point that tactic will become unsustainable.

Deloitte also notes that infrastructural investments are required in both developed and developing nations. However, operating in more remote locations increases the burden on miners.

“Individual companies cannot continue to build their own roads, generate their own power and pipe their own water,” the firm states in its report.

Mining companies are advised instead to improve collaboration by working with governments, communities, NGOs and corporations within multiple industries to change the economic dynamics and risk-sharing models that govern these massive infrastructure projects.

Remote locations mean more responsibility for mining companies

Although mining companies are moving to more remote locations, authorities have not ceased to focus on how they operate. On the contrary, Deloitte notes that miners are being held to higher anticorruption standards. In many cases, that means companies must assume responsibility not only for their own behavior, but also for that of third parties, such as suppliers and contractors.

There are also increasing demands for corporate social responsibility (CSR).

“[O]ver time, mining companies will need to commit a higher level of responsible behaviour by incorporating sustainability in their internal metrics, their capital project methodologies and their negotiations with with local communities, governments, NGOs and regulators.”

“These are not programs that can go on cruise control; you need a pilot constantly at the helm,” Hector Gutierrez, Deloitte’s energy and resource leader for Peru, said in the report.

Innovation, greater efficiency required

While Deloitte notes that mining companies are increasing their technological investments, the firm suggests that there is a need for more innovation.

People are increasingly turning to the internet to get information and to communicate about mining companies and their activities. But Deloitte states that the majority of the content available is delivered by opponents to mining. The firm advises companies to develop social media strategies and to take other steps to put a more human face on their organizations.

Deloitte outlines that the benefits of innovation extend well beyond public relations.

“New data analytic capabilities enable mining companies to take hundred — or even thousands — of contributing factors into account when allocating their portfolios, assessing their cost drivers, predicting project success rates, identifying third-party relationships, mitigating risk and uncovering the causal factors of safety incidents,” the report states.

Yet, the firm attributes much of the operational inefficiency within mining companies to the failure to leverage basic back-end technologies.

Deloitte points to such inefficiency patterns in mergers and acquisitions, stating that companies often fail to integrate their disparate technology systems. Many end up with incompatible systems that operate in different languages and include duplicate data on different servers. This doubling up complicates efforts to produce consolidated, accurate financial reports and means many companies leave cost savings of up to 15 percent on the table.

However, the mining industry does not appear able to dismiss such financial inefficiency. For the second year running, the high cost of doing business tops Deloitte’s list of mining industry trends. But unlike last year, commodity prices are not supporting the weight, the firm states.

Companies are facing higher taxes, royalties and resource rents while the costs of environmental and CSR programs is rising. Wages are also rising. Currency volatility relative to the US dollar is driving up costs for items such as specialized equipment and raw materials.

“Margins are once more under pressure and threaten to remain so as costs escalate across the board,” states Deloitte. “Capital project costs are also spiralling.”

But Deloitte notes that the external cost environment is not completely to blame for cost overruns and schedule slippage, which are alienating lenders and shareholders.

“While companies cannot control external price pressures, they can prevent costs from escalating due to internal operational inefficiency,” states Deloitte.

Demand not certain

While attempting to manage costs, miners must also deal with demand uncertainty.

Events in China frequently have a disproportionate effect on the rest of the world, notes Deloitte, adding that this statement is particularly true for mining companies whose fortunes have hinged on China’s voracious appetite for commodities.

In addition, the global macroeconomic picture is casting further gloom on the near-term outlook for nations such as Brazil and India, which are expected to see declining industrial production. Meanwhile, the US is muddling through a weak recovery and the Eurozone is attempting to manage a regional crisis.

However, Deloitte points to factors such as urbanization and population growth as presenting a bullish case for commodities.

But many miners have responded to the current conditions by resequencing and deferring projects, reassessing their project pipelines and placing marginal mines into care and maintenance. Deloitte states that capital spending will likely fall in 2013.

That poses risks to the industry as players in the mining business are supposed to operate with a long-term view. That means investing today for the demands of tomorrow. Companies should not refuse to expand, but rather should expand more strategically, according to Deloitte.

For example, the firm states that using profits to build mines that will yield lower-grade deposits ultimately destroys corporate value. “Increasingly, shareholders and lenders are taking note of this trend and are no longer willing to finance speculative long-term projects.”

Mining companies can no longer lay claim to a deep portfolio of expansion projects when only a percentage of them are viable, Deloitte notes.

“Volume growth is no longer a measure for success,” Abrie Olivier, Deloitte’s mining industry leader (advisory) for South Africa, states in the report.

“Projects need to earn their keep and only the highest quality projects will get the green light,” Carl Hughes, global head of energy and resources at Deloitte, commented.

Companies must keep investing

Deloitte warns that indecision could lead to supply constraints in the near term. Companies that fail to pursue capital project expansion or that make only marginal investments may face more than commodity market price penalties, the firm warns. They may also threaten the industry’s ability to meet future demand in a cost-efficient manner.

Deloitte insists that companies must continue to invest, which raises the question of capital and where mining companies will find it. This report is the latest to forecast the increasingly important role of Asian investors.

Equity and debt investors are largely opposed to financing development assets, and with majors as unlikely buyers, Deloitte states that the best recourse for financing is to look to Chinese, Korean, Japanese and other Asian sources of development capital.

However, companies should note that attracting this capital requires extensive planning in addition to “significant patience as well as an intricate understanding of local customs, cultures, languages and relationships.”

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.