Grant Thornton has released its latest International Mining Report, surveying 389 mining executives across the globe in an effort to discover their thoughts on industry trends.
What it found is a heightened optimism surrounding business prospects across the board.
Behind this optimism is the expectation that commodity prices will continue to rise this year, with 54 per cent of those surveyed indicating to this effect.
“It’s a challenging time for the sector,” Mark Zastre, global industry leader mining Canada, said.
“But growth can return; the risk-return equation will change once investors develop a renewed enthusiasm for potential high returns that few other opportunities offer.”
Aiding this growth are significant improvements to processes with automation and technology developments delivering efficiencies.
Miners’ global expansion movements are also improving supply and assisting the discovery of new resources.
The role government plays in constraining growth and delaying projects across the globe heavily impacts miners’ performance and investor confidence.
While the report found that most miners are confident about the location of their assets, 42 per cent nominated increased government involvement as a constraint to growth.
While Australia doesn’t have the same unpredictable level of sovereign risk as other mining nations around the world, it does have its own level of resource nationalism in the form of the mineral resources rent tax (MRRT) and the carbon tax.
“Whether it’s through resource nationalism, special mining taxes or the gradual creep in taxation, governments are looking for a larger share of mining company profits,” Deloitte’s Queensland mining leader, Reuben Saayman, said.
At the time the company explained that "increasing and unpredictable government intervention across the globe is adding further complexity to a sector that is already heavily laden with risk.
"The shadow of higher taxes, restrictive regulation and indigenisation looms large for an industry already grappling with the risks normally associated with exploration and extraction,” the company stated in its previous report Facing an uncertain future: Government intervention threatens the global mining sector.
Former Rio Tinto chief Tom Albanese has also spoken out against nationalisation, encouraging governments to look towards royalty schemes instead.
He said there is a massive debate on whether it is best for governments to gain their revenues via taxation and royalties, through partial operational ownership, or a combination of both.
The growing global threat of resource nationalism was rated as the number one fear for miners in an Ernst & Young report released last year.
In its report entitled Business risks facing mining and metals 2012-2013, global mining and metals leader for Ernst & Young, Mike Elliot, said "resource nationalism retains the number one risk ranking as governments seek to transfer even more value from the mining and metals sector".
This has been a huge rise of the factor in the last five years, after it was only ranked number eight on the top ten risks list, and is only one of five risks that have remained in the list during this time.
The level of bureaucracy, red tape and green tape involved in permitting or licensing procedures was also cited for limiting the growth of many miners.
Late last year Bob Katter's son, the member for Mount Isa Rob Katter, tabled the Environment Protection (Greentape Reduction) and other Legislation Amendment Bill 2012 to unlock the land to miners, Australian Mining reported.
A major focus of the bill is the "streamlining and clarifying [of] information requirements".
It also seeks to combine the single application requirements that previously applied separately to mining and chapter 5A projects.
Murray Hutton, technical manager at Geos Mining previously told Australian Mining that cutting costly bureaucratic processes like this will go a long way towards assisting junior miners and explorers in their early phases.
“State governments are placing more bureaucratic, OH&S and environmental obstacles in their way, which takes up a large slice of what little funding they have,” he said.
Urging for collaboration between the state governments, Hutton recommended a standard set of mining and exploration procedures needs to be drawn up.
“The various State governments really need to get together and come up with a standard set of procedures with regards to mining and exploration. At Geos Mining, we have dealt with projects in all States of Australia and coming to grips with differences in the rules and regulations between States is an administrative nightmare,” he said.
Mounting labour and energy costs has resulted in the likes of the Queensland Resources Council and mining magnate Gina Rinehart to call for wages to be made more realistic.
The QRC said the sector's current wages are too high and are unsustainable.
"I know we're all enjoying them at the moment but they are not sustainable," QRC director of economics and infrastructure David Rynne said.
Rinehart recently admitted advocating reduced wages has not helped her in the popularity stakes, especially as she is currently listed as Australia’s wealthiest person, but she explained it is important for the country's mining future.
"I know people hate me saying (it), but their wage rates are so much lower over there and they're lower in lots of countries, like Indonesia, for instance, which is a coal mining country we're competing with," Rinehart said.
"Once you see . . . very wealthy resources countries in Africa opening up, they're going to be horrific competition."
According to the International Mining Report, 55 per cent of those surveyed expect labour costs to increase this year.
Mining in Australia is only getting more expensive; costs are being driven up by the high cost of labour and compliance, and the introduction of the carbon and mining taxes, as well as Queensland's royalty hikes.
The difference this year however is that commodity prices are not expected to support such high operating costs as they have in the past.
While commodity prices remain well above the 2008 lows, they have shown a pattern of decline in the last year.
Add to this the rise of natural gas use in the US which has resulted in a drop in the demand for coal, and an increase in the amount of US coal being exported from the States to Europe and Asia, American coal is in direct competition with Australian coal.
Late last year American coal conglomerate Alpha Natural Resources even credited Australia's rising costs for the US’ boost on the global coking coal market.
"The fact is that their cost inflation has been so rapid that it is actually improving the US' relative position in the global seaborne metallurgical market," the group’s vice-president of investor relations, Todd Allen, said at the time.
Allen said that recent cost inflations have far outstripped that of the US and Canada, attributing the rising costs to changes in federal and state government regulations and the inflated cost of labour.
"Queensland has just levied a new royalty on metallurgical coal that can increase the cost of production by several dollars per tonne.
"You've [also] got the carbon tax and Mineral Resource Rent Tax,” he said.
Nikki Williams, CEO of the Australian Coal Association, recently told SBS that the Australian coal sector is at "a terrible junction where not only has the international market come off in terms of prices, but our costs and productivity have gone to a terrible place”.
Williams added that until recently Australia was the world’s cheapest place to produce coal.
“Yet in just five years, we’re now the highest cost producer in the world at $176 a tonne compared to the rest of the world at $106,” she said.
But it isn’t all doom and gloom, according to the Grant Thornton report opportunity is plentiful when it comes to improving operations and counteracting rising costs.
Among the opportunities mentioned the report suggests using strong cost controls, a skilled workforce and efficient supply chains as drivers for growth.
Challenges all around
Mining is susceptible to global economic ebbs and flows.
Sluggish economies can keep risk-averse investors benched which means miners need to begin looking beyond usual equity funding options like shares in order to raise the capital required for projects.
An increased level of government intervention is a particular concern for Australian miners, the report found.
“Federal Government intervention is such a key issue here in Australia,” Grant Thornton national head of energy and resources, Simon Gray said.
“The current government is doing little to support exploration companies, and it doesn’t really have the interests of junior miners on its agenda.”
This is of concern because a reduction in exploration activities can potentially impact not only future discoveries but the viability of the entire industry.
Within the Australian cohort of executives surveyed, the report found that 84 per cent believe government should be doing more to increase exploration assistance and provide incentives for juniors.
The response is particularly significant when two thirds said they were also planning to increase exploration expenditure.
“I don’t think the industry has reached its peak potential… there are still vast areas of the world that are virtually unexplored. There is a lot of opportunity out there,” Gray said.
Ore bodies are trending towards lower qualities and deeper depths, becoming harder and more costly to extract.
Add to this rising input costs, extended licensing processes, and uncertain commodity prices and investors will go to ground, the company explains.
But challenges can be overcome by developing and implementing strategies to adapt to rapidly changing local sentiment and regulatory environments.
The report explains that in order to protect an organisation from these challenges a thorough understanding of risks affecting assets, operations and supply chains needs to be developed.