Over the past few weeks Australian Mining has been analysing the top ten trends the mining sector is expected to encounter over the next 12 months.
Now, bringing it all together, it is evident a new year requires a new approach.
Navigating the year ahead will require fresh thinking.
Advisory firm Deloitte said it’s time for mining companies to change the way they do business, a difficult task for an industry which doesn’t historically cope well with change.
“It’s precisely what the market is demanding,” it said.
“While mining companies cannot change global economic trends, they can change the way they operate.”
This will take innovation around technology, community relationships, management practices and operational procedures.
It’s no secret mining has suffered from the rising cost of doing business.
With significant labour, production, equipment and regulatory costs all eating away at bottom lines it’s no wonder as commodity prices stabilise that miners are attempting to reign in and minimise runaway costs.
Major resources producer Shell flagged the high cost of doing business in Australia, saying it is affecting the nation’s competitiveness.
According to Deloitte the costs of adding capacity to an existing iron ore operation jumped from $100 a tonne in 2007 to $195 per tonne in 2012, while the poor old coal sector was hit even harder.
For thermal coal adding capacity rose from $61 to $176 per tonne over the same period.
Record commodity prices over the last few years also gave way to mining lower-grade deposits which in turn saw companies’ costs spike.
“Some gold projects yield less than one gram per tonne,” Deloitte said.
“With 75 per cent of new base metal discoveries hidden at depths in excess of 300 metres, this practice is pushing up strip ratios – reducing the economic sustainability of mining lower grades.”
Mining contractor Barminco’s managing director Peter Stokes told Australian Mining the industry’s current quest to reduce costs is also a response the declining ore grades.
In fact in the last year in Australia Xstrata's enormous Ernest Henry pit made the move to underground, while Chile's famed Chiquicamata – an operation that has been mined as an open cut for more than 500 years and even appears on the currency, is even moving underground.
"Tropicana is also a surface mine that will likely go underground to access higher grades, and even long term mines such as the Freeport-Grasberg mine in Indonesia is shifting; they spent 25 years doing surface mining and will now last another 40 to 50 years as an underground operation – these are massive operations making the move to underground and it bodes well for companies like us," Stokes said.
Closer to home Barminco has been working at AngloGold's Sunrise Dam for the past five years to help it move underground.
Importantly, he added, Australians also have the skills to make this shift, as they have the experience in creating decline mines, which are cheaper to develop than conveyor or shaft mines.
"Decline mining is definitely an Australian capability which is being pushed out (particularly in Africa), as declines are more cost and infrastructure advantageous compared to shaft mining," Stokes said.
In making the shift underground "it's all about how deep you go, and decline mining makes more sense going around one to two kilometres underground, however anything below that you'd look at conveyor or shaft operations," he told Australian Mining.
He went on to say that "we are seeing a great trend towards underground contracting, and the fact that our techniques are getting better is only helping this".
Working to bring costs back inline Deloitte said many miners will be forced to produce fewer ounces or tonnes at higher grades.
Throughout 2013 miners captured headlines with their cost cutting agendas and mass layoffs.
“Mining companies have retrained their focus on capital prudence, cost discipline, portfolio simpliﬁcation and non-core asset divestment in an effort to improve ROI,” Deloitte said.
“They are shrinking the talent pool, reducing executive compensation and limiting funding approvals to only the highest quality projects in mining-friendly geographies.”
But the advisory firm warned to avoid cost creep trends miners need to go beyond traditional cost cutting measures and revaluate entire operational models, cost structures and company culture.
“Reducing costs over the long term requires mining companies to prepare for a hard campaign of changing the way they do work. This, in turn, should spur them to look closely at their culture to determine if that needs changing too,” managing director of Venmyn Deloitte South Africa, Andy Clay said.
Deloitte said bucking the trend of one off cost reductions is important if miners wish to become and remain lowest quartile cost producers.
The advisory firm said implementing new technology including automation, using analytics to identify trends, rationalising supply chains, right sizing capital projects and transitioning to modular plants and projects are all strategies which can drive continuous improvements.
Iron ore, thermal coal and aluminium are all at risk of tipping over the edge into oversupply, Deloitte warns.
After years of unconstrained project development surplus supply and China’s impact on commodity markets are both factors set to make 2014 an interesting if not chaotic year.
“Government funding of aluminium production, for instance, is already pushing China’s aluminium costs down to a level that other producers can’t match,” Deloitte stated.
Ramping up its domestic production of gold and coal also has the potential to reduce China’s reliance on global imports.
Coupling Chinese influence with supply and demand dynamics, Deloitte said a serious commodity price devaluation could be on the horizon.
According to CIBC World Market forecasts by 2016 gold could hover at $US1383 per ounce,silver will fall to $US22.81 per ounce and copper will drop to $US3.17 per pound.
A new report from IBISWorld has highlighted a predicted boom in Australian diamond and gemstone mining in 2014, becoming the largest growth industry in the country.
Its study into the top five industry set “to fly and fall” in 2014 placed diamond mining at the top of the success list, predicting a 24 per cent growth in revenues year on year, increasing from $663 million in 2013 to $821 million in 2014.
This is a turnaround for an industry that was facing serious job cuts in Australia, with Rio Tinto only last year looking at a divestment of Argyle as part of the company’s wider strategy to get out of diamonds.
However the report was not all positive, listing mining exploration as one of the industries set for a decline in 2014.
This is no surprise for an industry that has already seen global exploration budgets take a massive hit.
Recent exploration budget slashings threaten to only exacerbate the demand and supply issues facing the mining sector.
Global non-ferrous metal exploration budgets have plummeted almost 30 per cent this year, new research suggests.
SNL Metal Economics Group’s Corporate Exploration Strategies surveyed almost 3500 mining companies around the world.
The group found total non-ferrous exploration budgets fell to $US 15.2 billion.
Major miners recorded a 24 per cent drop in exploration spend, whilst juniors took a bigger hit, with exploration budgets falling 39 per cent over 2012.
In Queensland alone explorers’ market capitalisation fell 31% in 2012-13 to $732 million.
Access to equity capital was listed as a significant problem with companies exploring in Queensland announcing $63 million in capital raisings in 2012-13, down 76 per cent in comparison to 2011-12.
Nationally, the amount of raisings was down 60 per cent in 2012-13 from $853 million to $342 million.
The latest IBISWorld report predicts the sector will continue to decline, falling another 7.5% over 2014.
“These adverse global conditions have suppressed world prices for the major commodity groups upon which the exploration industry depends,” Dobie said.
“The fall in investment in exploration also follows established miners shifting their focus from exploration to production.”
The number of troubled mining juniors is lifting and limited significant deposit finds means the sector’s nursery is shrinking.
“The resulting pullback in exploration budgets only threatens to widen the gulf between demand and supply and could ultimately tip the industry back into another heated production cycle, causing costs to careen even further out of control,” Deloitte said.
Looking ahead Deloitte’s Chile mining leader Christopher Lyon said despite short term laggings the long term fundamentals remain robust, reacting to short term conditions he says has resulted in companies mothballing projects, and capping capacity.
“Taken to its logical conclusion, this behaviour will tip the sector back into a scramble to build at any cost within the next five to ten years. It’s time to break this cycle by embracing new ways to do business,” Lyon said.
Declining ore grades and resource depletion is forcing miners into increasingly remote locations and pushing up production costs.
When realising innovation opportunities miners cannot simply layer new technologies over old operating models; rather current models may require complete operation overhauls.
“This will present both challenges and risks, but failure to innovate will result in greater risk over time – not only as costs escalate, but as more remote mining heightens safety risks,” Deloitte stated.
The company’s mining leader for Canada, Jürgen Beier explains that tweaking existing process will not deliver the sizeable changes required in today’s capital-constrained environment.
“To build true competitive advantage, companies must look beyond incremental performance improvement to determine how they can revise their systems to embrace the broad theme of innovation,” Beier said.
Innovation strategies for 2014 include automating processes and rethinking energy management, energy inputs account for between 40 and 60 per cent of a mine’s operation costs – thinking outside the box in terms of energy consumption can make a significant difference for miners.
Deloitte also explains that sharing infrastructure can also deliver economies of scale.
“By collaborating to achieve economies of scale (e.g. by building shared pipelines, water plants, power plants, etc.), companies can reduce costs while strengthening community relations in the process,” the company said.
A sentiment that was expressed by WA Premier Colin Barnett who said warring between resources companies over rail access and infrastructure deals is holding projects up more than government red tape.
Barnett said resource companies fighting over sharing infrastructure is one of the biggest hurdles in keeping projects to time and on budget.
Back in 2013 Deloitte’s Tracking the Trends report forecasted a competitive battle for funding with debt financing remaining tight across global markets throughout the year.
Tougher economic times have hit Australia’s shores and many miners are no longer equipped to bear the brunt.
Deloitte explains poor returns on mining stocks in recent years have pushed companies out of favour with investors, adding that traditional lenders are also pulling away from the mining sector.
“While bank ﬁnancing is still available, falling market capitalisations prevent companies from qualifying for the amount of funds they need to fuel growth,” Deloitte said.
With funding drying up, miners are increasingly turning to debt markets with BHP, Rio and Newcrest among the majors who signed off on substantial loans in the past six months.
“Widespread ﬁnancial crisis at the junior level could also cause a rash of unintended consequences, potentially driving shortfalls in commodities that majors no longer produce,” Deloitte stated.
The advisory firm explains that all these variants are coming together to create a “buyer’s market” that is full of opportunity.
But the problem is M&A activity is proving to be limited and interest from Chinese investors is lagging with it.
“While China still believes in owning more supply, it is currently struggling to cope with past deal ﬂow and internal issues,” Deloitte stated.
“As a result, Chinese investors are likely to conﬁne their near-term activity to the auctions of larger, later stage assets, with small groups of well-qualiﬁed buyers picking up only those projects that ﬁt their strategic focus.”
A recent PwC report claims M&A activity has slumped by about 31 per cent in the first half of 2013 when compared to the same period in 2012.
The 2013 January to June period saw just 649 deals completed, prompting the professional services company to attribute the lacklustre result to falling confidence levels fuelled by a wash of write-downs, market uncertainty, and tumbling commodity prices.
“There’s been a confidence crisis with big mining companies because they haven’t been able to deliver the levels of profitability shareholders have grown used to in recent years, even after the global finance crisis,” PwC global mining leader John Gravelle said.
Sluggish merger and acquisition activity in the mining sector is set in for the medium term, with mining majors more likely to shed assets then add them to their swag.
As miners and OEMs forge ahead with rationalisation programs, edging further and further away from the ‘production at any cost mentality which has plagued the sector in recent years asset impairments will continue to mark companies’ bottom lines.
In the last 12 months Australia’s top 50 mid tier miners have plunged into the red, posting losses of more than $1 billion dollars, while there was no love lost with investors, wiping more than $17 billion off market values, a recent PwC report found.
Rather majors are being increasingly selective with their investments all the while focussing on investor returns.
In November BHP opened its coffers, spending $301 million to replace two shiploaders at its Nelson Point port operations in Port Hedland, Western Australia.
The company said investing in the shiploaders will increase the reliability of its inner harbour port facilities.
The existing shiploaders are more than 40 years old and currently load iron ore at a rate of approximately 10,000 tonnes per hour.
“This investment will also create additional port capacity that can be utilised as a series of debottlenecking initiatives increase the capacity of our Western Australia Iron Ore supply chain towards 270 million tonnes per annum (100% basis), at a low capital cost,” BHP said.
Rio also followed suit approving a $400 million expansion plan to boost iron ore productioncapacity to 360 million tonnes per annum by 2017.
Rio chief executive Sam Walsh at the time said the new expansion plans are $3 billion lower than previous estimates and are in line with the company’s commitment to allocate capital to opportunities that will generate the best returns to shareholders.
Residents living in mining affected areas are increasingly voicing concerns and demanding a certain level of interaction and transparency from miners operating in their region.
Decent corporate citizenship is key to a smooth working relationship between company and community.
Securing and maintain a social licence, miners are improving community engagement strategies both face-to-face with open days, community drives and events, and digitally with real-time and personalised social media interaction and the dissemination of information.
But this is just the beginning.
Being proactive, enforcing local content policies and hiring locally are all strategies which can combat a good portion of community protests and ultimately enable miners to bring projects on line quicker.
“Recent years have made clear that many stakeholder communities are considerably more sophisticated than they first appear,” Deloitte Metals and Mining Lead, UK, Tim Biggs said.
“Many community groups have behind-the-scenes backing, which injects a political element into negotiations that may have been lacking in the past.
“Companies that do not make the effort to uncover the real drivers of stakeholder demands do so at their peril.”
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.
Both have the potential to reduce company profits and interfere with project feasibility assessments.
And both are set to be repealed this year, if the Abbott government sticks to its election promise.
“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 in last year’s report.
At the time they 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 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 Ernest & Young report released last year.
In its report entitled Business risks facing mining and metals 2012-2013, global mining and metals leader for Ernest & 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 is the year that resource nationalism spreads its tentacles across the globe riding a wave of mounting hostility toward mining governments are cracking down.
Not even three weeks into 2014 and Indonesia has made headlines, changing its mineral export laws in a bid to generate processing and smelting jobs within its borders.
Banning the export of unprocessed mineral ore was originally tabled in a bid to create more jobs and keep profits within Indonesia, forcing miners to develop smelting capacity by 2017.
The spectre of pan African mining rules and regulations is also rising, bringing with it the potential for Zimbabwesque nationalism.
Regulatory intervention is fuelling industry uncertainty, Deloitte explains.
“To prevent cost overruns and mitigate political risk, some companies are pulling out of controversial regions or putting projects on hold – actions that will leave governments without access to the revenues they seek,” the advisory firm stated.
Mitigating sovereign risk requires improving long-term government relations.
To achieve this Deloitte suggests forming policy development lobbies to meet with government stakeholders and influence the policy development process, coordinate local infrastructure projects, and hire and source material locally to keep communities onside.
Resource nationalism, corrupt governments, changing domestic laws, culture and lack of transparency are all major risks for miners operating in high risk regions.
As anti-corruption regulations tighten across the globe the risk of non-compliance for mining companies also grows.
“This extends well past the reputational issues associated with misconduct, exposing companies to steep fines and executives to the risk of personal liability and imprisonment,” Deloitte Africa Mining Leader, Tony Zoghby said.
In recent years even countries which were considered to have weaker corruption policies are closing the loop holes, including Brazil, China and Indonesia.
But playing by the rules means and increasingly complicated regulatory environment which in turn pushes up the cost of compliance.
“It may also threaten to tip the balance between the costs and rewards of operating in over-regulated regions, thereby restricting the ability of major diversiﬁed miners to invest freely on a global basis,” Deloitte stated.
To avoid getting caught in a compliance trap, Deloitte recommends ramping up anti-corruption monitoring processes by implementing internal controls, training employees, conducting compliance audits and regularly updating risk assessments.
In the past 12 months a number of miners have been embroiled in corruption allegations.
The Independent Commission Against Corruption handed down its findings into the questionable dealings of former NSW mining minister Ian Macdonald and the granting of three exploration licences.
The government terminated the Doyles Creek, Mt Penny and Glendonbook licences, leaving current owners NuCoal and Cascade Coal millions of dollars out of pocket.
In a statement Cascade Coal said the legislation commandeers its legal rights.
“The Government is clearly driven by political expedience and seeks to totally usurp the legal rights of innocent parties and override existing judicial appeals,” the company said.
It said cancelling exploration licences, denying compensation and forcing exploration data to be handed over is an “extraordinary and unprecedented action by the NSW Government”.
“This legislative action to confiscate private property rights and to deny access to judicial process is not based on a judicial determination of any kind or even on relevant ICAC findings but simply on Parliament “being satisfied”… that the grant of licences were tainted by serious corruption,” it stated.
Maintaining innocence both Cascade and NuCoal said they will be reviewing the legislation and are prepared to pursue all available avenues in order to protect their legal rights.
Handing down its findings ICAC said without tighter controls around policy and regulationcorruption is inevitable.
While the number of mining fatalities has dropped 24 per cent between 1993 and 2011, the statistic isn’t keeping pace with the 51 per cent decline achieved in non-fatal injuries.
“In mining, both serious incidents and fatality numbers remain high, particularly in many of the industry’s developing frontiers,” Deloitte stated.
What’s worrying is that as easier deposits are mined out and mining conditions become harsher the probability of accidents occurring increases.
“Beyond resulting in lost production time, investigative costs, reputational damage and regulatory ﬁnes, fatal accidents take a huge toll on employee morale and have dire impacts on families and communities,” Deloitte said.
A changing industry means companies will need to take a new look at the way they tackle safety risk.
“By combining current safety practices with those designed to reduce fatalities, mining companies should see signiﬁcant improvements in their safety outcomes,” Deloitte stated.
While mining companies often analyse masses of safety data, more often than not they end up without any significant insight or action plan, Deloitte’s National Leader for Corporate Responsibility and Sustainability, Valerie Chort explains.
“By examining the organisational factors that contribute to poor safety outcomes, and looking at non-traditional – but easily available – data points, miners can identify the employees at greatest risk of harm and objectively pinpoint the levers that can reduce those risks,” she said.
Crunching the numbers to improve safety requires modelling high risk events, re-examining procedures and breaking down data silos including rosters, production data, equipment maintenance schedules, and weather conditions.
10. Talent gaps widen
Despite the thousands of job cuts made across industry throughout 2013, Deloitte is predicting the talent gap to widen, estimating that over the next decade at least one third of the current mining workforce will retire.
“The pace of worker attrition threatens both operational productivity and the leadership pipeline,” the company stated.
In 2013 the industry saw executive’s heads roll, and while some were ousted for poor performance, many moved into retirement or took on consulting positions.
“Senior managers are transitioning into new roles in new regions. Organisations that once maintained a commitment to talent development are undergoing signiﬁcant layoffs, while executive salaries and bonuses are being cut,” Deloitte said.
“Interim management teams are replacing permanent hires.
“There has also been considerable movement on the boards of mining companies around the world, as companies work to attract directors with operational industry experience.”
The firm warns that mining’s specific talent shortage will transcend into the boardroom, reaching senior executive roles.
“This has left many companies without the skillsets crucial to shepherd them through the current commodity price downswing or ensure success in remote and unstable regions,” it said.
Attempting to lower labour costs while holding onto critical talent is a treacherous balancing act.
“The industry needs to develop different leadership skills as well and bring in management capable of improving productivity, controlling costs and maximising operational returns.,” Deloitte’s Director of Strategic Clients, Jenny Bravo stated.