The mining game is tough at the best of times; currently mining companies are operating amidst a volatile climate of rising operation costs, unstable commodity prices and a strong Australian dollar.
With this in mind, Deloitte has released its annual Tracking the Trends report which examines the challenges expected to affect the industry in 2013.
“As commodity prices decline and global economic uncertainty persists, it’s harder for mining companies to predict future demand patterns,” Deloitte’s Australian global mining leader, Philip Hopwood, said in a statement.
“Companies are deferring their expansion projects in the face of waning Chinese demand, yet world demand promises to increase dramatically in the coming years,” he added.
It’s one thing to predict this year’s trends, it’s another to put them in some sort of historical context, because how do you know where you’re going if you don’t know where you’ve been?
In the words of English poet Coleridge: “If men could learn from history, what lessons it might teach us.”
So here they are the top 10 for 2013 according to Deloitte…
1. The increasing costs of doing business
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 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 minerals 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.
Discussing cost pressures, Hopwood said mining companies must look at a more intricate series of investment options in order to remain competitive.
“With cost pressure mounting and talent shortages ongoing, companies must assess the viability of a more complex series of options. Investments will be necessary to enable companies to weather more severe volatility,” Hopwood said.
Deloitte suggests that such investments include improvements to operational efficiency, proactive control of maintenance costs, and investment in cost reducing technologies.
2. Commodity demand uncertainty
There is much debate over commodity demand predictions, while in the short term demand for resources like iron ore may be tapering, mining companies need to continue to look ahead to avoid long term supply constraints, Deloitte’s Americas mining leader Glenn Ives said.
“This danger will grow as companies halt production in the face of capital cost increases and growing shareholder demands for more immediate returns,” Ives said.
According to the Economic Intelligence Unit, real annual GDP growth in China is forecast to fall to an average of 8.1 per cent between 2013 and 2016.
Indications that China’s economic growth is slowing is having a ripple effect on mining companies, particularly those who have pinned their fortunes on China’s continued appetite for resources.
Such uncertainty present in the market makes it extremely difficult for mining companies to accurately predict or plan for future demand.
However one point to consider is that China to date has remained committed to its current five-year plan and vowed to spend an estimated $10 trillion Yuan by 2015.
Such conflicting global indicators means mining companies may have to look to history in order to plan for the future.
Either way, indecision will constrain future supply and long term trends appear robust, even if things are slowing down in the short term.
According to Reuters, in Australia alone over $246 billion in planned mining investments have already been frozen as a result of slipping revenues.
3. Quality over quantity of projects
Overrun costs and schedule slippage in mining projects not only worries lenders; they aggravate shareholders and attract media attention.
This year Deloitte believes we’ll see a growing number of miners being forced to determine what projects should be delivered rather then financing “speculative long-term projects”.
This is already happening in Australia: in August BHP Billiton’s $US20 billion Olympic Dam project was put on hold.
The company blamed weak commodity prices and rising costs.
However, in announcing the cutback BHP said it was looking at a different plan "involving new technologies" to make the project cheaper.
Shutting down projects like this is a sure-fire way to affect future profitability.
According to Deloitte Access Economics, the value of resources as a share of all projects in Australia’s planning pipeline fell from more than 56 per cent in June 2011 to 40 per cent in June 2012.
Adding to this statistic, a report by Newport Consulting found that just 25 per cent of Australian mining companies planned to make major capital investments in 2012, compared to 52 per cent in 2011.
“Mining companies can no longer lay claim to a deep portfolio of expansion projects when only a percentage of them are viable.
“Instead, companies must narrow the focus to those projects capable of delivering a demonstrable return on capital,” Deloitte said in its report.
4. Fighting for funds: Asian investment and M&A
The battle for funding is predicted to remain competitive in 2013 as debt financing remains tight across global financial markets and institutional investors continue to turn away from the mining sector, Deloitte said.
Such a turn of events has forced mining companies to look elsewhere in the search for capital, leading many companies down a road of joint ventures, mergers and acquisitions, and consolidations in an effort to get projects off the ground.
Asian based investors are still playing an active role in the resources market especially as the Chinese government continues to encourage them to provide development capital and acquire resources abroad.
It’s no surprise that growth in china is good news for Australia’s resource sector.
Australian Mining reported that in order to meet China’s growing demand for uranium, the China National Nuclear Corporation chairman said last year it would ramp up investments in overseas uranium mining exploration, focusing on Australia and Africa.
Just recently it was revealed that the state-backed China Metallurgical Geology Bureau is the major shareholder in new Australian uranium explorer Zeus Resources.
Zeus who successfully raised $13.5 million from Asian based investors, has numerous uranium projects scattered around Western Australia.
The uranium explorer had been searching for funding since prices slumped following the Japanese Fukushima nuclear disaster in March 2011.
5. Resource nationalism will remain
While Australia doesn’t have the same unpredictable level of sovereign risk as other mining nations around the world, Australia 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.
“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 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 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.
6. Combating corruption – Holding miners to higher standards
ICAC’s investigation into questionable mining deals done in New South Wales’ Bylong Valley is set to continue until the end of March.
And although Australia prides itself on having a relatively low rate of corruption, coming in at number 7 on Transparency International’s Corruption Perception Index behind the likes of Denmark, Sweden, and Switzerland, it is worth noting that to maintain such a standard the country’s prime industries like mining must continue to be held to world class standards and expectations.
Corruption poses a significant risk to businesses’ bottom line and corporate reputation, and around the world, particularly in tougher geopolitical environments, combating corruption remains a challenge for the mining sector in 2013.
Deloitte’s mining leader for assurance, Tony Zoghby, explained that as the comfortable countries are mined out, mining companies will need to find new reserves in less than desirable places.
“This will require a much higher level of risk assessment, planning, and forecasting, taking into account such issues as obtaining community permissions to access local watersheds, exploring public-private partnerships to build out infrastructure and being prepared to walk away from projects – or regions- where the risks patently outweigh the rewards,” Zoghby said.
7. Socially responsible behaviour
Corporate social responsibility today extends beyond what is legally required; instead it involves understanding shifting community, government and NGO expectations, and committing to a higher level of transparency and operational sustainability.
This means mining companies must provide local employment opportunities, infrastructure, training, education, and healthcare in order to avoid vocal opposition to their presence.
Rio Tinto is the single largest employer of Aboriginal and Torres Strait Islander people in Australia and has demonstrated an unwavering commitment to Indigenous training and employment through the company’s Work Ready programs.
What started as a local initiative in Western Australia’s Pilbara has now grown to actively provide literacy, numeracy, health and safety education as well as driving training through government funded colleges.
“Our work-ready programs aim to give unemployed Aboriginal people the skills to gain full-time, meaningful employment. We adopt a no-barriers approach to address common obstacles such as lack of driving licences, poor literacy and numeracy, limited training and employment opportunities, family life balance, fitness for work and work adjustment issues,” Rio Tinto Iron Ore explained.
Failing to comprehensively consult local people, environmental groups and government organisations can result in costly project delays.
Mining companies must understand local culture and cultivate local relationships on an ongoing basis.
8. Skills shortages here to stay
The skills shortages in Australia’s mining industry remains at unrelenting levels, which is where they’re expected to stay for a while yet.
The Minerals Council of Australia predicts the need for an additional 86,000 mining professionals and skilled mine workers by 2020.
While the remote location of mines poses a challenge when attempting to attract talent, it can be overcome with wage hikes.
However this can prove to be unsustainable solution for majors who cannot continue to increase salaries year on year, and for juniors who cannot afford to fork out such exorbitant salaries in the first place.
Training local talent, sponsoring university programs, and cross training existing workers are all ways of recruiting whilst behaving in a socially responsible manner, Deloitte says.
9. Improving safety culture
Building a culture of safety is one of the most important tasks, if not the most important task, mine management can undertake.
Mining is a dangerous industry, although it has come a long way from the days when mercury was mined by hand and children could be found underground.
This doesn’t mean it’s anywhere near reaching safety perfection or zero harm. Investment in education and training needs to continue for improvement to continue.
One way onsite safety can be improved is through the adoption of new technologies and ways of thinking.
“Significant advances in data analytics and increasingly affordable sophisticated software capabilities can help organisations gain insight into causal factors and improve their safety outcomes,” Deloitte said.
Australia’s coal sector is already acting through the development of RISKGATE, an online application which aims to bring a wealth of industry knowledge onsite when it is needed to mitigate risk and create a safer operating environment.
Such out of the box thinking was enlisted at Xstrata Coal’s Newlands coal handling preparation plant following the tragic death of an employee at another site in 2008 when a bin discharged its load while the cabin of a vehicle was in the drop zone.
CHPP manager Russel Muller told Australian Mining just how important it is to review and improve processes to ensure safety.
The company implemented a fail safe tag reader system to ensure this accident would never happen again; this solution addressed the safety concerns without introducing other problems.
10. Implementing new technology
More mining companies are choosing to reduce operational costs and increase efficiency through significant technology investments.
Taking advantage of powerful data analysis enables mining companies to become highly predictive instead of reactive in their decision making processes.
“New data analytic capabilities enable mining companies to take hundreds – 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,” Deloitte said.
Implementing remote monitoring and control capabilities through programmable logic controllers (PLCs) enables miners to automate industrial processes like blasting, drilling, and transportation and inturn can improve mine site safety and accelerate production rates.
Adopting technology from industries like advanced manufacturing is also proving to be successful for many miners.
Advanced manufacturing systems are improving engine and machinery design through the use of more complex parts and materials like composites and titanium alloys which are both stronger and lighter.
Collaboration is the key
Although these are the top ten trends for 2013, mining companies are renowned for taking a long term view of the market and long-term industry fundamentals remain positive.
“As global demand for resources grows over time, mining companies that lay the groundwork today will be well positioned to seize tomorrow’s opportunities,” Deloitte stated.
At present the mining industry faces a number of systemic issues that cannot be resolved without collaboration between players.
From aging infrastructure, talent shortages and growing social expectations, to heightened demand for both energy and water and the need to implement new technology to stay ahead of the curve and improve safety records, these issues will not be resolved whilst mining companies act alone.