The sixth of a ten part series examining the trends that will drive the mining industry in 2016.
“Just as, during the super cycle, people imagined prices would go up forever, people imagine the market will never recover. Neither extreme represents the truth. What is true, however, is that our cycle times are lengthening, that means it could takes years to adjust to current market forces – but it’s still a cycle,” Deloitte Touche Tohmatsu’s global leader for mining, Philip Hopwood, explains.
The notion the mining industry squandered the boom, and like the grasshopper in Aesop’s fable enjoyed the summer without preparing for the downturn of winter, is becoming more and more solid.
According to PricewaterhouseCoopers the idea that miners wasted the once-in-a-lifetime resources boom is a fact.
The 13th annual Mine: PwC study into the largest 40 miners by market cap found the largest collective net loss in the top 40’s history, totalling US$427 billion.
“2015 was a race to the bottom with many new records set by the world’s 40 largest mining companies,” PwC stated.
The report unveiled that of the US$623 billion in capital expenditure invested over the five year period from 2010 to 2015, nearly 32 per cent, or US$199 billion, was booked as impairments.
PwC blamed a “lack of capital discipline”.
It went on to state all the ground gained during the boom was effectively negated, adding that, “The collapse was all the more painful for producers in 2015 because the value destruction was perceived as self-inflicted.”
“You would have to think if you were an investor in the industry the way to have made your money was to sell at the top,” PwC Australia’s mining leader, Chris Dodd, said.
“The money hasn’t come through in dividends, the money hasn’t come through in capital accretion and it is not there anymore.”
This position was supported by the PwC report, which outlined evidence “signalling an almost stagnant investment environment”.
But the resources industry is learning from its self-inflicted mistakes and is no longer idle.
The mining industry is not a stationary animal, it is constantly moving and changing, not only in the way it mines but also in the way it interacts with communities, integrates technology, and approaches its role in terms of social awareness and corporate responsibility.
Every year brings new challenges, and 2016 is no different.
Starting from such a low base, with many commodities at five year lows, the industry hopes for a 12 months vastly different to those experienced in 2015, after reaching debilitating lows in December.
Actions taken by the majors to reduce oversupply (particularly in terms of iron ore), cut costs, and concentrate on productivity have all been focused on not just surviving mining’s ‘winter’ but on rebuilding the industry after the widespread destruction of commodity and company share prices.
And this seems to be the case; the industry appears to be well on its way to recovery, with many inside and outside of mining staking their claim on the end of the downturn.
This is supported by strengthening commodity prices almost right across the board, from iron ore’s rallies and largest single day gains since many metal indexes began to an expectation of a 20 per cent rise in coal prices by the end of the year due to drastic actions in China to reduce output and stockpiles.
Some are even saying we have returned to a bull market after years of bearish movement in commodities.
New data from the Bloomberg Commodity Index, which tracks raw materials, is running more than a fifth above its low in late January earlier this year.
According to Bloomberg, this movement qualifies it as bull market.
In terms of resources, the Bloomberg World Mining Index is up 24 per cent after a three year rout, much of this driven by BHP which has seen a 16 per cent rise in value over the year to date.
“The broad-based recovery in commodity markets this year has tipped several markets into bull market territory,” Mark Keenan, head of commodities research for Asia at Societe Generale in Singapore told Bloomberg.
“Overall, sentiment is good but remains cautious, the market is evolving significantly.”
Zinc has been the best performing metal this year to date, following Glencore’s decision to shutter its operations in order to address oversupply issues in the market, and was declared ‘bullish’ by Goldman Sachs for the first time in 12 months
Mining appears to be slowly, but surely, getting back on its feet.
Now we investigate the main issues that will shape the industry in 2016.
In the June edition of Australian Mining, we examined the first five of the ten trends that are forecast to affect the mining industry the most this year.
These focused on issues around productivity, the changing nature of demand – particularly China’s evolving markets – and dealing with what has become the ‘new normal’ for the industry.
In this edition, we round out the second half of the top ten, focusing on miners’ changing relationships with stakeholders and the community; how they approach finance in an investment starved world and new avenues for funding; how the old way of interacting with governments – and tax regimes – can no longer work; if the industry is ripe for a spree of mergers and acquisitions; and where the industry may head in the last months of 2016.
6. The changing nature of stakeholder dialogues
“When it comes to stakeholder engagement, miners have traditionally found themselves between the proverbial rock and hard place,” Deloitte explained.
“Reconciling the often competing needs of government, local communities, non-governmental organisations (NGOs), employees, and regulators – whilst still delivering return on shareholder investment – has become a balancing act of huge proportions.”
This is becoming even more difficult as the industry endures the current commodities slump yet faces the same expectations of high returns seen during the boom, creating a disconnect between expectations of stakeholders and reality – especially in terms of tax and royalties.
This situation has been further exacerbated by growing resource nationalism in many countries, which has driven increased demand for ever larger stakes in mining operations without suffering the initial input costs.
“Resource nationalism has remained in the top risks facing mining and metals companies for the past five years and seems to be picking up pace as governments seek to transfer even more value from the mining and metals sector,” Ernst & Young’s Mining & Metals sector said.
“Many governments around the world have now gone beyond taxation in seeking a greater take from the sector, with a wave of requirements introduced such as mandated beneficiation, export levies and limits on foreign ownership.”
“Whilst governments are typically motivated by the need to maintain national revenues,” Deloitte explained, “their tactics are leading to detrimental results – not only to mining companies but to economic health as well.”
It pointed to ongoing issues between Mongolia and Rio Tinto over the Oyu Tolgoi mega-mine as a case in point, stating the country’s foreign investment rapidly plummeted 90 per cent in two years –from US$4.5 billion in 2012 to US$400 million in 2014 – largely due to a long standing dispute between the two over Mongolia’s demand for an increasing level of ownership of the project.
Resource nationalism in countries such as Zimbabwe has become the norm, and has driven miners away from the nation.
Pressure from community and stakeholder groups is also rising, particularly in opposition to coal.
Communities are no longer placated by lump sum cash payments, sport stadiums, or water pumps – instead they are seeking more meaningful engagements and the development of the resources company as a citizen in their community, interacting on a local level to improve overall conditions in their operating region.
Health, educational, vocational, and cultural support programs; active heritage and archaeological programs; as well as environmental studies are now all the norm for miners that endeavour to be good corporate citizens and socially responsible.
And these local groups are more than willing to withhold development consent when companies fail to accommodate their needs.
This takes a financial toll.
“Researchers found that mining projects with expenditures of between US$3 billion to US$5 billion can incur weekly losses of roughly US$20 million due to delayed production caused by community opposition,” according to Rachel Davis and Daniel Franks’ Harvard Kennedy School report, Costs of Company-Community Conflict in the Extractive Sector.
Maligned community members also work with NGOs, special interest groups, and activists to dramatically halt operations and sway public opinion against mines.
From chaining themselves to moving equipment or mine gates as seen at many coal and coal seam gas operations throughout Australia, to more drastic action such as the hoax ANZ press release purporting the bank was divesting its interest in coal mining – specifically Whitehaven and its Maules Creek operation – in order to wreak financial damage against miners, or even full scale mine invasion such as in Germany and the UK, activists and protestors are carrying out actions designed to halt mining and suspend production.
“Increasingly,” Deloitte states, “these organisations work to sway public opinion through online communications such as social media and campaigns geared to go viral.”
“As activist organisations become more vocal they are able to exert greater pressure on both governments and communities considering mining project approvals.”
Miners need to change the dialogue so that they have a voice, as the social media battle is all but lost at this point, with campaigns such as ‘Coal – An amazing little black rock’ roundly mocked as failures.
“Miners interested in reclaiming their licence to operate are coming to realise that a new form of stakeholder engagement is needed – one that balances the demands of multiple groups,” Deloitte stated.
“Rather than simply reporting the amount of money spent on takes and community initiatives, companies should aim to track and report on the impact they are having on each stakeholder group – not only shareholders, but governments, communities, and employees as well.”
Miners need to align their operations with the long-term needs of the many stakeholders, and employ better community engagement models and reporting.
Strategies ranging from demonstrating their commitment to the local community, listening carefully, and helping to inform national strategies all aid this growth.
Deloitte also suggest drastic action in certain cases: walking away.
“Mining companies capable of responsibly walking away from projects that no longer promise to deliver a sound business benefit would send a strong message to governments and local communities on what they potentially stand to lose by adopting an intransigent anti-mining stance.”