It’s a tough time to be running a mining company [analysis]

Pity today's mining company executive! 

Not only do today's mining company boards have to weigh up the technical and environmental considerations of mining projects and dealing with ‘mining-friendly' governments keen to use natural resource development as building blocks to advance their economies , but also deal with a major downturn in commodity prices, resource nationalism issues in less mining friendly nations, environmental activism, dissident shareholders and workforces with high expectations.

To a great extent all the above are connected – by a period of very strong commodity prices – often called the commodity supercycle – which is currently in remission. 

The commodity price benefits achieved because of the huge surge in demand, while supply struggled to keep up, might have seemed like boom times for the miners, but in retrospect may be seen to be the root of many of its most recent problems too.

High commodity prices meant high profits and stock prices for miner, developer and explorer alike, but high profitability, or potential profitability, has led to often excessively high expectations from the stakeholders – governments, investors, workforces etc. and when an inevitable downturn arises the mining companies are seen to be underperforming and the expectations of these stakeholders are just not achievable. 

Consider the principal worries being seen by the industry:

Resource Nationalism 

In times of high commodity prices and mining company profits, the companies start to be seen as greedy entities making undue returns from a country's natural resources – or that is how it can be presented by astute politicians looking for popular appeal. 

It is easy to forget, or ignore that mining companies developing these resources may be investing billions of dollars of risk capital in them and it is the commodity price good times which makes this all worthwhile.

Resource nationalism takes many forms, of which the extreme is state takeover, or nationalisation. 

Luckily for the mining companies, in most cases government leaders realise they do not have the expertise, or the capital to nationalise companies and operations and run them as well as the major mining companies, but there are countries, like Venezuela, which have gone down this route and the jury is still out as to whether these moves to take over foreign miners are beneficial to the country in the long run or not. 

But even talk of possible nationalisation, or of taking a majority stake in a company's operations – if this is seen as a serious possibility even in the medium or long term – has to be moved into the risk assessment analysis for miners and explorers. 

It will inevitably lead to that country almost overnight being seen as a riskier place to invest which affects all kind of decisions to proceed, not least increasing the costs of finance from banks and institutions without which most major projects could not go ahead. 

No longer can mining companies finance major new mine developments from their own resources – the costs are just too high.

Of course there is a more insidious form of resource nationalism which companies need to take into account. 

Even countries which purportedly embrace capitalism and the free market can see mining as a cash cow to be milked and can increase royalties, taxes and other demands  to levels which are not commensurate with the risks involved in new mine development – or sometimes keeping a mine operating as a going concern if, and when, commodity prices enter a period of weakness.

Environmental Activism

This again takes many forms from the ‘all mining is bad' brigade to those who may have genuine concerns about the impact of specific operations. 

Unfortunately, the former may seize on the latter as an opening for disseminating their more radical viewpoints. 

Here the mining company often has to proceed with its hands tied behind its back. 

The companies will rely on fact and proven research to refute the environmental concerns, but often the anti-mining groups rely on distortions, references to bad practices which may have been prevalent tens of years ago, and often downright lies to put their case across. 

Scaremongering is a major tool in their repertoire and one which can often easily sway local populations and political groups.

Dissident shareholders

When markets are down, as they are now, this more and more frequently leads to the rise of dissident shareholder groups claiming to be able to run the companies better than existing management which, in many cases, may have built a company up from scratch and have a huge personal commitment to its advance. 

The dissidents will usually act because they have seen their investments suffer and feel frustrated and assume management is not doing all it should to revive their fortunes. 

When the markets are caught in an enormous malaise, as, for example, the TSX Venture Exchange is today, there is often little any management group can do to allay the situation and the dissidents will likely fare no better if they gain control – indeed past history suggests that in many cases matters get worse under the new management.

There are also the opportunists who strike when a company is seen as weak. 

They set up dissident shareholder challenges in the hope of unseating the board and taking over, often with hidden agendas revolving around commercial gains for themselves at the expense of the bulk of the shareholders. 

If you are an investor and your stock is suffering, even if just about everyone else's is too, the siren songs of the dissident shareholder group can generate a strong appeal.  Can a change make things worse? 

The answer is yes they can!

Workforce activism

This is perhaps a particularly difficult area for management in times of low commodity prices following a period of high ones. 

When profits are strong because of high prices the workforce will often look for a share of these profits through increased wages and bonuses. 

But when prices fall it is usually not prepared to take a commensurate cut from the high levels achieved when things are going well. 

This can prove to be an industrial relations nightmare, particularly in parts of the world where the workforce tends to be very volatile. 

Serious industrial disputes can also lead to strained relationships with government – and if the latter takes a heavy handed response to labour activism if it is seen as potentially damaging to the economy, the company concerned may then be viewed as a directly involved party in any over-reaction by police against workers which may raise concerns among shareholders, human rights groups and the anti-mining community.

But of course big mining companies nowadays have a plethora of specialist advisers to help them out. 

Corporate Affairs, Investor Relations, Political Affairs, Environmental Affairs etc. and these become departments in their own right often having different individuals to deal with Federal issues, State or Provincial issues, specific country issues  as well as operational matters. 

It can now be a significant management problem just keeping up with internal bureaucracy within a large mining company.  For the junior though all these different tasks may end up just being handled by one person. 

No wonder stress levels can be high.

Mining has never been an easy occupation which is why its ranks tend to be swelled by pragmatic, dedicated types who like a challenge but, one could argue the problems faced in today's political, social and technical environment probably dwarf almost anything faced in the past.

So, perhaps we should spare a thought for the lowly mining executive, it may sound like an easy job but, its anything but.

This article was originally posted on Mineweb. To read more news on the global mining industry, click here.

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