VANCOUVER — In its annual forward-looking report on mining trends, big-four financial consulting firm Deloitte had a clear message for industry players: do not sacrifice future growth in the name of short-term capital savings. Deloitte released the report on Nov. 29, which highlights the top ten issues facing mining companies in 2013.
In what has become an industry trend, major miners are opting to defer capital-intensive development projects in the face of a volatile global economic landscape and unpredictable commodity prices. Deloitte cites the ongoing difficulties within the Euro zone and weakening demand from China as underpinning the movement, as mining companies find it increasingly difficult to forecast future demand for commodities.
Deloitte expects capital spending in the sector to rise by 13% in 2012, and likely fall in 2013.
“Despite near-term tapering demand, the world remains at risk of long-term supply constraints. This danger will grow as companies halt production in the face of capital cost increases and growing shareholder demands for more immediate returns," writes Deloitte's Americas Mining Leader Glenn Ives. "Although companies are hesitant to invest aggressively, one thing is clear: failure to replace depleting assets will result in higher future commodity prices. Significant rewards will be available to the companies that invest today.”
For a second straight year cost inflation headlined Deloitte’s report, with higher prices being compounded by a simultaneous weakening in commodity valuations over the past twelve months. The result has been cost overruns at many large-scale development projects, resulting in weaker share prices and challenging capital markets.
As an example, the report cites research from the Metals Economics Group, which found that costs over 20 major copper projects rose by “20% to 140% without a corresponding jump in reserves.”
According to Deloitte the answer to cost overruns lies in financial discipline when it comes to selecting projects. The firm describes a frantic "push to production at all costs" where miners have chased more marginal deposits in challenging jurisdictions.
A related industry-wide criticism has been squarely aimed at project scoping processes and risk assessment methods. In a bid to portray a deep project pipeline, Deloitte argues that many companies are advancing lower-grade deposits with higher risks.
The trend also has the effect of stretching capital over too many projects, where companies would be better served focusing on a selection of higher-margin investments. The report encourages miners to continue to invest in feasibility and scoping work in order to have a strong set of development options as markets recover over the mid-to-long term.
“As shareholders pressure mining companies to improve returns through dividend yields, cash flow becomes more critical,” writes Deloitte's South African Mining Industry Leader Abrie Olivier. “Volume growth is no longer a measure for success. Instead, mining companies need to pursue quality over quantity, focusing on profitable production while striking an optimal balance between generating cash and growing revenues.”
A second major theme in the report addresses growing socio-political complications mining firms are encountering in emerging jurisdictions around the world. These concerns involve growing resource nationalism movements and increasing uncertainty in regards to taxation regimes and ownership regulations. Miners have been dealing with complications in regards to exploration and operating permits, as well as increased government taxation incentives and profit sharing measures.
“Combined with mounting community demands, the difficulty in obtaining local licences, social and environmental mandates and labour union pressures, it is getting increasingly difficult to justify a large number of mining projects to investors and financiers," writes Deloitte's Queensland Mining Leader Reuben Saayman.
Companies have been addressing these concerns by establishing stronger in-country relations teams and working with governments to establish royalty and taxation models. Deloitte cites a situation in Peru where the central government consulted local mining associations to create an acceptable royalty regime. Another important step for miners will be establishing jurisdictional diversity to hedge against geopolitical volatility.
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