Short-term thinking on issues has harmed int'l mining, a new Deloitte report suggests

Consulting firm Deloitte advised miners to expand cautiously and utilize a forward-looking approach as the mining industry slowly returns to profitability.

RENO, NV - 

A report issued Tuesday by international accounting and consulting firm Deloitte contends activity in the international mining industry "has often been disproportionately influenced by short-term outlooks."

Given the continued uncertainties facing the mining sector, Deloitte suggested "the winners will be the companies that learn to manage volatility more effectively by adopting an integrated, forward-looking approach that defines responses to a range of anticipated futures."

And, ironically, as a U.S. mining industry continues to fund anti-global warming campaigns, Deloitte urges mining companies to seriously consider the "real risks" the issue poses to the mining industry more broadly.

In their report, Tracking the trends 2010, Deloitte identified 10 of the top issues mining companies face.

•1)     Securing local supply-Is the demand from growing nations sustainable? Driven by the conviction that natural resources are an issue and national security and the need to secure local supply, nations such as China, Vietnam and India are working hard to secure metals and minerals supply. Meanwhile Russia and Indonesia have scaled back their exports. Deloitte suggests the trend may be driving up short-term demand artificially. Glenn Ives, North American Mining Leader for Deloitte & Touche for Canada, advised, "As foreign companies buy into domestic markets, majors are facing unprecedented competition in their own backyards."

•2)     Commodities, currencies and costs-The rollercoaster ride continues. Seelan Naickjer, director for Deloitte Consulting in Singapore noted. "While it is hugely encouraging to see prices move back up, companies must consider very carefully whether demand fundamentals can sustain prices at these levels." Deloitte suggests long-term demand for gold and silver "remains set to rise and could potentially outstrip supply once more." However, Deloitte cautioned, "Rather than reigniting a cycle of spiraling costs, companies will need to manage their risks more effectively. ...More than ever before, commodity prices have revealed themselves to be fickle masters and companies must explore ways to hedge against currency and commodity volatility."

•3)     Ramping back up-Success hinges on effective demand management. Carl Hughes, head of energy, infrastructure and utilities, for Deloitte's UK branch, noted, "Until mining companies understand what's driving demand, they will have difficulty thinking ahead of the curve, planning exploration and development investments and differentiating themselves in the global commodities marketplace." Absent advanced planning, Deloitte warns many mining companies are bound to face project delays, talent shortages and spiraling costs when demand recovers. "This may be good news for organizations interested in pushing prices higher again, but it only dooms the industry to continuously re-living an endless series of boom and bust cycles." Deloitte cautioned that in many countries, "the mining sector is poised on the edge of a looming talent crisis." A number of the jobs eliminated by the industry in the past 18 months were less skilled workers, "leaving an ongoing gap in access to experienced geologists, mining engineers and technical experts. A lack of coordination between companies and university has exacerbated this situation...."

•4)     The spread of sustainability-Earning a social license to operate requires an integrated approach. "While no one can map what the future holds, sustainability in the mining sector is likely to revolve around issues such as biodiversity loss, water shortages, climate change, demand for energy, resource scarcity and population growth," Deloitte suggested. "Companies will need strategies to promote greater reliance on clean air and water and renewable energies-a focus that also can help them address concerns around accessing energy supply in remote mining locations."

•5)     No easy money-The cost of capital dampens growth. "No matter how you cut it, mining is an exceptionally capital-intensive industry," Deloitte declared. Although some credit markets eased open as commodity prices rebounded, access to capital is still a challenge. "In many jurisdictions, mining companies must now hold higher reserve accounts than in the past.  ...Even then, lending terms remain exceptionally onerous and the cost of capital has risen dramatically."  Mining companies are now "struggling with a hangover of high debt ratios accumulated during better times, more complex loan negotiations, and the risk of facing vastly altered terms upon renewal," Deloitte noted. "In all cases, organizations must remain laser-focused on capital efficiency if they hope to weather the current downturn and position themselves for sustainable growth in the future."

•6)     Contending with a changing climate-The risks to the mining industry are rising. Among the risks climate change poses to the industry, Deloitte advises are regulatory risks, such as the cost of compliance and reporting across different jurisdictions and regulations. Physical operation risks include the potential for operational and infrastructure impacts due to extreme weather, rising annual temperatures and changing precipitation patterns. Financial risks related to carbon liabilities. Market risks may arise due to changing demand patterns. Strategic risks related to future regulation, technology availability and the price of carbon must also be considered. Supply chain risks as suppliers increase costs for regulatory compliance and energy. Litigation risks as affected communities or environmental NGOs challenge companies or specific projects on the basis of greenhouse gas emissions. Trevear Thomas, principal for Deloitte Consulting in the U.S. advised, "To keep energy costs under control and avoid environmental damage, organizations need to plan for various alternative scenarios in the development of their climate change strategies

•7)     Extreme Mining-Searching for the industry's next frontier. Deloitte suggested mining companies need to better harness the power of technology to access tough-to-reach reserves and navigate complex geological structures.  "Now that mining companies have cherry-picked the easier deposits to mine and process, they will have to cast their eyes towards harsher geographic climates and overcome rising metallurgical challenges," advised Eric Lilford, partner of Deloitte Touche Tohmatsu in Australia.

•8)     The valuation abyss-The need to merge still exists, but the desire does not. "Burned by the breathtaking drop in value across the world's markets, many would-be acquirers are hesitant about entering new deals with one notable exception; China," Deloitte said. Jeremy South, partner and global sector leader for mining, Deloitte & Touche Canada, noted, "The need to merge still exists, but the desire to merge does not. Buyers are trying to take advantage of lower market valuations to acquire quality assets, while sellers are trying to ignore the stock market on the belief that they are simply undervalue. This is making it nearly impossible to find a middle ground."

•9)     Big brother is watching. Government intervention takes a toll. As mining companies expand, they must frequently contend with challenges beyond earning a permit to operate. "In some countries, shifting tax and royalty policies target the mining sector and eat into profitability," Deloitte warned. "With so many governments short on cash following the global recession, this may become a bigger risk coming forward." As evidence of the risk of corruption found in many emerging nations where mining would like to operate, Deloitte highlighted the decision of DRC police to seal off a copper mined owned by First Quantum Minerals, "forcing the company to halt construction and lay off 700 people." Deloitte advised mining companies must engage in more sophisticated scenario planning so they can determine how to respond to government intervention with their operations.

•10)  No bridge to cross. Infrastructure costs are on the rise. Mining companies are being forced to bear the costs for infrastructure development, using public-private partnerships and similar initiatives to fill the gap. "If the trend continues in this direction, mining companies may find themselves investing in and managing an entirely new class of assets," Deloitte noted. "While this move may support local communities in some areas, it also mandates considerably more collaboration with government stakeholders around the world."

To read the report, go to www.deloitte.com/ca/mining-trends

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Runway Times Unlike an oil or gas well, mines cannot be turned on and off with the turn of a valve. Even facilities on a well planned care and maintenance mode are generally remote enough that mobilizing in a skilled workforce is a herculean effort. These . .more circumstance do little to encourage new entries into the workforce in numbers adequate to replace those exiting. I cannot foresee these fundamentals changing in the near future. . .less by savvy_trader on December 16 2009, 20:55 Find this comment inappropriate? Report it

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