The insight of one major industry watcher is unequivocal: down the road, the mining industry has solid prospects for sustained growth. However, miners who intend to get that far must steer the course with a steady but loose hand. This is the crux of a recent report from the consultancy firm Deloitte. “Tracking the trends 2010” catalogues issues that the firm’s mining professionals expect will propel — and rattle — the industry in the coming year. At the top of the list are: the push by developing countries, led by China, to ensure their supply of commodities; the need for mining companies to brace themselves for more manic price swings; and the necessity to ensure that they will have the human resources and capacity to meet stronger demand in the future. “These are the trends we think are going to have the biggest impact in 2010,” says Glenn Ives, North American mining group leader for Deloitte.
“Asian countries need raw materials. They see it as a matter of national security,” Ives continues. “I think what has changed recently is that these countries — China in particular — understand better how the natural resources sector works.” He cites the failed bids by Chinese investors to buy American and Australian firms as important lessons in restraint. “They have learned that what they need is to secure supply and that they can do so with contracts and off-take agreements.”
Uncertainty about the prices of commodities topped Deloitte’s initial list as 2009 dawned, and this remains a primary concern for the year ahead. “There has been astonishing volatility,” says Ives. Copper prices rebounded over the last year and gold has climbed steadily, but the latest report calls for cautious optimism: “Rather than reigniting a cycle of spiralling costs, companies will need to manage their risks more effectively.”
Part of that strategy should include a more optimistic view of long-term prices. Ives contends that many mining companies underestimate future commodity values to their detriment, passing on projects that could meet stronger present and future demand. “It’s understood that there will be skills shortages and that there aren’t a lot of new copper mines,” he says. “That means the long-term price outlook is good.”
Deloitte’s report contends that a clear vision for the future will be key in managing risk. “Absent advance planning, many companies are bound to experience project delays, talent shortages and spiralling costs when demand ultimately recovers,” the report states. “This may be good news for organizations interested in pushing prices higher again, but it only dooms the industry to be continuously re-living an endless series of boom and bust cycles.”
Beyond securing local supply, price volatility and demand management, Deloitte identifies these trends — some emerging, some enduring — in the sector:
- Sustainability: The strengthening demand for more transparency from stakeholders and regulators will require a comprehensive approach to sustainability.
- Tight fists: With the demand for credit still outstripping supply, miners will be in tight competition for access to capital.
- Climate change: Mitigate risks now, says Ives, because stricter environmental regulation is inevitable. “There are lots of things you can do, particularly in the design phase of a mine with a 20-year life, that don’t cost you very much initially that will have bigger benefits for the environment in the longer term.”
- Extreme mining: New frontiers, such as underwater mining, will require R&D investment in technology now.
- The valuation abyss: Mergers fell apart last year as rebounding commodity prices created a broad gap in the expectations of buyers and sellers. That divide will likely remain.
- Government intervention: Governments looking to fill their empty coffers pose a risk for which mining companies must be prepared.
- Infrastructure costs: Limited infrastructure in remote areas will continue to put pressure on mining companies to invest building infrastructure and working relationships with government stakeholders.