Mining industry faces heightened challenges amid c By Scott Simpson, Vancouver Sun November 28, 2011
VANCOUVER - The global commodity boom is evolving into a "perfect storm" combining new social, economic and political challenges for mining companies, a new report suggests.
Higher profits and escalating international demand for metals and minerals are making mine operations and projects into "front page news" around the world on a daily basis, Deloitte says in an international report that projects industry trends for 2011.
"Gone are the days when conversations about commodity prices were confined to industry analysts," said Glenn Ives, Americas mining leader for Deloitte Canada, in a news release accompanying the report that was released today.
"As nations around the world industrialize and strive to improve their standards of living, mining has come to take a more central role on the world stage," Ives said. "And for mining companies, this greater visibility comes with greater responsibility."
The report, titled Tracking the Trends 2012, outlines what Deloitte describes as escalating social, economic, and political factors that are forcing mining companies in Canada and around the world to incorporate more complex scenarios into their strategic planning.
The report includes an analysis of the top 10 trends expected to affect the mining sector at an accelerated rate in the year ahead.
"The mining sector is facing a perfect storm of converging global forces," said Jurgen Beier, deputy mining leader, Deloitte Canada. "Confronted with unrelenting cost inflation, unprecedented commodity price volatility, ever-tightening regulation and mounting labour shortages, mining executives must be willing to seek unconventional solutions."
The leadoff trend is the cost of doing business.
"With commodity prices surging to all-time highs, accelerated production has become the mantra of most mining companies and costs are going up across the board." Deloitte said. The report recommends tighter scrutiny of capital project spending and looking for ways to curtail energy costs.
Unstable and unreliable commodity prices were second on the list, and Deloitte faults China, the leading contributor to the multi-year boom, for withholding information that could enable miners to better manage their production schedules.
"Have commodity prices been reset at a higher level or are we at the top of a bubble that's about to burst? Making informed decisions in this highly uncertain environment requires a level of forecasting many companies lack."
Third, Deloitte recommends that companies be discriminating about the nations in which they choose to do business, noting that several resource-rich nations - including Australia, Chile and South Africa - are boosting mining taxes and other fees, and even threatening to renegotiate existing tax deals.
Fourth, mining companies can expect increased scrutiny from activist shareholders.
"To meet the demands of a broad stakeholder base, mining companies will need to integrate risk-based corporate social responsibility strategies and develop and track key performance indicators with the same diligence they use to track production."
Fifth, companies need plans to expand their workforce, recruiting a new generation of employees - including competing against other industries.
"There simply are not enough people to power projected mining company growth, and each year skill gaps extend to a wider range of functions. Steps companies can take to find willing workers include applying science to workforce planning, introducing industry-level cross-training, and building a global culture."
Sixth, global spending on infrastructure such as railways, roads, ports and power lines is increasing, and that's pushing up the cost of new mine development.
"Mining companies must now focus on managing risks that could interfere with their ability to meet steady-production objectives," the report warns.
Seventh, although company profits are soaring as commodity prices climb, it's a challenge to obtain through traditional mining investors enough money to develop new properties.
Instead they're turning to alternative mechanisms such as sovereign wealth funds and hedge funds.
Eighth, as companies grow, so do the number and scale of potential risks to profitability.
"Yet few companies possess the internal skills to grow their capital project portfolios aggressively or to operate in unfamiliar regions."
Ninth, "volatility is the new stability."
"Although 'black swan events' are by definition rare, high impact, and hard to predict, they are finding their way onto corporate agendas. Preparing for these unanticipated surprises is likely to require more of a creative license than mining companies are accustomed to exercising."
Tenth, many nations appear to be in a competition to tighten their mining regulations, and companies should be preparing for greater restrictions.
"Nations around the world have been ramping up their regulatory initiatives, and many are increasingly focusing on the mining industry, heightening the need for mining companies to review their regulatory compliance procedures."