Issues facing the mining industry have reached a new level of extremity, forcing mining companies to incorporate more complex scenarios into their strategic planning, according to theDeloitte Touche Tohmatsu Limited (DTTL) Tracking the Trends 2012 report. The report provides an analysis of the top 10 trends that are expected to impact the mining sector at an accelerated rate in 2012.
“The burning issues facing the mining industry tend to remain largely unchanged over time. But if we take into account the extent to which shifting social, economic and political trends affect the mining sector, companies will have to look beyond traditional planning,” says Kalpana Jain, Senior Director, Deloitte in India. “Mining executives need to work towards unconventional solutions for their conventional challenges, prepare for previously unanticipated risks and incorporate more complex scenarios if they truly hope to address some of the industry’s most endemic issues.”
The top 10 trends as identified by the report are:
· The cost of doing business: what goes up does not always come down. With commodity prices surging to all-time highs, accelerated production has become the mantra for most mining companies and costs are going up across the board. Capital expenditures are reaching a new peak.In some regions, investments in water, transportation and energy are expected to account for 82% of project spend. Indian companies need to explore ways to curtail energy costs and try to balance short-term requirements with long-term strategy, weighing the long timescales needed for mine development, against possible sharp downturns in prices and demand.
· Commodity price chaos: no price stability without great transparency. Have commodity prices been reset at a higher level or are we at the top of a bubble that’s about to burst? Demand in China, India and Africa has witnessed a strong growth, showing little sign of relenting.But factors like: decline in US domestic spending, a shaky European debt market, political instability and rising interest rates in Asia, have affected the commodity prices.Currently, mining projects, both domestic and abroad, have become relatively viable due to improved commodity prices globally. However, given the global uncertainties, it is not easy to predict prices in near future. Hence, Indian companies need to adopt appropriate hedging strategies and monitor cash needs closely.
· The battle to keep profits: government taxes target the mining sector. The bid to increase national revenues now extends beyond the introduction of new tax legislation. To maximize investor returns and manage political uncertainty, companies need to consistently engage in financial modeling and engage at a political level to help influence government policies.
More From This Section
· Restless stakeholders: the demand for heightened corporate social responsibility. Industry stakeholders are continuously facing high level of activism than ever before. To meet the demands of a broad stakeholder base, mining companies need to integrate risk-based corporate social responsibility (CSR) strategies and develop and track their key performance indicators with same diligence they use to track production.Until CSR is considered a direct business risk, mining companies might struggle to minimize the probability and financial impact of these risks.
· Labour pains: bridging the precarious talent gap. There are not enough people to power projected mining company growth, and each year skill gaps extend to a wider range of functions. Companies need to adopt and apply strategies like work force planning, introduction of industry-level cross-training, and building a global culture, in order to find willing employees. Technical and technological solutions alone cannot replace the need for skilled talent.
· Capital project quandaries: project risk rises as the supply/demand gap widens. As commodity prices fluctuate and the gap between supply and demand widens,number of capital projects across the globe is mounting in the mining sector. Mining companies need to now focus on managing risks that could interfere with their ability to meet steady-production objectives.
· Non-traditional financing: new sources of funding require new levels of knowledge. Despite cash liquidity, companies face difficulties in finding sufficient capital to fuel growth. The key to success in these efforts hinges on mining companies’ ability to build relationships to gain access in foreign markets, while gaining better insight into those regions.Though there are Indian players with cash reserves who are more than willing to invest overseas; they lack the expertise of operating mines in global regions. Hence, there is a need to collaborate with western companies who have expertise but lack cash.
· The big get bigger: risk multiplies as companies diversify. Dwindling access to deposits, deteriorating grades, spiking global demand and lofty commodity prices have heightened mining companies’ appetite for geographic and economic risk. Yet few companies possess the internal skills to grow their capital project portfolios aggressively or to operate in unfamiliar regions. For global growth, Indian companies need to focus on the quality of assets and reserves, and integrate local operations into global culture.
· Volatility is the new stability: planning for the unforeseeable. Although “black swan events” are by definition rare, high impact and hard to predict, they are finding their way into corporate agendas. As Indian players expand globally, they need to consider mitigation plans for risk of implausible events such as geopolitical movements to volatile weather patterns.