The commodity super-cycle which began in the early part of the 2000’s is most definitely over. Signs of its demise were evident in 2013 and steadily falling commodity prices and mine closures since that time have confirmed it. Iron ore, coal and oil have been the most prominent minerals in terms of the decline in price and are certainly the most talked about, but few if any mineral commodities have been untouched. What does this mean for the mining industry in the year ahead?
The retreat of mineral commodity prices from their super-cycle peaks quickly saw the closure of high cost operations where lower grades, complex treatment routes and long logistics chains locked in a high cost base such that these operations could only ever be “swing producers”, viable only during peaks in commodity prices.
Not only did declining commodity prices see the natural elimination of high cost producers, it also brought about a change in the thinking of all resource companies. During the boom times, when skills and other resources were scarce and came at a premium, companies were prepared to pay just about anything or agree to any terms just to ensure that output and revenue were maximised, with perhaps only a cursory thought for margin. The end of the super-cycle has seen a complete turnaround in thinking. Many skilled professionals now find themselves without work and those that are still employed are happy just to have a job. Not surprisingly salaries have declined. The focus of the industry over the past 12 to 18 months has been on cost-cutting and this is perhaps where early opportunities have been missed and where focus will be placed during the course of the coming year.
Cutting costs is easy, and is the normal knee-jerk reaction of almost all businesses. What appears to come less instinctively, at least in the mining sector, is the search for productivity improvements. A notable exception is perhaps Rio Tinto’s “Mine of the Future”, although I believe that this was driven by scarcity and cost of resources at the peak of the boom, rather than a search for improved productivity per-se.
Whilst perhaps it should have been their initial focus, those companies still operating are now being forced to look for improvements in productivity and I believe that this will be a major trend during 2015.
Every operator will be asking themselves whether there is a way to operate that would increase output using the currently available resources and thereby reduce unit costs. The decision that each will then have to make is whether to maintain output at the increased level and risk oversupply, further reducing prices, or whether reducing output, laying off more personnel and idling some equipment may result in a better outcome for the business. My 35 years of experience in the industry inclines me to think that most, if not all, will choose the former and argue that it is natural selection at work ensuring that only the fittest survive.
With falling commodity prices has come a capital strike, where even projects with seemingly robust economics are finding it difficult to gain funding. Those that have found finance have often had to surrender a significant portion of the project or company to the financier.
At the small cap end of the market, funds appear to have dried up almost completely with companies struggling to raise even $1m to $2m from their existing shareholders via share purchase plans. This has some significant long-term implications because it is often the small exploration companies that make the discoveries which lead to future operations.
It is an old adage that capital always needs to find a home and whilst there are rumours circulating that there are investors with funds ready to be placed in the resources sector, it appears to be something of a stand-off, with no one wanting to blink first and make an investment.
The gold sector may perhaps provide a beacon of hope for the industry and act as a trigger for investment of these funds. Whilst the gold price is well off its 2012 peak of US$1901 /oz it does appear to have stabilised in the range US$1250 to US$1300 /oz. More importantly, for those producer countries whose currency has devalued against the US dollar, prices in local currency are, in some cases, approaching previous all-time highs. Reductions in the cost of labour and the cost of energy mean that these operations could offer attractive margins and therefore good returns for investors.
So to summarise, in my view, 2015 will see the industry focus on productivity, most likely with a greater focus on mechanisation and automation and an easing of the tight capital markets with early investments being made in the gold sector.