Confidence in "free-fall"

BUSINESS confidence among mining leaders is so bad that executives are generally concerned about what the future holds, with a report indicating the downturn in the sector has led to a huge surge in the number of people no longer optimistic about their prospects.
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Lauren Barrett

This is just one of the many findings from Newport Consulting’s latest annual Mining Business Outlook report, which discovered that mining leaders in 2013-14 were primarily focused on cost-management, operational efficiencies, profitability, cash flow and improved productivity.

From interviews with about 60 mining executives from a range of privately and publicly listed companies, Newport found that business confidence in the mining sector was in “free-fall”, with leaders displaying a gloomy outlook together with a lack of confidence regarding the economy and global market.

Perhaps one of the strongest indicators of the impact the downturn was having on sentiment was the fact confidence was at its lowest level since the report’s inception four years ago.

Volatile markets, followed by falling demand and falling prices, were the main reasons for the negative outlook, with close to half of those surveyed admitting they were not optimistic about future prospects. The figure is up 34%, compared with just 7% in 2010.

Meanwhile, the number of mining leaders very optimistic about their outlook fell 38% since 2011 to just 19% this year, coinciding with the general consensus that the investment phase of the mining boom had drawn to a close.

Reflective of the negative sentiment was that 44% of mining leaders interviewed indicated they were reducing capital spending. It is the first time companies have stated definitively that they are reducing spending in the four years of undertaking the report.

This compares to just 14% of those interviewed who stated they would either moderately or significantly increase their investment in capital expenditure projects.

In parallel with reducing CAPEX, miners were axing staff in an effort to control costs, with close to one-quarter of those surveyed saying they will cut costs by reducing workforce numbers.

According to Newport, the key drivers for not spending include the uncertain economic environment (32%), difficulty in getting development funding (30%) and budget constraints (12%).

Difficulty in sourcing development funds, according to Newport, is a new factor that has emerged in the report, supporting the case for miners to turn their focus internally by maximising operational efficiencies.

“If miners have to postpone projects and future investment because of lack of funds, they will extract the most value they can from existing operations and assets,” Newport said.

However, Newport warned that if the hold on investment continued, Australia could be reinforcing its status as less attractive as an investment destination.

Furthermore, Newport noted that falling prices combined with higher costs had caused concern about the ability of Australia to compete effectively with more cost-competitive and emerging destinations such as Papua New Guinea, South America and Indonesia.

With commodity prices coming off their highs, leaders were reacting by concentrating on more effective cost control and management (27%), which was followed by closing mine sites and projects (16%).

In comparison to past reports where government policy, introduction of mining taxes and IR regulation proved to be very real challenges facing leaders, more effective management of operations was the main priority in 2013.

The report also revealed that while productivity was on the agenda, a staggering 66% of leaders reported a low level of productivity, with the strength of unions, cost control and high labour costs cited as key barriers to improving productivity.

A notable shift from last year’s report was the fact there was no longer a skills crisis, with 53% of companies surveyed admitting to having very low vacancy rates, up 17% on last year’s figures.

The report also concluded the blatant dissatisfaction mining leaders had towards the government and its lack of support, with union strength, inflexible IR regulations and poor national infrastructure key concerns.

Leaders voiced disappointment with the political rhetoric from Canberra that the resource sector is a burden on Australia, and noted that a more secure and stable government and policy would deliver more certainty for the economy and benefit the sector.

Despite the doom and gloom picture, Newport managing director David Hand said the tougher times would give miners an opportunity to maximise value from existing assets through improved productivity.

“This is not a bad thing for the sector,” Hand said.

“If anything, a renewed focus on operational efficiencies could deliver healthier profits and shareholders’ value in the current difficult economic climate.”

The release of the report comes just a few days before the annual Diggers and Dealers conference in Kalgoorlie is set to kick off. If this report is anything to go by, a subdued and pessimistic tone could be much more prevalent at the industry conference than prior years.