The fifth edition of Deloitte’s Tracking the Trends report has painted a challenging picture for our miners.
Amid rumours of growing stockpiles, China’s buying has been waning while share prices have decoupled from underlying commodity values for many miners, restricting access to capital.
The report said that gone were the days when mining companies could commit to production solely on the basis of their initial business case.
Shifting legislation and political realities, infrastructure needs, community expectations and risks associated with corruption and fraud all needed to be taken into account by miners.
The top issue identified in the report as one that would likely have an impact on the global mining industry was dubbed “counting the costs: paying the price of bullish behaviour”
“The high cost of doing business tops our mining industry trends,” the report said.
“Unlike last year, however, commodity prices are not supporting the weight.”
Capital costs were spiralling and margins coming under pressure which, coupled with lower grades, were affecting decisions around continued production, expansions and new projects.
The report noted that worker demands for higher salaries and bonuses, and the cost for fly-in, fly-out arrangements were driving labour costs to unprecedented highs.
As a result, mining companies must start driving good financial discipline into their organisations more aggressively to counteract the increase in costs.
Deloitte Australia consulting partner Mike McNulty said shrinking margins were presenting challenges for project partners, but miners were adapting to tackle the issues.
“Major miners have responded to recent changes in market conditions by deferring major projects and looking at alternative ways to both finance and develop these projects,” McNulty said.
“There has undoubtedly been a history of significant cost blowouts on most major capital projects over recent years which have been compounded by Australia’s relatively poor productivity, the recent rapid escalation in costs and the shortage of key skilled workers required to manage these large and complex projects.
“If we’re going to remain competitive it’s critical that all project owners, not just the big international players, start focusing on developing and executing strategies to control costs and deliver greater productivity,” he said
Managing demand uncertainty, resource nationalism and the skills shortage were among some of the other top issues facing the mining industry.
McNulty said a shift in the industry was occurring, but stressed it could be an opportunity for companies.
“For the Australian mining industry, the days of quantity over quality evaporated when commodity prices started returning to earth and, in future, projects are going to have to prove not just that they have the resources in the ground but they can put the dollars in the bank as well,” McNulty said.
“There is real opportunity in the market now for producers who can develop a clear strategy to achieve profit and productivity, while also being able to keep their nerve and stay the course while the current uncertainties in the market play out.”