INDUSTRY FORECAST: REVENUES RISE, BUT FOR HOW LONG?

REVENUES RISE, BUT FOR HOW LONG?

By Lauren DeLorenzo, Assistant Editor, Mining Magazine

Although commodity prices remained high in 2021, changes in our global political, environmental and social landscape have caused swift shifts in miners’ priorities. Here, we look ahead to the biggest areas of opportunity in mining and the challenges the industry is looking to tackle in the coming years.

An accelerating energy transition. Geopolitical instability. Technological advancements. While the mining industry has traditionally operated over the long term, these recent global forces are demanding that mines react quickly in the short term.

Last year, high commodity prices elevated executives’ confidence in a lucrative future. A recent PwC report, Mine 2022: A critical transition, highlighted a 32 per cent increase in revenue and a 127 per cent increase in net profits in 2021, in large part due to these high prices and careful cost management.

But as critical mineral demand rises and climate issues loom large, experts agree that the mining sector must reconfigure its priorities and business strategies to address the impact of external influences.

While the pandemic took a toll on the industry, KPMG’s survey of over 300 mining executives, Global Mining Outlook 2022, found that the impact of COVID-19 is no longer considered a top risk by executives. Rather, it is regarded as something that will be incorporated into regular business practices.

Instead, supply chain issues, social license to operate and environmental risks and regulations were seen as the top risks to the industry. So how can miners address these concerns, and where will the future of mining take us?

Critical minerals

A surge in demand for critical minerals has reshaped the focus of the industry. Critical minerals with direct impacts on the energy transition are forecast to dominate the mines of the future.

The mining industry’s ability to deliver these critical minerals will be fundamental in Australia’s energy transition, and in allowing the country to reach its goal of net-zero emissions.

Demand for these minerals is expected to surpass US$400 billion by 2050, but the industry is already struggling to keep up.

A failure to meet this demand, the PwC report found, would jeopardise the potential for a large-scale renewable energy transformation in Australia.

The report found that there is a major risk for a supply shortfall in the near-term, particularly for copper, lithium and cobalt, and mines will need to scale up operations quickly. Shortages of silicon, rare earth elements, uranium, aluminium and steel could hinder progress of new energy generation projects and installation of distribution networks.

The supply and price of battery materials, including nickel, lithium and cobalt, will be one of the major factors on whether electric vehicle batteries will ever reach cost parity with traditional internal combustion engines.

Urgency is required to meet demand, with a new generation of miners already shifting to take advantage of the supply gap. In 2021, market capitalisation of the top five lithium, graphite and rare earth producers grew by 56 per cent, 101 per cent and 154 per cent, respectively. In comparison, market capitalisation for the top 40 miners grew by seven per cent.

Because critical minerals are not considered bulk commodities, investors may need to reassess their threshold for investment, or aggregate supply through shared infrastructure hubs.

Price volatility and limited price visibility mean that going forward, innovative financing solutions may be required for these projects.

Environmental social governance (ESG)

Establishing trust

Once considered a point of differentiation, environmental social governance (ESG) is now considered essential, and is at the top of the priority list for mines of the future.

The expectations for tax transparency, strong social licences, responsible divestitures and minimising environmental impact are high, and will be crucial to success.

In fact, 84 per cent of executives surveyed agreed or strongly agreed that success in the long run will become dependent on a more broad definition, encompassing a holistic view of stakeholder returns, including governments, communities and employees.

Working with communities to establish trust is valuable for more than just a continued social licence to operate. Increasingly, investors are severing ties to projects that are seen as unsustainable or unethical, and basing investment decisions around ESG metrics. Meanwhile, green bonds and sustainability-related loans are becoming more common, enabling ESG-conscious companies with extra capital.

A new business model

KPMG’s survey respondents overwhelmingly agreed that ESG will be a cause of major disruption in the industry over the next three years, significantly impacting the current business model.

Nearly 20 per cent of mines operating today are likely to close in the decade ahead, according to International Council on Mining and Metals surveys. Miners must collaborate with landowners, communities and stakeholders to manage closures and sustainable decommissioning.

This transition presents an opportunity for the industry to establish trust and move towards a low-emissions future. To achieve net-zero targets, miners can diversify, decommission or reduce emissions at existing operations.

Reporting

But what exactly constitutes ‘good’ ESG is difficult to measure, and KPMG’s research suggests that it will only become less clear over time. Over half of executives believe that investor expectations are not consistent or clearly measurable.

Trevor Hart, Global Head of Mining at KPMG International, said, “Mining companies like clarity and certainty. So they are wrestling with the question of how they should report to the market about their ESG progress when it is not really clear yet what ‘good’ looks like.”

Standardised reporting is being developed by several industry bodies, and until they are finalised, companies should continue to clearly communicate their ESG goals and measures to investors.

Technology

As companies look to decrease their carbon footprint, technology solutions can allow for greener, more socially responsible operations.

KPMG’s survey revealed that 87 per cent of executives believe that technological innovation will have a significant impact on the industry in the next three years – but this can be an opportunity for growth, rather than a threat to operations.

Replacing diesel or petrol as the main energy source for mining equipment and trucks could drastically reduce a project’s carbon output. In Australia, hydrogenpowered equipment is currently being trialled, and electric batteries may be embraced in the future.

New innovations are also set to make operations more efficient. Drone technology can conduct surveys more easily, and health and safety sensors can create real-time data streams for better decision-making.

But technological advancements are nothing without the labour force to maintain and optimise operations. Retention and recruitment of a new labour force in the sector will be paramount in realising the full potential of the industry in the coming years.

Copper is an essential critical mineral used in the wiring of solar panels.

Companies are looking to invest in technology-centric roles, data analysts, computer scientists, environmental scientists, heritage experts, water management experts and more. Some companies are offering mobility schemes to allow individuals to travel and work around the world, and better ESG will make these positions more attractive to talented workers.

The new business model

The impacts of COVID-19 and the war in Ukraine have shaken supply chains, and governments are responding with new partnerships and alliances. Companies will need to demonstrate they’re addressing risks and setting higher ESG standards for continued growth.

Strategies for growth

While the KPMG report reveals a general trend of better access to traditional sources of capital over the last year, for some companies, it is still a significant challenge.

According to the survey, 62 per cent of executives agreed or strongly agreed that companies need to embrace new business models, such as strategic partnerships, private equity and public private partnerships. This view was particularly pronounced in organisations with market capitalisation of less than US$5 billion, and there are signs that increased ESG reporting, regulatory requirements and a combination of funding factors are encouraging miners to consider alternative models.

The survey also found that organic growth was still seen as the most effective strategy for most businesses, but mergers and acquisitions are now seen as the second best option. According to the report, miners can expect mergers and acquisitions to play an increasingly large role in the years ahead, as big businesses buy up smaller companies to quickly increase their production. If valuations stay high, companies may consider the cost of a merger or acquisition against investing in their existing brownfield sites.

Another trend found in PwC’s analysis is that many original equipment manufacturers and end users are directly entering into joint ventures, partnerships and offtake agreements with miners to secure supply. This points to original equipment manufacturers eventually becoming directly involved with critical minerals mining.

Deals

The number of deals made in the last year increased by 60 per cent, with the primary driver being gold.

Due to low debt levels and high commodity price, gold miners are well-suited to take part in mergers and acquisitions, and this trend is expected to continue as large and middle-tier gold miners look to expand portfolios.

The mining sector has seen a staggering growth – 159 per cent – in critical minerals’ real value since 2019, and this trend is expected to continue for at least the next ten years, as demand grows and assets with high extraction costs become viable as prices rise.

Many leading companies are already shifting their focus towards these minerals. In August 2021, BHP announced a divestiture from its oil and gas operations to concentrate on its potash mine development. Glencore has also announced its intentions to accelerate its shift towards future commodities.

Recommendations

PwC’s report recommends that companies should review their position on critical minerals for the energy transition, and evaluate opportunities to own more of the supply chain or partner with original equipment manufacturers. Developing shared infrastructure solutions could accelerate timelines on this front and lower capital costs.

Companies should consider the impact of high volatility in the short or medium term, and the impact of increased geopolitical risks, while evaluating merger and acquisition strategy in the long term.

Increased attention to ESG is crucial, and miners should be aware of the potential impact of the OECD’s pillar 2, while looking towards exploring green premiums in the future.