Mining - industry issues
Population growth and burgeoning development, especially in Asia, are driving ever increasing demand for mineral commodities and ore bodies.
Mining companies are scrambling to ensure that sufficient supply is in place, along with supporting infrastructure and distribution to meet future demand. The lack of good quality projects in "safe" areas is leading to exploration and development efforts in troubled or developing markets where considerable cultural, infrastructure, security or technology challenges must be met. This makes managing geopolitical risk effectively a strategic imperative for mining companies as cross-border expansion brings them into new markets.
Markets of particular interest to mining companies who are seeking to grow are Russia, the countries of the former Soviet Union, much of Africa, as well as parts of Central and South America. In terms of anticipating future demand and getting into position ahead of competitors, China and India are of particular interest.
PricewaterhouseCoopers and Eurasia Group have brought together a team of specialists who developed a Political Risk Assessment (PRA) diagnostic and monitoring methodology which enables companies to isolate and assess the contribution of political risk to their overall risk profile. This allows mining companies to manage these risks, and identify and capitalise on unexploited opportunities.
Recruiting and retaining a skilled workforce
Mining companies have large workforces with diverse skills and operation, often in numerous locations outside their home countries, including developing and frontier markets.
The rapid aging of the workforce, combined with the downturn of students in mining fields such as mining engineering, geology and metallurgy, is generating increasing concern for mining companies. Recruiting strategies and the ability to retain employees in mining companies is more important now than ever. With growing demand for mineral commodities, mining companies need greater production and a larger workforce. Developing human resource strategies that help attract new recruits, as well as retain the experienced workforce and their knowledge and skills, is imperative to the future of the industry.
With more than 5,000 experts in over 100 countries, PwC's human resource network forms one of the world's largest HR advisory organisations. Our multi-disciplinary approach allows us to advise clients on all aspects of people management. Access to our Saratoga modelling capability and vast databank of workforce and HR metrics allows us to underpin our expertise with hard data. Saratoga is highly recognized as a world leader in the field of HR metrics and analysis, dedicated to the premise that intelligent measurement is fundamental to performance improvement.
Although there has been an increase in the regulation of the mining industry with respect to local economic development, environmental management and climate change strategies, mining companies are leading other industries in terms of sustainability reporting, and this trend is set to continue.
Leading mining companies are successfully integrating sustainability into their overall strategies by:
- Building trust with their key stakeholders through balanced reporting on their activities;
- Actively managing their risks;
- Publicising the positive effects of their operations; and
- Embracing a growing body of international best practice on non-financial matters.
Sustainable development practices have the potential to leave a legacy of positive impact long after the life cycle of a mine has ended. Financial markets are also increasingly assigning a greater value to effective risk management of non-financial issues.
Our Sustainable Business Solutions team works with mining companies across the world to align corporate governance and non-financial management including operating systems and processes, performance reports and mechanisms to meet the needs and expectations of stakeholders. Our solutions include:
- Sustainability report assurance (often combined with financial audit):
- Sustainability report development
- Sustainability strategy development
- Stakeholder engagement
- Country risk assessments (including human rights)
- Certification (ISO 14001, 9001)
- Performance benchmarking
- Evaluation of environmental risks and liabilities
- Environmental liability audits and due diligence
- engagements
- Climate change strategies and emission trading advice
Mining companies are currently generating large amounts of cash due to the high commodity prices that have resulted from increased demand from China and India as well as from increased production volumes following investment in additional capacity in recent years. Cash levels have increased further from the cash generated from asset sales as a result of recent restructures. Cash generation levels are expected to remain high for the foreseeable future which has given rise to the enviable problem for mining companies of what to do with the surplus cash.
Surplus cash represents a problem due to the resulting impact on capital structure. Every company has a target capital structure which is determined based on a number of factors including the riskiness of the underlying business operations, tax position of the company in terms of its ability to avail of tax deductions on interest payments, requirement for financial flexibility, as well as attitude to different forms of finance. Surplus cash reduces gearing below the target range which gives rise to lower returns on equity. Conversely, higher gearing can threaten a company's credit rating and increase the cost of debt finance.
Mining companies have responded to the problem of surplus cash by spending the cash (on acquisitions or by accelerating organic growth) or by returning cash to shareholders (through special dividends or share buybacks). Each of these approaches is not without its risks.
There has been extensive M&A activity in the mining sector which reflects companies spending surplus cash on acquisitions. However, a cash acquisition at a time of high share prices runs the risk of overpaying in the event that commodity prices are not maintained at current levels. Adopting this strategy may depend on a view as to whether we are currently at the top of a cycle or have entered a super cycle.
Organic growth can be accelerated by bringing forward planned projects. This approach depends on the availability of projects at appropriate stages of development as well as expectations regarding the sustainability of future demand. It is also limited due to external factors such as the availability of equipment and outside contractors which are in demand at times of high commodity prices.
Billions of dollars have been returned to shareholders in recent times through special dividends and share buybacks. Buybacks are favoured by some market participants who see them as a sign of confidence in the company. However, others view buybacks as a failure to identify opportunities which can earn a return above that which shareholders can earn elsewhere. The relative tax treatments and a requirement for flexibility may also influence the appropriate approach to adopt in returning cash to shareholders. Again, the view of the company regarding future prospects for the company and the industry is a factor to be considered in returning cash to shareholders. Care is also required in the communication of the rationale for returning cash to shareholders and the approach adopted.
