Tracking the trends in 2010

An interview with Deloitte’s mining expert Glenn Ives

In late December, Deloitte was kind enough to lend  George Media the voice of Glenn Ives, North American Mining Leader (and respected advisor to public companies), who shared his insider perspective into Deloitte’s latest report on issues facing the mining industry in 2010 and beyond. The report is a true indication that Deloitte is on the cutting edge of industry research. The result? ABJ can share expert insider information into one of the industries that will make groundbreaking headlines this year.

The report begins with “In mining, as in life, nothing lasts forever”—and nothing could be closer to the truth. The last 18 months have been a scramble for mining enterprises as they try to ground themselves and move into the next cycle.

The Top 10 issues, as addressed in the report, are as follows:

1. Securing local supply.
Ives says that “As foreign companies buy into domestic markets, majors are facing unprecedented competition in their own backyards. This trend is set to rise as countries try to secure access to strategic resources.”

2. Commodities,
currencies, and cost.  
You don’t need a translator to know what this issue means for mining companies and investors. The markets, and industry, are volatile. Watch for the roller coaster, be prepared to ride it. As per the report: “As demand fundamentals pick up, organisations must take heed to expand with caution.”

3. Ramping back up.
As “success hinges on effective demand management.” This problem is compounded by a lack of skilled talent in the industry. Deloitte says, “to succeed over the long term, mining companies must do more than master the supply and demand dynamics of the world’s commodity markets. They must also understand the fluctuating demand dynamics of the world’s labour markets.”

4. The spread
of sustainability.   
Mining companies have sometimes considered social responsibility issues as public relations issues. But today’s mining industry calls for a longer-term, integrated approach, and so sustainability is in Deloitte’s top five issues.

5. Credit availability.
Financing is still hard to come by, and will be for some time. Capital sources are less eager to lend, and mining companies have to be prepared to wait this phase out.

6. Contending with
a changing climate  
The risks to the mining industry are immense, and include regulatory, physical, financial, market, strategic, supply chain, and litigation obstacles.

7. Extreme mining.
Where can the industry go once traditional, easier mining locales have been explored? The industry has begun to explore, and tackle, new and more challenging physical frontiers (from Greenland to the Arctic, to the Nigerian deserts).

8. The valuation abyss.  
“The need to merge still exists, but the desire does not.”

9. Big brother is watching.  
Tensions between miners and governments still exist, and relationships will be challenging despite gradual improvement in some regions.  

10. Infrastructure still poses a problem in some countries.


Sara Kopamees: Could you give our readers some insight on what mining fundamentals will need re-evaluation in the new economy, drawing upon the report?

Glenn Ives: One of the things that will need re-evaluation is how companies recognize the volatility of prices. Mining companies, before the economic crisis, didn’t really “believe” the higher prices that had occurred in the last three years. They were still used to very low prices in order to determine whether or not to build a mine. Quote on quote, they were “vindicated” when the price crashed. Let’s use copper as an example.  Copper prices went from $4.00 back to $1.25 last December. Mining companies’ reaction was ‘Hey, the prices were not realistic and we should have never put more than $1.50 in our models’.

We’ve got to look at these things and get away from the view that prices like $0.75 copper is realistic or is something we should really worry about in terms of buying a mine. If there is a mine that can be built, a mining company needs to recognize that really it needs $2-2.50 operate it, but they must  build in the flexibility to shut it down if necessary, in order to work with the ups and downs of commodity prices.

Fundamentally, we believe commodity prices are headed into a long-term upswing. The demand from China, India and other industrializing countries will keep the prices high.

SK: What would be the fundamental differences between those mid-level companies and majors and how they approach things now—as these are operating very differently already?

GI: The problem for mid-level companies is attaining capital and of course, it flows when prices are high and then it shuts off when they are low. They should be relying on financing more from equity than what they get from investors, because once you have equity in the bank you know you can build your project and then start producing your marginal costs off to production which are much lower. If you need $2.50 to build a copper mine, of which only $1.00 is related to capital; once you’ve spent the capital you can’t really operate. That’s why I think the medium-sized companies must not be reliant on financing and instead use equity in the market; it means the shareholders are more diluted but at least, they don’t have that downside. You can’t go bankrupt if you don’t have any debt.

SK: What is your advice for mid-level companies, would it be to focus less on debt?

GI: the counterbalance to such volatility is you have got to take what you can get. In the big picture you can reduce your debt significantly by doing so with equity. Which of course is the opposite of what many of these companies are doing... they are all focused on the share prices.
If you want to be in the game for the long-term, that’s what you have to do.

SK: I’ve heard in the past year, from many of the guys who’ve been in the game for a long time, that there were a lot of unique factors to this particular crash—what would you say was different about this one?

GI: We’ve seen it all before;   bouncing commodities prices and volatility in the market. But this was really a banking crisis. But I think we’ve learned a lesson from this all. I show my stripes when I say, capitalism isn’t great but I haven’t seen anything better. But there are sometimes where it does get off kilter.

Capitalism and government when instituted appropriately, over time, can be mediated with more regulation in certain places. The thing that won’t change, however, is the fact that we’ve got hundreds, if not billions, of people who will start to consume a lot more—which will definitely affect things.

SK: So we have to find a way to meet this demand for base commodities?

GI: Well, the places we do find them are politically challenging. We get into extreme mining where people are looking at more and more innovation. We have an unbelievable demand; I’m not sure this is the time of normal.
I think we’re looking at a very different future.

SK: One part of the study I wasn’t expecting was the part about mine locales—I find that when we’re talking to Canadian companies, we’re really ahead of the game in terms of using new technologies to get into those difficult mining areas. In terms of competition in our own backyard, who is coming after those spots in Canada?

GI: For historic reasons, I think, Canada has been exceptionally good at developing engineers and technologists, and capital markets actually play along with us being a global leader. So there isn’t a lot of competition. It is a situation in which we lead in the world.

There is the potential for us to see more extreme mining happening in minerals. We don’t know about every mineral but we’ll find a way; someone will find a way to explore underneath the floor of the ocean.

SK: Can we go back to sustainability—number four on the list. Nowadays, in some countries like Canada, I feel that sustainability is a given.

GI:  In some respects it’s number one for companies, because you cannot mine unless you have a social licence. There’s no debate or question among mining companies. Everyone understands that sustainability is important.

SK: But what do you think about companies out there—because I know there are some out there—that go in, explore, exploit and pull out of those internationals areas? Sustainability is part of the plan but how do we get them up to speed?

GI: I don’t think there are very many; and if there are I don’t think they are very reputable. Yes, it happens, but I think it is far less frequent than what people realize. Very, very few companies are exploitative nowadays.

The problem I have with an aggressive government approach is that it says the countries mining companies are operating in aren’t able to make the decisions properly for their people. I can tell you it doesn’t matter what country it is; environmental licence is very hard to come by without the cooperation of the government.

I would say that most companies listed on a stock exchange have tremendous difficulty in taking part in an endeavour where they don’t have social license. It just isn’t good business; people won’t invest in something run like that.

SK: In terms of sustainability, do you think climate change will speak loudly to companies ramping up production when things stabilize?

GI: Climate change is one aspect of what a social license includes, so I think climate change will become a separate agenda. The issue with climate change is that it is a much bigger issue in the oil and gas industry than mining; mining as a whole industry has a higher responsibility—it has been held at a higher accountability.  

SK: Problems are certainly more obvious when in the spotlight, like climate change has been in the media.

GI: Companies that are designing new projects are building mines and looking at plans, trying to decide how to mitigate climate change and worrying about those things at the design stage. Because again, you’re looking at 20-plus years before you’re building a mine. The question is not what the regulations are today, it is essentially what they will be in 20, 30 years.

I think people will be delighted to know how responsible people are being when they look at these things; it takes years to come to light but you know, I think mining companies are taking it seriously. They realize it is critical and it’s all to do with that social licence—you can’t go without it.

SK: Can you speak to the report—if you had to pick three issues that we’d be dealing with in the new decade, which ones will be most challenging?

GI: Sustainability or social license—I lump it all together. That is something that mining companies will be dealing with forever and it’ll be as important as any other single factor in the next 10 years.

The second: I think the demand aspect is there and if I can take the liberty of combining number one [securing local supply] and number three [ramping up] on the list I’d say that the combination of demand and those mines that are ramping up—the link between those two factors is extremely important.

My third choice would be the volatility of the markets and the world in which we live in. I don’t think volatility is going to disappear. I think volatility will continue, and how companies deal with it will determine how successful they are; how do you mitigate risk, how do you finance etc., all factors that will be important.

One more thing we haven’t talked about is the U.S. dollar. What it is going to do?
Commodity prices are in U.S. dollars and that is probably unlikely to change; I don’t think there’s another reserve dollar out there at least in the next 5-10 year frame. And I have a tremendous amount of respect for the U.S. economy. It’s been written off a couple of times but it’s probably way too early, way too often. The U.S. dollar isn’t going to fall apart, but it does mean we’ll have this volatility in the revenue side. Companies will have to take that into account. It’s part
of the game.

SK: There is so much going on, and it will be hard to predict what the next 12 months will look like. Thank you, Glenn.

GI: Thank you, anytime.

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