SRK Consulting says that waiting for the economic upturn will be too late

African Mining Indaba '16 starts two weeks today in Cape Town. It will be interesting to hear the views of financiers and other pundits on how the industry might perform this year. Many have certainly got it wrong in the past (posting of 4th January).

SRK Consulting, regular contributors to MEI Conferences, is a leader in natural resource and development solutions, providing independent technical advice and services through over 50 offices in 22 countries, on six continents. The South African office will be exhibiting at Indaba, and have kindly invited me to their cocktail function two weeks tomorrow.

SRK will be urging mining companies to look beyond the gloom of the current commodities slump and to start planning their next projects without delay. “Africa’s growing population and its demand for commodities and energy is a positive underlying factor that will promote future economic growth as soon as global conditions improve,” said SRK corporate consultant Roger Dixon. “But it will require mining companies to plan now, while investing in skills and technology to improve operational efficiencies and to meet growing challenges such as energy supply and water quality.”

Dixon’s comments coincide with a recent report from leading management consultancy McKinsey & Company, who argue that declining ore quality and the limited accessibility of new deposits will squeeze mineral supply between now and 2020, potentially driving a commodity-price rebound as global demand continues to rise. “The commodities likely to be the most severely affected by ore quality decline are copper, gold and phosphate rock,” according to McKinsey. 

This forecast would support Dixon’s point that, while the commodity cycle is in a general downturn, there are many commodities which could see a change in fortunes in the not-too-distant future – catching many companies ill-prepared. “There is not enough time to bring a medium-sized mine on-stream and still benefit optimally from a buoyant market,” said Dixon. Starting a modest mine – even after establishing the existence of a payable orebody – could take five years or more, with all the technical studies and regulatory authorisations that must be completed. He said South Africa’s mining sector missed out on the last commodity boom due to minerals policy uncertainty and to companies’ reticence to commit to projects early enough.

“It has been a difficult period for most mining companies, and cutting costs has been the order of the day,” he said. “But shareholders are soon going to be asking where their future returns are going to come from, and exactly what plans have been put in place to build their business up again.”

"Waiting until the recovery is on the doorstep has the danger of placing undue time pressure on the process of planning and building a mine", said Dixon. Indeed, the reasons for low returns on capital witnessed in the sector include the purchasing of assets in a rising-price environment and the attempting to accelerate projects to take advantage of price-cycle peaks. This is exacerbated by the limited availability of competent project staff, as well as the higher turnover of staff, experienced at these times.

“It is imperative that mining companies take a strategic long-term view of their business, so they can invest timeously in well-researched studies and methodical implementation,” he said. “They need to plan for how best to survive the downturns – while also considering how to invest in the future even when revenue is down. Africa is resource-rich and has much to offer the global economy, so the productive capacity of our mining sector must be preserved for better times.”

Neither will it be business as usual. There are growing risks to mining projects – from tightening environmental regulations to more mobilised communities – which could frequently lengthen lead-times and complicate the planning process, according to SRK principal consultant Andrew van Zyl. Leveraging technology will be imperative – not just to make mining more efficient but to reduce pollution, conserve water and generate electricity sustainably in remote locations.

“With climate change increasingly on the global agenda, mines will need to become more carbon-efficient, and more electricity could be generated from renewable sources,” said Van Zyl. “As population increases and living standards in Africa rise, competition for water in certain areas will also increase between mines and communities.”

"Mines today are called upon to observe the highest levels of regulatory compliance and technical performance", he said, "but at the same time they must build robust relationships with stakeholders so they can maintain their social licence to operate – as this has become the most fundamental risk to mining everywhere".

I look forward to hearing more from SRK and others in Cape Town next month.