Profit versus Purpose – a Mining Industry in a State of Flux

Shareholders and stakeholders need to come to the party to identify solutions to ensure the survival of the mining industry.

Cape Town, 5 February 2014: The balance between sustainability and profitability has always been a difficult one to strike, particularly within the mining industry. All too often, the pursuit of generating revenue is put above the importance of social engagement in the communities that the sector impacts. Although corporate social investment has always been a critical factor in the mining industry, more often than not proper measures are not taken to ensure their tangible impact.

According to DuPont Global Consulting Solutions, as uncertainty and complexity continue to define the context in which mining companies operate, executives are facing pressures to become more competitive and agile, while also delivering tangible value for all stakeholders.

Speaking at the 2014 African Mining Indaba, Simon Herriot, Managing Director, DuPont Global Consulting Solutions had this to say, “The need for, and desire of, mining companies to maximise benefits for local communities is quite clear.  And yet, while many mining companies have bolstered their commitment and understanding of sustainable development, successful implementation remains a challenge.”

He further said, “Sustainable implementation can only happen when executives start to balance shareholder accountability with stakeholder concerns, and company success with social progress. In doing so, executives can provide products that not only address the communities’ need, but the expectations of consumers and society – while accessing new markets, creating demand and spurring growth.

Herriot added that key to this is a belief that the mining sector can truly become a vehicle for positive societal change. Historical impressions of an industry only interested in profit at any cost must be reversed in favour of a more inclusive approach that intends to share benefits of the company being in operation with community stakeholders and company shareholders alike.

The greatest obstacle towards achieving this ideal is twofold – an efficient and productive workforce and finding alternative energy solutions to help fight souring energy costs.

Finding a balance between employment and mechanisation has always been challenging for the mining industry. The best approach, Herriott believes, is one that aligns skills development and educational programmes to future business needs.

“Championing sustainable labour solutions within the mining industry relies on educating and uplifting communities. In many ways, large global entities can benefit from a dedication to promoting skills development. If executed correctly, this can directly serve the business requirements while engaging the communities.”

“Promoting critical skills development in science and mathematics with a view towards training rural youth to become mechanical or industrial engineers, for example, is an approach that can have a long-lasting impact. This allows the mine to focus on implementing mechanization where required to protect profitability, while benefitting from a well-trained and skilled work force.”

The necessity to reduce energy consumption and unnecessary wastage of valuable resources is also critical to the process. This approach demands a long-term dedication from all stakeholders and will not be something that is rectified over-night. “As such it is essential that the mining industry work together to achieve a sustainable solution ” , concludes Herriott. 

MINING INDABA WILL GENERATE SUBSTANTIAL LEADS FOR AFRICAN COMPANIES

 The Mining Indaba that is currently taking place in Cape Town will generate substantial leads for future investment and collaboration in the mining sector for South African companies. This was said by the Chief Director for Investment Promotion at the Department of Trade and Industry (the dti) Mr Yunus Hoosen

He was speaking on the side-lines of the Africa Mining Indaba where twenty four companies supported by the dti are exhibiting in the South African National Pavilion set up in partnership with the Department of Mineral Resources (DMR) and the Department of Science and Technology (DST) is supporting.

“The companies exhibiting in the pavilion represent mining houses, professional services, engineering and capital equipment manufacturers who are capable of developing value chain with their respective counterparts in other countries,” said Hoosen.

He added that the Mining Indaba will afford these mining companies an opportunity to showcase their expertise especially in the area of beneficiation.

“Government still wants to attract and encourage investment in the sector in order to grow the economy and also to explore joint ventures for future major mining infrastructure projects in South Africa,” he explained.

The dti delegation will be meeting with potential investors from Brazil, India, Nigeria, Japan and Iran to explore areas of mutual benefits, throughout the week. An investment workshop will also be held on tomorrow, as part of the Indaba. 

Earlier the Minister of Mineral Resources, Susan Shabangu, told delegates at the Mining Indaba that the event has contributed significantly in attracting the appropriate attention to the potential of African mining investment and development.  She also stated that beneficiation of minerals was critical for the government and formed part of the Mineral and Petroleum Resources Development Act (MPRDA) Amendment Bill.  Minister Shabangu added that government is confident that the MPRDA will provide a predictable, stable and globally competitive mining legislation that will amongst others promote investment, development and transformation.

An outlook for the mining sector 2013-2014

To coincide with his visit to South Africa for the Indaba conference, Evy Hambro, Fund Manager of BlackRock’s BGF World Mining Fund, makes the following comments about the outlook for the mining sector this year -

On the outlook for the Mining sector in 2014:

“The mining sector has significantly lagged the general equity market in recent years. However, as we move into 2014 a number of the downside risks have reduced (albeit not disappeared). The industry has made good progress in refocusing its strategy: operating costs have been aggressively targeted and investment in projects reassessed. Many commodities are trading close to or below their marginal cost of production, implying that price downside should be limited, in the absence of a collapse in demand.”

“The global economic backdrop is showing signs of synchronous growth and this has typically been supportive of commodity prices. The sector is trading on an undemanding valuation, as well as being at a dividend yield premium to the broader equity market, and with capital expenditure rolling off, management are guiding investors towards rising free cashflows.”      

“In our view there are three sources of potential upside for the mining sector in 2014: higher than expected commodity demand, lower than expected commodity supply and better than expected company performance.”

“On the demand side, stronger than expected economic data from China or global synchronous growth could lead to commodity demand which is higher than current estimates. This could push prices up and thus improve company profitability. On the supply side, existing mines underperforming due to weather, industrial relations’ issues or government interventions could result in reduced supply and higher commodity prices. This could also be echoed by new projects missing current production estimates.“

“Should commodity prices rise and company margins improve, we could then see earnings’ upgrades. The market continues to remain sceptical of management’s ability to deliver on the promises of capital discipline and cost cutting. To date the companies have delivered on message with continued and improved cost control as well as capital discipline.  A continuation of these actions in 2014 could result in upgrades across the sector.”

“Signs of these factors could prompt a significant rotation of capital away from areas of the equity market that performed very strongly in 2013.”   

On the outlook for Gold in 2014

“In the near term a strengthening U.S. economy and the withdrawal of quantitative easing could act as headwinds to the gold price. However we expect much of this has already been factored into markets and the gold price should find some stability over coming months.  From this point we believe there is the potential for the gold price to trend higher as strong retail demand, ongoing central bank demand and the consequences of significant levels of monetary easing across the globe contribute to inflationary pressures, which make real assets such as gold attractive to investors.”

“In 2013 while we saw strong physical demand from Asia, notably China, the gold price came under significant downward pressure from Exchange Traded Fund selling based on expectations for quantitative easing to be withdrawn and the US dollar to strengthen.  If this selling continues through 2014, gold is unlikely to gain positive momentum, however if it stops or we see buying emerge from the investment community, an upward trajectory would be expected.”

“Following the falls in the gold price in 2013, many gold producers have focused on cutting costs and reducing capital expenditure.  Given where valuations and margins currently stand we would expect to see gold equities exhibiting a greater beta to gold in the future.  In fact, the beta gold equities typically exhibit to gold bullion returned during the second half of 2013.  While this relationship has held in rising periods as well as falling ones, we believe as we look forward with a stable gold price and the opportunity for pockets of momentum in the sector, gold equities should be well placed to deliver strong performance in this environment.”

Looking back on the Mining sector in 2013:

“2013 really proved to be a year of two halves. During the first six months, commodity prices continued their downward trend and mining equities lurched lower still as ample commodity supply, concerns over the trajectory of Chinese economic growth and widespread asset write downs weighed on the sector. A number of mining commodities fell by double digit percentages and the Euromoney Global Mining Index declined 33%. Gold bullion sank 30% as the market began to price in an end to quantitative easing and gold equities showed leverage to this fall: the FTSE Gold Mines Index declined 48%.”

“Demand was not the culprit for lacklustre industrial commodity and base metal price returns in 2013. In fact, most mining commodities enjoyed record absolute levels of demand and reacceleration in demand growth rates from 2012 levels. Ample supply was instead the price dampener as the investment in new capacity the mining industry has made over recent years began to bear fruit. Significant reductions in capital expenditure mean that rates of supply growth should tail off over the coming years.”

“Towards the end of the year, confidence showed tentative signs of improvement. Economic indicators from the US continued their gradual ascent, the Chinese economy experienced pockets of acceleration and the beleaguered Eurozone surprised on the upside with PMIs moving into expansionary territory. The sector therefore ended the year on a slightly firmer footing, helped too by material progress from the industry in addressing investor concerns over capital discipline.”