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PDF includes findings from the United States as well as Australia, Canada, South Africa and the United Kingdom.
Shoots of Optimism Emerge for a Battered Global Industry
It’s no surprise that the global mining sector has endured a difficult few years and, for many mining companies, optimism has been in short supply. Persistently low commodity prices, waning demand, and tightening capital and credit markets have been squeezing the industry, and no one has been immune to the pain. Mining companies of all sizes—from the giants to the juniors—have seen the strong profits of 2011 and 2012 give way to painful losses, and exploration has slowed to a trickle as the industry waits to see if and when the markets begin to cycle upward.
But according to BDO’s inaugural Global Mining Middle Market Monitor
, the end of the latest downturn may be in sight. The study found that although companies continue to struggle, there is reason for optimism: Among global middle market mining companies from 2014 to 2015, median exploration expenditures grew 17 percent, median price-earnings (PE) ratios grew 15 percent, and median cash balances increased a modest—but still promising—2 percent.
“The global mining industry has had to navigate intensely murky waters over the past half decade, first digging out of the fallout of the 2008-2009 financial crisis and rebuilding, only to falter again amid volatile commodity prices and softening Chinese demand. Creativity in this industry, then, may be the ultimate kingmaker: Mining companies that are able to find effective ways to streamline their businesses, maximise their resources, collaborate with the right partners, and develop a nimble core business will be the first able to take advantage of any market rebound.” - Charles Dewhurst, Leader of the Global Natural Resources Practice at BDO
Revenue & Income
The United States’ mining sector has not been immune to the challenges plaguing the broader industry. Mid-market U.S. mining companies, like many of their counterparts globally, saw strong growth and a ramp-up in activity in 2011 and 2012, before declining commodity prices put prosperity on hold.
The past five years have entailed some painful losses for the U.S. mining industry, with measures of investor confidence—price-earnings ratios and market capitalisations—taking the brunt of the hit, and cash on hand reaching concerning lows. But the longer-term picture still suggests modest growth and, for U.S. mining executives, reason for cautious optimism.
Q&A: Amy Roberts
What do you think is the biggest challenge facing the mining industry in the U.S. right now?
Assurance Partner, BDO USA
From an audit perspective, the current decline in commodities prices is obviously the biggest challenge facing our clients. When prices began to drop in 2015, the industry was hopeful that the markets would rebound quickly. However, it’s clear that this isn’t going to happen–prices aren’t going to bounce back as quickly as they plummeted.
Another concern for mining companies is liquidity. With prices down, revenue obviously takes a considerable hit, and it’s becoming very difficult for companies to maintain necessary cash flow. Unfortunately, given how rapidly mining companies have expanded over the past decade, many are largely unable to reduce costs at the same rate as market prices are declining. They still need to pay their people and maintain their mines. Even if they essentially put mines on a care and maintenance program, there are still some costs they can’t avoid. As a result, many companies are burning through their cash supply faster than they’re bringing it in.
This factors into a third challenge: Because of the low commodities prices and liquidity concerns, many banks aren’t as willing to lend money as they have been in the past. With the market for capital raises being so dry, mining companies are being forced into financing deals with unfavorable terms that may not enable them to survive until prices rebound.
What is your outlook for the mining industry?
From my perspective, I think it’s unlikely that commodities prices will change significantly in the near term. Since the price drop, many companies have executed major cost-cutting strategies, and I expect this is likely to continue throughout the remainder of 2016 and into 2017. For mining companies, these cost-cutting plans can employ a variety of tactics, including shuttering mines and slashing thousands of jobs or reducing capital projects in operating mines or cutting exploration budgets. Companies are cutting costs wherever they can in the hope that they can outlive the current decline.
For precious metals, the demand is still there, and is staying strong despite the decline in prices. However, they too may need to grapple with potential cuts this year.
What kinds of investments are critical for mining companies to make today to ensure long-term growth?
Identifying and making the right investments is challenging in any environment, but can be particularly difficult when liquidity is limited.
Although it may seem counterintuitive, any mining company CEO will tell you they can’t cut exploration completely. Companies have a set number of years of proven reserves, and they must be consistently putting money into projects that will extend the lifespan of their mines and operations, as it takes an incredibly long time to get those mines up and running. In order to maintain some exploration activities, mining companies need to make sure their long-term planning strategies prevent total disruption, regardless of the current commodities market.
The key takeaway for mining companies right now is that they should resist the urge to make aggressive cuts across the board, and instead focus on building a strong, nimble core business that will be ready to move when the market bounces back.
For more information on the mining industry in the United States, please contact Amy Roberts at email@example.com
What Lies Ahead for the Global Mining Industry?
The primary takeaway the mining industry should glean from the 2016 Global Mining Middle Market Monitor
is that, although we’re beginning to see positive momentum in the sector, we have a long way to go before the industry regains full strength. Even as commodity prices slowly inch upward, capital remains tight, and global demand is unlikely to soon reach the levels the industry once enjoyed.
But middle market mining companies tend to exhibit a high degree of flexibility and manoeuvrability when compared to their larger counterparts, and they are looking for opportunities to streamline their businesses across the board. But the key to maintaining this nimbleness and securing a sustainable recovery is making cuts without handicapping the ability to grow operations and make smart investments as the markets improve. While companies should always evaluate their operations and assets to determine where to trim the fat, here are three key areas where miners would be well-advised to eschew austerity and embrace innovation:
2017 promises to be a time of considerable political turbulence. Between a new U.S. presidential administration, the fallout of Brexit, China’s growing economic power, global efforts to curb climate change and protracted conflict in resource-rich regions, mining companies must keep a wary eye on how the geopolitical tides turn in the coming year. New regulations may emerge, or old ones may take on renewed urgency as governments seek to crack down on fraud, environmental damage and human rights violations. While the cost of regulatory compliance is often high, this is one area where mining companies cannot afford to cut corners.
There is no single, obvious global trend line for M&A activity in the mining sector. In some countries, like Canada, consolidation has been an important avenue for struggling companies to shed underperforming assets, shore up their operations and stay afloat. But in other countries, such as the U.K., the cost of M&A is too high, and capital is too scarce for transactions to be a viable option. Mining companies seeking to merge or sell off some portion of their business must ask themselves several key questions to ensure they’re making a good deal: Are buyer and seller seeing eye-to-eye on valuations? If exploring a merger, what liabilities might the combined business carry? What will integration look like? What are the tax implications of the sale? A sub-optimally structured or failed transaction can be particularly costly in the current market, and could cause more problems than those it set out to address.
It may be some time before the mining industry enters another boom phase, but there is reason to believe the worst of the bust is now behind us. Key trends to watch in 2017 include continued increases in exploration and gradual movement toward increased M&A activity—if these trends begin to pick up steam, we could be looking at much brighter days ahead.
In a low-commodity-price environment, many mining companies have been forced to implement significant layoffs. The tradeoff, of course, is that a downsized labour force may not be large enough or may lack the breadth of skills required to take advantage of an eventual industry turnaround. Combined with regulatory scrutiny surrounding health and safety standards for workers, mining companies must make difficult decisions to contain their labour costs without cutting themselves off at the knees. Savvy mining companies are using a scalpel to make the necessary labour cuts—not a chainsaw.
For more information on BDO's international service offerings to the mining industry, please contact one of the following practice leaders: