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A time of optimism in the mining industry, says BDO Report

Creativity in this industry, then, may be the ultimate kingmaker: mining companies who are able to find effective ways to streamline their businesses, m...

Dale Benton
|Oct 21|magazine13 min read

Creativity in this industry, then, may be the ultimate kingmaker: mining companies who 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.”

Those are the words of Charles Dewhurst, leader of the Global Natural Resources Practice at BDO.

This comes from the BDO 2016 Global Mining Middle Market Monitor study which highlights that there are actually signs of optimism creeping back into an industry that has endured some difficult times as of late.

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.

Here’s what we learned from the BDO 2016 Global Mining Middle Market Monitor and the road ahead for middle market mining:

An industry in recovery

As 2016 draws closer to an end it is fair to see that we are seeing something of a revised sense of hope and optimism across the industry, it is effectively in our own hands. As Dewhurst noted, the mining companies that are able to find effective methods of streamlining their businesses, maximise resources and more importantly collaborate with the right partners are the ones that will reap the rewards of an upward swing.

While there is an increase in demand, particularly from China, and commodity prices are slowly inching higher, capital is still a tricky subject and demand still isn’t really anywhere close to the industry’s hey days.

For middle market mining companies, making smart investments, cutting in the right places without compromising business and remaining flexible is crucial in securing a sustainable recover.

Three key areas of thought for mining companies and the future of the industry:

1) Revitalising regulation

Mining companies are advised to keep an eye on the role geopolitical developments will play in transforming the way the industry is regulated. In just a few months’ time there will be a new U.s President, the full implications of Brexit in the UK and Europe are yet to be felt and there is no saying how much further China’s economic power will grow. Throw in an increased focus on climate change and sustainability and 2017 will be a very different industry compared to 2016.

Regulatory compliance has always been crucial to the industry and success across the industry, and it’s certainly not going to change.

2) Consolidation

Consolidation is a global trend. That being said, it is a trend that is different in almost every country and every company. For example, in Canada it has been seen as an opportunity for struggling companies to survive through the shedding of assets and shoring up operations. Compare that with say, the UK, where the cost of mergers and acquisitions is relatively high and capital is few and far between.

For any mining company looking at consolidation, they must ask the right questions before proceeding. The cost of failure, or a bad/risky transaction can prove fatal and generate more questions and losses than it ever could in profits.

Mergers & acquisitions are becoming more common place across the industry, leaving many to believe that in actual fact – there is something of an upward swing in motion. With more companies moving towards consolidation, who knows how much better the industry could look in a years’ time.

3) Labour of love

With commodity prices falling and companies looking at where they can recuperate money to stay afloat, more and more they are turning inwards.

Yes, layoffs.

Nobody likes to say it but it is a significant element of the current industry. It’s natural, unfortunate, but a natural survival tool for a business.

And what’s worse is that, should there be an upward swing, companies could be left with such a limited working force that they simply cannot capitalise on the market.

There is also an increase in health and safety governance. Just last week the MHSA announced that the US mining industry is at its safest, but that still included 24 deaths. This is forcing companies to really look at their labour costs and in some cases, it forces them to make that difficult decision of letting someone go.

BDO states, rather nicely, “Savvy mining companies are using a scalpel to make the necessary labour cuts, not a chainsaw”.

 

You can read the full report here: http://press.bdo.global/documents/31548

 

 

 

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