Deloitte tracks the trends for 2012

After recent trips to China and India, Glenn Ives, the Toronto-based chairman of Deloitte, is more convinced than ever that the urbanization and modernization taking place in Asia will continue to drive demand for metals at the same time as dwindling access to deposits and deteriorating grades make it essential that mining companies enhance risk management on multiple fronts.

Ives points to China’s twelfth five-year plan in which the government envisions moving 80 million people into new cities over the next five years–“the equivalent of building a greater New York area every year”–and to India, where the pundits in New Delhi talk of hundreds of millions of people moving into cities over the next twenty years because the country’s current cities “are full.”

“The underlying trend is that Asia is continuing to grow and China and India in particular are moving significant numbers of people up the economic growth curve,” he explains. “That is going to keep demand for commodities high, which means we’ve still got this disconnect between demand and the ability of mining companies to supply.”

Ives notes that China alone accounts for 37% of world demand for copper and 44% of global demand for aluminum, and while the expectation for growth next year is closer to 7% than the historic 9%, that’s still a lot of metal demand. “China consumes more copper than the U.S., the EC, and Japan combined,” he says. “We’re not building enough copper mines. Many of them were discovered in the sixties and seventies…where are we going to find enough copper to meet this demand? Of course you can look at places like the Congo…but yikes, they are tough places to do business.”

Indeed, dwindling access to deposits and deteriorating grades are forcing more and more mining companies to move away from the more established mining countries like South Africa, Australia and Chile to the more challenging jurisdictions of Eritrea, Papua New Guinea, the DRC, Liberia, Afghanistan, Mongolia and Kazakhstan, co-authors Ives and Jurgen Beier of Deloitte argue in the new report: “Tracking the Trends 2012.”

Looking ahead, escalating costs, talent shortages and competing infrastructure builds will make it very difficult for mining companies to complete their capital projects on time and on budget. Cost management will become a critical priority, the authors assert, citing examples of rising prices for everything from tires (“by mid-2011 the price of haul truck tires alone had tripled, touching $100,000 on the spot market”) to Brent crude (as of June 2011 Brent crude prices rose 45% year-on-year). And in some areas, “investments in water, transportation and energy are expected to account for 82% of project spending.” The Deloitte study estimates that for 2011, mining capital expenditures will reach US$113 billion, 50% higher than previous years.

At the same time, mining royalties over the last year have risen in Australia, Chile, Peru, South Africa, Ghana, Tanzania and Burkino Faso, Deloitte asserts, while the governments of India, Kazakhstan and Russia have brought in new export duties. Companies must also grapple with rising wages, talent shortages and getting permitted. “Getting permits takes longer, which drives up costs,” Ives says. “Mine after mine has struggled to get its permit, you’ve seen the stories.”

“For big mining companies it used to be that $1 billion would buy you a pretty good mine,” he continues. “Today, if you look at some of the new projects, capital expenditures are in the $2-4 billion range. That’s a significant increase in risk.”

The report offers some suggestions on how to get costs under control, including investing in automation, such as autonomous drilling. And new technology can lessen the impact of workforce shortages. Some companies have moved towards driverless trucks, remote operations centres, automated mine-to-port operations and security control and data acquisition systems. To fill the human resources gap Deloitte also recommends cross-training people from other industries such as the automotive and manufacturing sectors and stepping up recruitment efforts in countries “that lack a mature mining industry (such as Ireland) or that continue to suffer from high unemployment.”

One suggestion for managing costs was purchasing transport vessels to lower transportation costs. “Although hovering in the US$50 million range, cape-sized vessels are now half the price they were just a few years ago,” the authors contend.

Ives recommends taking best practices from other industries and looking outside the mining industry for things such as supply chains, process engineering, and computerization, among others. He also advises being more proactive with public relations and getting ahead of the concerns of stakeholders, citing the example of Barrick Gold (ABX-T, ABX-N), which recently inaugurated its $70 million Punta Colorada wind operation in Chile.   

“That’s the sort of story the mining industry has not necessarily got out there as often as it should. A wind farm at a mine-nobody is going to complain about that-and the picture that it gives to the public is that it’s a responsible corporation doing its part.”