Home' Australian Resources and Investment : March 2010 Contents 12 • MARCH 2010 • AUSTRALIAN RESOURCES & INVESTMENT
its date for full production of the Natalka deposit from 2015 to 2025
when government funding to increase power generation and build new
infrastructure fell through.
“Until mining companies understand what’s driving demand, they
will have difficulty thinking ahead of the curve, planning
exploration and development investments and differentiating
themselves in the global commodities marketplace.”
Carl Hughes, Partner, London, UK
Admittedly, not every company put on the brakes. Most industry
majors continued to invest in their tier-one projects throughout the
down cycle. Many gold companies also maintained production to take
advantage of current high prices, with several mining marginal shafts—
sometimes at the expense of profitability. Absent advance planning,
however, means many companies are bound to experience project
delays, talent shortages and spiralling costs when demand ultimately
recovers. This may be good news for organisations interested in pushing
prices higher again, but it only dooms the industry to continuously re-
living an endless series of boom and bust cycles.
To succeed over the long term, mining companies must do more than
master the supply and demand dynamics of the world’s commodity
markets. They also must understand the fluctuating demand dynamics of
the world’s labour markets.
While much has been written about declining international birth
rates, populations nearing retirement and shifting workforce
expectations, the entire challenge can be distilled to one central fact:
without an immediate and concerted effort to attract new talent to the
mining sector, organisations will very soon face a severe skilled labour
shortage. This challenge will become particularly acute as organisations
begin ramping up to meet the anticipated upward trajectory in market
While the current down market might seem like an ideal opportunity
to attract skilled labour, the truth is not quite so simple. Many of the
jobs shed in the past 18 months were of less skilled workers, leaving an
ongoing gap in access to experienced geologists, mining engineers and
technical experts. A lack of coordination between companies and
universities has exacerbated this situation, resulting in a slower flow of
mining engineer graduates. To complicate matters, many experienced
people simply are not prepared to work in the mining sector’s
increasingly harsh conditions.
This trend potentially can limit a mining company’s ability to meet
its production targets and maintain profitability—pushing workforce
optimisation higher up the corporate agenda for mining organisations
across the globe.
4 THE SPREAD OF SUSTAINABILITY
EARNING A SOCIAL LICENCE TO OPERATE REQUIRES AN
Many countries have long considered natural resources as assets
strategic to the state. In the past year, however, their true strategic
value has been reinforced as countries like China accelerate the pace at
which they acquire these commodities.
Flush with over US$2 trillion in foreign reserves, China has been on
a buying spree. Although China’s overseas direct investment was down
60% year-over -year as of October 2009, Chinese investors still
completed 30 outbound mining deals for the year with a total disclosed
deal value of US$5.2 billion.
Driven by the conviction that natural resources are an issue of
national security and a need to secure local supply, China is investing
in iron ore, gold, silver, copper, aluminum and coal in countries around
the world. And China is not alone. As of August 2009, Vietnamese
companies were set to invest $1.5 billion outside of Vietnam, with a
majority of those funds slated for investment in oil, power and mining.
In a bid to protect supply to local populations, Indonesia has
scaled back its coal exports. Russia, too, continues to retain majority
ownership of key assets like uranium and gold. Other countries lacking
rich domestic reserves, including India, increasingly are casting their
eyes to global supplies
“Sustainability now encompasses the creation of business processes
that benefit all stakeholders. Mining companies are responding by
seeking to understand how they can integrate these actions into
their strategy and operations to drive economic, environmental
and social value.”
Valerie Chort, Partner, Toronto, Canada
This trend is doing more than raising concerns about the sale of
sovereign assets to foreign investors. It also may be driving up short-
term demand artificially. On the one hand, industry stakeholders
speculate that this stockpiling is unsustainable. On the other hand,
people point to the astonishing underlying demand likely to resurge as
China, India and the world’s emerging nations continue to modernise,
industrialise and automate. Given the plausibility of both scenarios,
mining companies need the strategic flexibility to adapt to either one—
as well as the range of other potential outcomes they may face in the
TEN PRINCIPLES FOR SUSTAINABLE DEVELOPMENT
Various organisations around the globe have developed guidelines
companies can follow to enhance their sustainability initiatives. The
following ten principles guide company members of the International
Council on Mining & Metals (ICMM):
1 Implement and maintain ethical business practices and sound
systems of corporate governance.
2 Integrate sustainable development considerations within the
corporate decision-making process.
3 Uphold fundamental human rights and respect cultures, customs
and values in dealings with employees and others who are affected
by our activities.
4 Implement risk management strategies based on valid data and
5 Seek continual improvement of our health and safety performance.
6 Seek continual improvement of our environmental performance.
7 Contribute to conservation of biodiversity and integrated
approaches to land use planning.
8 Facilitate and encourage responsible product design, use, re -use,
recycling and disposal of our products.
9 Contribute to the social, economic and institutional development of
the communities in which we operate.
10 Implement effective and transparent engagement, communication
and independently verified reporting arrangements with our
5 NO EASY MONEY
THE COST OF CAPITAL DAMPENS GROWTH
No matter which way you cut it, mining is an exceptionally capital-
intensive industry. When the debt markets shut down and equity deals
started falling through last year, the mining sector was affected
disproportionately. Many exploration companies were forced to put a
hard stop to operations and junior companies around the world began
to fold. Even major companies and state-owned enterprises had greater
difficulty accessing capital, although many were sufficiently cash-rich to
continue financing existing production from internal cash flow.
As commodity prices began to rebound, credit markets eased open,
although access to capital remains a challenge. In many jurisdictions,
mining companies now must hold higher reserve accounts than in the
past. In Australia, for instance, capital adequacy ratios rose from 8% to
10%, raising the bar on organisational ability to attract debt financing.
Even then, lending terms remain exceptionally onerous and the cost of
capital has risen exponentially.
“Although the credit markets are opening slowly, there is still no
easy money available. Funding continues to go to the best projects
first, pitting other organisations in a battle against each other to
gain access to capital.”
William Joseph Ballantyne, Partner, South America
CONTINUED ON PAGE 14
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