Mining sector faces rising costs, uncertain demand

Canada’s mining industry faces significant challenges in the near term, including higher prices, uncertain demand and depressed commodity prices, according to an annual report card on the industry by Deloitte.

But the report cautions that demand for commodities will rebound in the longer term and companies should be investing now in anticipation.

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The industry is in an awkward transition period, facing growing resource nationalism, demands for greater corporate responsibility and a looming labour shortage, at a time when companies are struggling with volatile commodity prices, said Jurgen Beier, a national mining practice leader at Deloitte.

Embrace innovation

But that will force mining companies to be nimble and innovative, he said.

"There are a number of proven technologies and things that are out there today that radically change the way ore is extracted and change the way mining occurs,” Beier said.

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"We think this is the opportunity to embrace that innovation, to get to that point of sustainability."

The Canadian mining sector is seeing a lot of cost-cutting and rationalization in the face of slowing demand from China. Barrick Gold has suspended work on its massive Pascua-Lama mine in South America as the gold miner moved to cut costs.

Just today, Potash Corp. announced more than 1,000 layoffs in the face of falling potash prices and Rio Tinto said it would pull back on capital investment in its iron ore and copper projects.

Commodities slide temporary

Jim Rogers, author of Street Smarts: Adventures on the Road and in the Markets and the chairman of investment group Rogers Holdings agrees the slide in commodity prices is temporary.

“Commodities have pulled back but I would remind you that in all bull markets there are periods of correction. In 1987, during the great bull market in stocks, stocks went down 40 to 80 per cent around the world, again in 1989, 1990, 1994, etc, ‘’ he said in an interview with Lang & O’Leary Exchange.

“Every time people said the bull market’s over, but it wasn’t.  I think that’s what ‘s happening with commodities now.”

Rogers said the oil and gas sector is facing supply constraints on top of low commodity prices.

The Deloitte report warns mining firms they must be careful about how far and how fast they pull back, because they have to be prepared to meet future global demand.

Deloitte urges more corporate responsibility

"Tweaking existing processes cannot deliver the massive shifts mining companies need in today’s capital-constrained environment," Deloitte's mining leader Jürgen Beier said. "To build true competitive advantage, companies must look beyond incremental performance improvement to determine how they can revise their systems to embrace the broad theme of innovation.​"

Deloitte singled out a few trends that miners can use over the longer term to stay afloat and then thrive

• Embrace new technology wisely. Beyond automation and remote operations, numerous technologies can help miners over the long term. Many miners are transitioning to quick-start modular plants and projects that can be expanded as industry fundamentals improve.
• Reconsider energy needs. Consider using energy in more effective ways. Many projects are remote and that makes them susceptible to finding suitable energy needs, usually oil. In addition to renewables, miners should use electricity more strategically, Deloitte's report says. And building shared infrastructure for things like water with nearby projects can also keep costs down.
• New sources of capital. 2013 was a tough year to get financing for many miners because of lower commodity prices. But the report suggests taking advantage of new sources such as sovereign wealth funds, private equity and alternative markets for financing.
• Work with locals. Developing local bases of supply, improving communications with communities and sourcing local labour wherever possible are helpful tips to get projects back on track.
• Avoid the compliance trap. Companies that operate in countries where bribery and corruption are 
  prevalent must engage in appropriate employee training. Compliance audits can help review local operations proactively and conducting conducting due diligence reviews of agents or third-party suppliers also helps.