Engineering & Mining Journal

JAN 2013

Engineering and Mining Journal - Whether the market is copper, gold, nickel, iron ore, lead/zinc, PGM, diamonds or other commodities, E&MJ takes the lead in projecting trends, following development and reporting on the most efficient operating pr

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O P E R AT I N G S T R AT E G I E S Report Highlights Issues Ahead for Mining Industry A series of immediate challenges facing the global mining sector—including rising costs and increased demand uncertainty— should not deter miners from making investments today to fulfill future global commodity requirements, according to a new report from Deloitte Touche Tohmatsu Ltd. (DTTL) released recently. Tracking the trends 2013, which provides commentary and analysis of what DTTL views as the top 10 issues most likely to impact the mining sector in 2013, predicts the companies that will thrive into the future will be those that set a solid strategic direction and hold the course amid shifting industry realities. The annual report also provides a range of responses that companies can adopt to prepare for shifting industry dynamics. Now in its fifth year of distribution, the DTTL report notes that an ever-increasing wave of volatility—including declining commodity prices, mounting cost pressures, the persistent Eurozone debt crisis and China's economic slowdown—has led some companies to put projects on hold while others have pursued richer deposits and higher yields through projects in some of the world's toughest geopolitical and operational environments. Coping with such a challenging situation requires a sophisticated level of analytic capability that many mining companies fall short on. "The endemic factors impacting the global mining industry pose serious implications for meeting future demand and profitability," said Philip Hopwood, DTTL Global Mining leader. "In the face of shifting industry dynamics, mining companies must determine where to focus during volatile times. An often overlooked way to improve their operations and reduce costs is to ensure they get the most out of existing and emerging information technologies." "For the second year in a row, mounting costs tops the list of the key issues affecting the mining industry," said Glenn Ives, Americas Mining leader, Deloitte Canada. "This is expected to worsen in the short term as commodity prices continue to dip, workers demand higher wages and regulatory costs rise. But rather than halting production in the face of shareholder demands for more immediate returns, miners should be mak86 E&MJ; • JANUARY 2013 ing investments today to meet the expected long-term demand for commodities. Here are the top 10 issues the mining sector is expected to face in 2013, along with some responses companies can adopt to deal with them: • Higher costs: This remains the number one trend for the second year in a row. Currency volatility, high operating costs and lower grades are affecting decisions around continued production, expansions and the delinking of corporate equity from commodity prices. To get costs under control, mining companies must pinpoint their cost drivers, automate, improve asset efficiency with analytics, improve their operating model and streamline the supply chain initiatives. • Demand uncertainty: China's deceleration of growth, combined with the widening gap between its official global demand data and observable reality, has adversely affected commodity prices and investment decisions. Rather than halting production and risking an inability to meet future demand, mining companies should consider applying game theory to enhance their scenario planning to guide their capital project decisions. • Capital project deceleration: Although mining executives are hesitant to authorize new capital expenditures at a time of tightened margins and ongoing pressure to pay shareholder dividends, the report suggests the correct response may be less about freezing projects or waiting The key to controlling project cost overruns, suggests a recent report, may require management to improve investment decisions by applying project rationalization, higher capital efficiency, data analytics and project delivery quality assurance. (Source for all data: Deloitte Touche Tohmatsu Ltd.) until commodity prices and government intentions settle and more about making disciplined investment decisions through such measures as project rationalization, improved capital efficiency, data analytics and project delivery quality assurance. • Increased M&A; volumes: As a result of limited debt financing, some mining companies are seeking to enter deals pre-emptively with partners of their choice through "proactive and rescue M&As;," with transaction volumes likely to rise into 2013 and Asian investors remaining frequent providers of development capital. To improve the odds of transactional success, the report suggests engaging in more comprehensive due diligence to assess potential partners and planning in advance for the integration. • Resource nationalism: Governments around the world are exercising several forms of resource nationalism, from mining industry privatization and expropria- The importance of mining to the economy of many developing nations, and an accompanying trend toward resource nationalism, will require miners to strengthen their relationships with national governments and demonstrate the industry's value to local organizations and citizens. www.e-mj.com

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