Commodity price plunge ushers in greater need for low-cost strategies, says Deloitte
Commodity prices have plunged to five year lows, raising the stakes for companies to survive and still achieve results for their stakeholders. But finding ready capital for development needs is proving elusive for marginal projects, once attractive at higher prices, leaving companies little choice but to seek out the development of low cost mining assets with clear advantage of higher grade reserves, says Deloitte.
In this environment companies will focus heavily on costs and continue to explore selling non-core assets so that they can meet cash flow expectations and selectively move after growth opportunities as well as expansion strategies.
“The strategy is to have low cost positions and to develop pipelines of growth which create more low-cost opportunities,” says African mining leader at Deloitte, John Woods.
“In an environment with expectations for softening commodity prices, all mining companies are going to look at their portfolios. When they look to sell an asset, they must do it within a strategy and consider the value for shareholders,” he says.
Oil prices are important from an operating cost perspective and a drastic reduction in oil prices and diesel in particular do have an advantage in the short term for the sector. “Depending on the type of operation, diesel would be between 10-20% of the cost for surface mining operations,” says Woods.
But for those countries with a high reliance on oil as an export, the picture is bleak. “The current oil price will make you sit up and reach for your coffee,” he says.
Wage negotiations looms as another risk factor for mining companies in light of the fall in prices and strain being placed on their bottom lines.
“Wages are always important for both parties. It would seem to me that the issue in SA is more intense than I observe the issue to be across the rest of Africa at present. That may change. I’m seeing more focus across the rest of Africa on jobs and building the capacity of people within each country,” says Woods.
Weakening currencies are another challenge to manage. “It is tough if you bought in one currency and have to transact in another. If you’re on the wrong side of that then that can be very difficult indeed,” he says.
While there is always volatility in the commodity market, it is just a matter of degree and “we will see degrees of volatility going forward”.
But the picture is not all doom and gloom if increased levels of demand are tied to growth in manufacturing in key markets.
“If you link consumer demand in the US to manufacturing in the US, China and India you would think that would be a helpful complement for the buoyancy of selected commodity prices,” says Woods.
According to Deloitte six key factors set any mining project or operation up for a successful outcome. These are:
- A good mineral deposit;
- The deposit is located in an economic region with good governance and consistent application of civil and tax law;
- Infrastructure in the form of roads, rail, ports, electricity and communications to support the mine should be available and functioning;
- A well understood inbound and outbound supply chain supporting the mine and points to market;
- A competent and cohesive team which safely works together; and
- Social licence to operate
- According to Woods, consistency in governance and in tax structures in certain areas, a lack of power supply and a general lack of infrastructure continue to pose threats to investment and project development in Africa.
