Companies need to strengthen relationships with governments where they operate, report suggests
TORONTO—Mining companies facing an uncertain economic outlook and rising costs need to keep investing in their development projects to ensure they are ready to go when the market picks up again, a new report suggests.
The report by audit and consulting firm Deloitte suggests that while miners need to focus on controlling costs that may have risen during the recent boom, they also need to hold the course on their strategic plan for the long term.
Jurgen Beier, national mining leader at Deloitte Canada, said as prices for many key commodities slip, the focus is increasingly on reducing costs that may have been masked in boom times.
“The key thing with cost is that when you’re not worried about the revenue line, basically there is less focus on the cost line,” he said.
“Over time, inefficiencies creep into running any business and many of these inefficiencies are based on merger and acquisition transactions where the companies haven’t been completely integrated.”
But Beier noted that cutting costs needs to be balanced with ensuring a miner’s future, and that means continuing to develop new projects so they are ready to go in the next boom.
“Many of these projects take 10 years or more to get production from the point they get the first pre-feasibility study done,” he said.
Beier said the firm isn’t recommending companies go full speed ahead and build whatever they have in their pipeline, but rather that they be prepared.
“What we’re recommending is that they continue with their pre-feasibility and feasibility studies so that they can advance those projects and get them ready for construction so that when things pick up they are in a position to do that.”
The report said, for the second year running, the high cost of business topped its review of industry trends, but unlike last year when commodity prices were high, prices have dropped.
Deloitte noted that for some mines, the production costs for key commodities such as copper, aluminium and nickel have already reached or even topped the prices.
The cost to build mines is also increasing with rising metal and material prices.
Beier said companies had been focused on expansion during the boom, but now “have to get back to the fundamentals.”
Other trends identified in the report included governments exercising what it called “resource nationalism” such as windfall taxes, resource taxes and export controls that increase uncertainty for miners.
The report suggested companies need to strengthen their relationships with governments where they operate and diversify their commodity mix and area of operations.
Deloitte also said companies need to get the most out of new and existing technology to help reduce costs and improve operations.