Here are the key risks and opportunities for 2018:
Investment in mining technology has lagged behind the technological advancements of other sectors. These advancements range from automated production and data analysis to advance digital applications, such as artificial intelligence and blockchain technology. Companies willing to invest in new technology or further apply existing technology will be positioned to maximize efficiency and to gain a deeper understanding of their operations through the data that is now available to them. Consider these potential applications:
Data analysis allows a company to examine its performance under various types of weather and then have the ability to implement subtle changes based upon weather conditions that improve productivity
Machine learning applications as equipment transmit operational and geological data in real-time, while at the same communicating with a vendor regarding the operational health of the machine and need for servicing
Production analysis paired with customer profiles to maximize sales
The use of blockchain technology to streamline contract negotiations and provide direct corroboration between inventory warehouses and suppliers
Companies who utilize the tools that technology provides will be well positioned succeed in this sector. Companies who fail to invest in technology run the risk of losing competitive advantages to their competitors.
The mining sector has not been a “hot” area for investors in recent years. Public companies have yielded mediocre results at best and been slow to issue dividends. Private companies have struggled to obtain the pricing and production volume necessary to reward existing shareholders and to entice private investors. Recent trends, such as changes in the American geo-political environment, the increase in metallurgical coal prices, and the increased demand for cobalt (stemming from battery applications), have created an environment of interest to new investors, who may seek quick returns on their investment. This presents the sector with a philosophical paradigm, to invest in the growth of the company or the satisfaction of the shareholders. It will become increasingly important for companies in the sector to balance the growth agenda with disciplined capital expectations.
The mining sector is not immune to the digital reformation transforming all other industries. With these changes come significant threats to cybersecurity. Cyber threats have the ability to eradicate gains obtained from any strategic efforts. The influx of artificial intelligence and operational intelligence as a core strategy causes cybersecurity to be a primary risk to the sector. The risk of rogue network operators, “hackers,” puts all digital data at risk.
After several years of the mining sector being cash strapped, trends within the sector have recently resulted in positive cash flows. The question now becomes how to put this cash to use: corporate growth versus shareholder awards. The concerns of the shareholders have been discussed previously. A return to growth will drive new revenue and new cost structures, namely an investment in capital. Equipment fleets have become aged as the sector sought to minimize capital expenditures. Deferred maintenance of mature equipment is likely significant as cash resources have been limited. Revenues will continue to be highly volatile and susceptible to unexpected market fluctuations. Companies within the mining sector must be intentional in their utilization of cash, balancing the needs of today with investment in the future.
Regulatory and political issues are a significant consideration within the sector. Nations are seeking accountability over the extraction of their natural resources while at the same time seeking to be business friendly in order to maximize tax revenue. This creates an intense regulatory environment. States and localities are advancing tax regulations that create additional cost and administrative burden. Public policies continue to promote renewable energy sources, thus decreasing demand. Environmental agencies can block or hamper access to strategic mining areas. Certain regulations threaten the way in which extracted minerals are used, thus decreasing demand. Changes to the regulatory environment can lead to uncertainty within the sector; it is very important to stay abreast of such changes. American miners start 2018 with lower income tax rates which afford them the opportunity to invest back into their businesses. Owners may also look at stock buyback opportunities. The new tax act allows for 100% bonus depreciation for five years which encourages capital investment. Mining companies may be able to improve employee benefit packages as well to help retain key employees. Lastly, miners should look to move operations back to the U.S. from foreign locations to take advantage of the better tax landscape.
The mining sector must seek to proactively engage the local and regional communities in which it operates. Miners have a unique role in the local, state, and national community. The safety of its workers should always be a priority for mining companies. Miners must consider the impact of their actions within each unique community. Illegal or unethical practices will damage a miner’s reputation and make national headlines, but legitimate closing of a project due to financial reasons may generate significant reputational damage as well. Miners should consider the impact their operations have on their communities.
Years of focusing on survival led many companies to minimize costs, resulting in exploratory efforts being drastically reduced. As such, many companies in the sector may have limited operational runway, meaning limited access to ongoing or future mining areas. Extending this runway becomes a key risk. Key factors include expanding the exploration budget, utilizing contract miners, studying existing areas under control, and forming strategic alliances with competitors or others within the industry.
This risk will only rise in severity. The mining sector is a mature component of the global economy. As social preferences change and new technologies become available the status quo of the mining sector becomes irrelevant. The future of coal becomes increasingly uncertain as natural gas took a significant portion of coal’s use in energy production. Now, technological advancements are increasing the ability of renewable energy sources to compete with coal and natural gas, depleting coal’s position even further. The current and expected future demand for electric automotives and the potential for the American commuter system to be replaced by a fleet model in the relative near future draw into question the long-term demand of petroleum and the potential demand for minerals used in battery manufacturing such as cobalt. Understanding current and future trends within the sector will be a key to success.
Maximizing the economic efficiency of production is a competitive advantage for miners who do it well. Production is impacted by financial, geological, and even social factors. Miners who effectively manage these factors and maximize production in areas that return the most value to their company will experience success. Additionally, miners who invest in maximizing the efficiency of their production abilities will be most prepared to take advantage of market improvements in their industry.
Certain segments of the mining industry have lost favor with public investors and consequentially, many financial institutions. Traditional financing arrangements are difficult to obtain, and when obtained may come with high fees and interest. Companies should consider alternative capital sources such as international institutions, brokers, and even customers. These alternative capital sources may offer a form of strategic alliance, such as in marketing existing products, or helping to develop additional assets.