Playing For The Long-Term: PwC’s Mine Report 2018

What a year it was for the world’s Top 40 miners in 2017. Compared to the previous period, market capitalization was up 30% to $926 billion, revenue was up 23% to $600 billion, and EBITDA rose a whopping 38% to $146 billion.

And according to our forecasts outlined in PwC’s Mine 2018, the good times are set to continue, fuelled by buoyant commodity prices and higher production volumes. By the end of this year, the Top 40’s revenue is expected to reach $642 billion, with an EBITDA and net profit of $162 billion and $76 billion, respectively.

But it’s not all good news, of course. With the mining upswing well and truly underway, leaders are now facing the various temptations and demands that often accompany a run of good fortune. Shareholders will expect to realise improved returns, employees will demand pay rises and better conditions, and governments will look for ways to increase taxes and royalties.

The fiscal pressures experienced by governments has provided added incentive for them to increase their share of the perceived super returns earned by the mining industry. For example, Tanzania has just passed new laws aimed at taking a larger slice of the mining revenues, while the Democratic Republic of Congo has recently increased royalties and instituted a new ‘super profits’ mining tax. At the same time, mining companies will be tempted to buy more mines and expand operations to meet rising demand. With reinvigorated balance sheets and healthy cash flow, companies risk eschewing capital discipline and chasing assets ‘at any cost’. But as we’ve seen time and time again in the mining sector, giving in to such temptations only ends up hurting miners when the cycle inevitably turns. So, how can the industry – and its stakeholders – break free of this ‘pro-cyclical’ behaviour?

Stick to your strategy
While almost every mining company in the Top 40 has a vision along the lines of ‘responsibly creating long-term value for all stakeholders on a sustainable basis’, each has their own strategy based on what they believe their core business is and the way they view long-term value. For example, Glencore is increasing its stake in coal while Rio Tinto is getting out of coal. Whatever your strategy, the key is to maintain that strategy throughout the cycle and always evaluate investment decisions with the long-term in mind. This means avoiding ‘emotional’ investment decisions – such as buying into a commodity because it’s the flavour of the moment. We’ve noticed many of the larger miners are staying away from new investments into lithium, for example.

Also, investment discipline is critical: put together a set of investment rules based on the long-term required return, vision and strategy for your company and don’t budge. A great example of this approach is by Randgold, which invested in gold when everyone else was fleeing the commodity in the early 2000s. The company was extremely diligent in following their investment policy and never made an investment that failed to meet their hurdle rates over the long-term – and it has paid off.

Partner with stakeholders
The long-term also matters when it comes to working with stakeholders. Seeing stakeholder relations not as ‘us versus them’ but as long-term partnerships to deliver shared value is the key to negotiating the current demands for a greater share of rising profits. And as with any relationship, proactive and transparent communication is critical.

Take employees. They need to be aware of the long-term plans of the company and how a short-term sacrifice (such as delaying a substantial pay rise or improved conditions this year, while prices are up) will likely lead to a more sustainable share of the benefits across the whole cycle.

The same goes for the communities in which mining companies operate. There is a pressing need for skilled professionals to engage with those communities on a regular basis and not only listen and act on their concerns but also explain the importance of long-term sustainable benefits, such as infrastructure investment versus short-term handouts, for example.

While governments will naturally seek to maximise the return on their country’s resources, it’s the job of miners to empower governments to understand and explain the sustainable social and economic value that flows when mining operates within a stable and sustainable regulatory and tax environment. Shareholders, too, need to understand the value of a sustainable, long-term approach. It’s not realistic for an investor to expect a 30-year mine to return their money in year two or three. But nor is it realistic for companies to increase borrowing to continue to pay high dividends when cash  flow  is  low, as many companies did during the most recent downturn. A better approach  is to move to fixed dividend policies – as many leading miners have done – as it takes the pressure off management to deliver unrealistic returns and provides greater clarity and certainty to investors.

Invest in R&D and new growth
Thinking for the long-term also means continuing to invest in new sources of potential growth. Unfortunately, exploration expenditure among the Top 40 remains at record lows, although there are signs that it’s starting to improve. But to avoid the ‘mad rush’ for new resources at the top of the cycle, miners will need to address this underinvestment – while still maintaining capital discipline  –  during  2018 and beyond.

When it comes to R&D, the big focus for miners over the last few years has been mechanization and automation; technologies that have, and will continue to, deliver significant productivity gains.

Looking ahead,  we see  value in shiftng the research focus to discovering different extraction technologies and methods. So not just replacing humans with machines to do the same kind of mining, but thinking entirely differently about how the industry can extract metals in ways that are faster,  cheaper, safer and more environmentally friendly.

We also see greater scope for mining companies to get more involved in the downstream development of technologies that use their products; for example, platinum companies developing commercial applications for hydrogen fuel cells.

So while the future  looks bright for the Top 40, long-term success is by no means assured. In these ‘tempting times’, miners will need to  stay focused and deliberate in the pursuit of their long-term goals to deliver sustainable value for all stakeholders.