Before the current economic downturn, it seemed that almost any reasonably feasible mining project received funding wherever it was situated in the world. But now, there simply isn't enough funding to go round; any that is directed towards mining is put towards sure-bet can't-fail projects (or projects that appear as such). There is little remaining for other projects.
Substantial mining companies may be able to live with this allowing them to concentrate on their better projects, shelving more risky projects until metal prices rise. Sure, budgets are trimmed but often at the expense of non-op costs and exploration cutbacks. Smaller mining companies are forced to scramble for crumbs at the investment table and many lose out - projects are shelved, companies lose reputation and money and venture investors head for the hills.
So when will mining be back on track? As the world economy gently grows in the next few years demand will slowly improve but it will take a substantial jump in metal prices for this to have a significant impact on mining investment towards any other than low risk projects with acceptable ROI. Using Copper as an industry-wide indicator, Infomine's five year Cu price graph doesn't lend confidence to the prospect of rising prices anytime soon. Gold rose fleetingly over $2,000 per ounce and is now languishing around $1,200 with no serious prospect for a rally in the near future. (Kitco's 5 year chart).
Investment confidence has fallen in the developing world too, often through unscrupulous practices, exacerbated as the downturn bit and as corruption gained more focus in these arenas. Smaller companies in high risk areas have little chance of finding serious funding even for good projects. In Africa and Asia north of the Himalayas risks are significant and smaller companies have withdrawn - some larger companies are unable to make headway too (Oyu Tolgoi is a case in point).
For the foreseeable future, mining suits multi-nationals - although they are adversely affected, they have largely adjusted to the present economic climate. Everyone seems to be trying to find a place at the feed trough of mining investment funding. It's not going to change any time soon.
Those that survive this prolonged downturn will as always come out of it stronger, but the longer this continues the more mining companies will call it a day. As this happens, supply will diminish and eventually outstrip demand. Exploration expenditure is curtailed in times of economic difficulty too and as a result reserves diminish with a further medium-term consequential effect on supply and demand.
As all of these factors come into play, markets may then be swayed favourably but we are a long way from that possibility and there would have to be substantial impacts to bull the market.
For equipment, materials and service providers to the mining industry - those that have not already moved on to alternative business ideas, that is - times are hard and 2014 was as difficult as many will have experienced since 2008.
Only those with an edge can hope to survive as current market conditions continue - and this applies both to mining companies seeking investment and suppliers/service providers searching for diminished business opportunities.
The name of the survival game is remaining afloat. To do this costs must simply be lower than expenditure.
One way of lowering costs is to spend less on administration, labour, exploration and materials and services. All of these are major cost elements for mining companies and materials and services alone may be between 30-50% of total costs. A 10% saving on both materials and services, direct and indirect, achievable in these times of austerity, goes straight to the bottom line. A 10% saving on every $1 million spent on M&S is $100,000 additional profit.
M&S savings can be achieved in 3 ways:
1. Removing unnecessary purchases
2. Reducing quantities and ordering only what is economically viable, and
3. World-class negotiation
We will review these in more depth in future blogs
For more information, please contact us.
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