Capital Quarter Winter 2019/2020: Modernise to thrive
Read time: 3 mins
Service: Capital markets Sector: Natural resources
The mining and metals sector is recovering from one of its most difficult periods in recent years. It has come under pressure from commodity price decreases and geopolitical changes.
In the UK, ‘Mining and Industrial Metals’ accounted for just 1% of funds raised through further issues on the London markets from January to July 2019. This is likely to reflect a change in perception of the mining industry, partly because of consumer appetite for creating low carbon economies.
Despite this, in 2018 global mining companies had a combined revenue of over US$683billion and the industry showed global year on year revenue growth.
It’s clear that there will continue to be huge demand worldwide for mining and metals for many years to come. But the successful mining companies of the future will need to modernise to overcome the changing geopolitical landscape and a shift in how the market sees the industry.
So what are the factors these companies will need to consider?
Demand for ‘low carbon’Historically, the strategic goals of a mining company were likely to focus on maximising production for the lowest cost. The ever-growing pressure to reduce carbon emissions means that miners will need to increase emphasis on corporate social responsibility (CSR) in their strategic plans. Spending on CSR programmes will become less an act of compliance than a genuine market differentiator and value creator.
The mining sector must demonstrate how it is reducing its emissions and innovating to find cleaner methods of extracting resources. Some miners are aiming to differentiate from competitors by fuelling their operations from renewable sources.
Global low-carbon strategies may also provide opportunities for the sector. Why? Because in order to de-carbonise energy systems, countries must move to low-emission energy sources, and these are often more mineral intensive than fossil fuel alternatives.
The importance of technologyCompared to many other industries, mining is behind the curve in its technological maturity. Digitisation of processes will produce better non-financial data. And this, in turn, can inform operations, improve efficiencies and reduce waste. Successful modern mining companies are investing in and embracing these technologies earlier than their competitors.
Better stakeholder engagementIncreased activism and engagement from local communities can lead to difficulties in obtaining social licenses to operate. That’s why corporate strategy must now place far more importance on new models and initiatives to win local community buy-in.
Transparency in operations and regular communication with all stakeholder groups, through strong corporate governance, is vital. It will help mining companies to keep stakeholders informed of key initiatives and of the benefits the industry can bring to their community.
New funding solutionsMining operations are, by their nature, capital intensive projects. After the decrease in commodity prices in the last decades, many mining operations found themselves burdened by suffocating debt covenants and high debt ratios.
Recently there has been more conservatism in funding instruments, a situation that’s bound to continue throughout the current period of economic uncertainty. So it will be all the more important to spread the risk of the capital projects, and alternative funding solutions that support this will likely be favoured.
So while the mining sector is well poised to capitalise on the current economic climate, it will also require modernisation of the industry and increased stakeholder engagement.
Written by Adam Humphreys in our London office.