Every action has an equal and opposite reaction, and that law of physics seems to hold true in markets cycles. Yet the inevitable fall of commodity markets seems to escape attention, the giddiness of high prices apparently eroding the memory of the world’s most predictable emergency.
This time, the global mining sector has had an especially rude jolt. The so-called commodities supercycle of the early 2000s crashed to a halt in 2014 and 2015. Prices plummeted, investors fled and countries dependent on revenues struggled to fill the holes in their budgets.
A slow return
In 2018, prices are starting to edge back up. The first quarter of 2018 was gold's best since 2013, as was the case with copper. However investment into mining has been slow to return. After peaking in 2008 greenfield FDI into mining globally has declined steadily since 2013, according to data from greenfield investment monitor fDi Markets.
“Commodity prices have been volatile in recent times and this has made it difficult to justify investment. We have picked up but we are not there yet,” says Norman Mbazima, deputy chairman at miner Anglo American South Africa.
Investors are still shell-shocked. During the peak, decisions that prioritised the short term allowed an industry awash in cash to smash production records. Investments and acquisitions accumulated, and balance sheets bulged.
One justification was that demand from the emerging world – led by China – would continue to grow. The other was the desire for returns. The assumption that both would continue proved false.
Instead, a new, less-feted, set of records was broken. “The top 40 [mining companies] experienced their first ever collective net loss, their lowest return on capital employed, unprecedented capital expenditure containment and the tag-team effect of prevailing debt levels plus impairments, sending leverage to new heights,” consultancy PwC wrote in 2016.
Moderately improved conditions are cold comfort to investors who saw millions in shareholder value evaporate when the market turned. “We get pushback from clients on investing in the resource space. Investors feel they have been burned in the downturn, and that pain is still fresh,” says Evy Hambro, chief investment officer for natural resources at asset management firm BlackRock.
Punishing the frontier
The current mood of risk aversion means many are holding back altogether from new mining investments and challenging markets. According to Randgold, a dual-listed gold miner, investors are instead piling into brownfield projects in ‘safe’ jurisdictions such as North America.
Emerging markets that hold rich deposits but are considered higher risk are paying the price. Only 14% of total exploration funds were allocated to Africa in 2017, according to Randgold CEO Mark Bristow.
This has far-reaching consequences. In India, for example, at the height of the cycle the mining sector accounted for 3 million jobs directly and an additional 8 million indirectly. National employment has since dropped, and mining is one of the sectors that has shed the most. “We need to keep in mind the entire supply chain. Mining services bring more employment than mining itself, so local content must be maximised here,” says Bold Baatar, CEO of energy and minerals at Rio Tinto.
Mining is a tricky industry for investors. The promise of fabulous returns is counterweighted by volatility, high upfront costs, long lead times and vulnerability to the political whims of host countries. In stable jurisdictions, the latter is usually not an issue but elsewhere it is a huge problem.
This tension between government and investor interests is now playing out acrimoniously in the likes of the Democratic Republic of the Congo (DRC), South Africa, Zambia and Tanzania. Governments are either seeking to renegotiate mining charters or going after miners for millions of dollars in allegedly unpaid taxes.
In the case of renegotiations in South Africa and DRC, mining companies have balked at the new terms. “The central truth about mining [is that] it is a huge investment and technically difficult work, especially if done responsibly,” says Mr Bristow.
He is a vocal critic of the new DRC mining code, which he calls “draconian”. Despite industry objections, it was signed into law in March. Miners are still trying to negotiate better terms.
In South Africa, negotiations over a new mining code ground to a halt in 2017. “This led to what was probably the lowest time in living memory for the mining industry in terms of regulation,” says Roger Baxter, CEO of the South African Chamber of Mines. Talks have restarted following February’s ousting of former president Jacob Zuma, but progress remains slow.
For their part, governments claim to only want to share in their country’s natural bounty. “The recent mining boom only benefited mining companies, not the government,” DRC prime minister Bruno Tshibala told fDi in an interview.
Martin Kabwelulu, the country’s minister of mines, is less circumspect. “If Mark Bristow does not like the new code, then Mark Bristow can leave,” he says.
The vitriol of these debates is not lost on investors. “You cannot underestimate the impact of poor or inconsistent regulation on long-term capital investment,” says Mr Mbazima at Anglo American.
Investors also want to see discipline within mining companies, in contrast to the looser boom years. “What we don’t want is a massive amount of investment back into the cycle. There is no need for prices to go back to the levels they were at a couple of years ago,” says Mr Hambro at BlackRock.
This lack of discipline was more to blame for the crash than the slowdown in China’s growth, according to research from HSBC. There was simply too much supply coming onto the market. Painful cost-cutting exercises and divestments have improved the sector’s focus. Investors want to see that held over time, however. “We hope companies can stay disciplined [and] recover shareholder value,” says Mr Hambro.
While miners may feel starved for new investment, BlackRock’s funds have found a path to recovery by holding back. By February 2018, BlackRock’s World Mining Trust had reduced shareholder losses over five years to 7%, from 75% three years ago, their lowest point.
A fundamental tension remains between the needs of mining companies and their investors. “The dilemma for shareholders is that no matter what they say, they want short-term benefits, and the quarter that drives our business is incredibly damaging,” says Mr Bristow.
Bigger changes are afoot that will fundamentally alter the way the mining industry operates, but that will also require major investment: namely, the digital revolution. “[This] is the biggest risk to the mining industry. We see it as an opportunity [but] the skills of our workforce will be transformed irrevocably,” says Mr Baatar at Rio Tinto.
Currently, Rio Tinto’s workforce is made up of two-thirds mining engineers and one-third data engineers. “This will flip,” says Mr Baatar, “[but] we need to convince graduates to join Rio Tinto rather than Facebook or Google.”
For shareholders, digitisation may be a boon. Miners cannot compete on price. “The only piece we can compete on is cost, and automation will lower cost,” says Mr Baatar. It will also help improve the accuracy of exploration, potentially bringing pipelines of greenfield projects online at a fraction of of today’s costs. “So much money goes in but there is so little return,” says Mr Hambro. “Tech could be deployed to improve the rate of success.”