Five ways the industry is changing
The plenary session at this year’s CIM conference in Vancouver in May aimed to outline the many complex, intertwined challenges the mining industry is facing.
While the session touched on multiple topics, from political risk to diversity, CMJ identified five big changes in the industry that miners will need to address, regardless of where commodity prices go.
- Longer and more volatile resource cycles
The resource cycle follows a predictable pattern: a demand surge followed by rapid supply expansion, a stable period of good margins and increasing capital expenditures, and then finally a denouement where supply exceeds demand.
But John Bianchini, president and CEO of Hatch, noted that the cycles are becoming longer, and the price swings between the troughs and peaks are becoming wider.
“That means that the volatility is getting more extreme over time,” Bianchini said. “That causes some real new dynamics that we have to contend with.”
The way to temper the swings in the resource cycle is for the industry to adopt longer-term thinking, Bianchini said.
For example investing in projects not when markets are riding high, but when they’re depressed.
“We have to start having the courage to counter-cyclically invest in development,” he said. “That means doing your studies early on in the down part of the cycle; getting ready, investing in technology.”
Evidence shows that if feasibility and early engineering studies are done in the stable market and denouement stages of the resource cycle, the projects are much more successful.
Of course, there are many barriers to this strategy.
“The mining community has this juxtaposition of a mining company having to manage its business for plus ten years but the investing community, if you’re lucky, having a quarterly time horizon,” said Nicole Adshead,-Bell, director of natural resource investment firm Cupel Advisory.
- New sources of financing
“There’s probably no portion of our business that is changing faster right now than how capital works,” said Sean Roosen, CEO and chair of Osisko Gold Royalties.
With the underperformance of gold miners fresh in investors’ minds, fund managers and retail investors have largely abandoned the space.
“One of the biggest reasons why there’s no money out there now in the gold funds is because they’ve lost so much money,”
said Clive Johnson, CEO of B2Gold. “And it isn’t because of the gold price.”
For investors to return, miners need to start delivering on their promises and provide a better reason to buy the stock than the possibility the gold price will go up, he added.
Roosen said there’s been a pronounced narrowing of financing sources, with a handful of institutional shareholders now holding over 60% of all the public companies in the space.
One new source of financing has been private equity. But the terms that come with this money can be extremely stringent.
Royalty and streaming firms have also grown to be an important source of financing.
Reflecting these trends, Roosen pointed to a recent $500-milmillion financing for Victoria Gold that bypassed the public markets, and instead involved a royalty streaming company (Osisko), private equity, and the financing arm of an equipment manufacturer.
On the exploration side, investors retreated even earlier, leaving junior companies reliant on joint ventures with majors or selling potential future royalties for funding.
Retail investors have turned to cryptocurrencies and marijuana and tech stocks for the “casino” experience junior miners used to provide. “I think the number one challenge is how do we re-format the exploration business to get the excitement back into it,” Roosen said.
That will require new discoveries and “a few wins” for shareholders.
“Greed is an amazing thing – it will overcome a lot of sentiment,” he added.
- Exploration is becoming more challenging
At the same time as funding for exploration has dried up, it’s becoming much more difficult to find new mineral deposits. Timelines from discovery to development have increased from 5-6 years to 10 years – another factor that’s expected to make resource cycles more intense.
“The easy stuff is gone,” Roosen said.
A trend toward mining companies being managed by executives with a financing rather than technical background is one of the factors underpinning an underinvestment in exploration among majors, said Adshead-Bell. “Exploration is a cost and they’re focused on the bottom line,” she said.
Short-term thinking has also infiltrated companies’ exploration strategies.
“Because of that pressure to produce results quickly, instead of going through the multi-year processes of an appropriate exploration program, it’s designed to have the glory hole – the hole that drives your share price, the hole that allows management to give you a big budget to explore,” Adshead-Bell said, adding that such a strategy is not likely to result in success.
Even worse, some majors have outsourced exploration completely to juniors – which don’t have the funds or stability to be solely responsible for making discoveries.
- The talent gap is becoming more pressing
Because of the downturn and resulting layoffs in the late ‘90s and early 2000s, there’s a missing middle of technical people in the industry with 10-15 years of experience.
“The visible minority in the mining space right now is the greenfield exploration geologist that has 20 years’ experience.
That is far more interesting to me than a unicorn,” said Roosen.
Because exploration geologists are typically the first fired, and last hired, larger mining houses have lost the ability to execute, Roosen said. “They’ve really lost the theme. A lot of these senior mining companies – you could blow up the building and you wouldn’t kill an exploration geologist.”
In addition to the exploration skillset, the industry is looking at a looming overall labour shortage, noted Johnna Muinonen, vice-president operations at RNC Minerals. Over the next decade, it’s projected the sector will be short 50,000 workers.
A low percentage of women and First Nations in mining point to relatively untapped labour resources. Women comprise 17% of the workforce (up from 14% a decade ago), while Indigenous people comprise only 6%, despite the proximity of many First Nations communities to mines and agreements that commit miners to training and employment.
Although there are exciting technology and innovation developments taking place, the mining industry’s image is not exciting. Mining is key to “sexy technologies” like electric vehicles and renewable energy, “yet we don’t sell ourselves as being part of that technology economy,” Muinonen said.
- CSR is being recognized as critical to success
Corporate social responsibility was once thought of as “soft” issue. But miners are realizing it’s anything but.
“More projects are killed by CSR related issues than technical or financial issues,” said Leon Teicher, chairman of Continental Gold, a junior that’s building the first modern gold mine in Colombia. “We believe that the sustainability aspect of business is equally as important if not more than geology or operations or financing.”
Teicher emphasized the importance of starting good CSR practices early, ingraining them in the company’s culture, and providing CSR training across the company.
“Exploration is where it all starts,” Teicher said, adding that problems created early on can be difficult to resolve later.