Industry expert George Saplyvy talks about mining industry challenges and how Maine Pointe helps companies achieve their goals.
Q. What are the big issues facing the mining industry in the next 12 to 18 months?
A. The industry will continue to face rising operating costs due to the rising price of extraction including, fuel, steel, transportation, mining consumables, labour demands, financing, local operating licenses and the ever increasing demands from governments for a bigger piece of the action. Of course, the current soaring commodity prices and base metals values have off-set increasing costs in the industry. Operators have enjoyed tremendous growth in profits propelled by demand from China for all base metals as well as physical demand from India and Eastern Europe for rare earth metals such as gold, silver and gemstones. With gold prices, for example, hovering just south of $1,800 USD dollar per ounce, these are very good times indeed.
The industry has also experienced a surge in M&A activity. Last year global mining deal value jumped 77% from 2009 and volume was up 28%. Most analysts are expecting another strong year—both in mega-deals fueled by high commodity prices, as well as strong activity in exploratory or junior-phase projects. I expect to see a significant escalation in M&A brokering in the second half of this year and well into next year. With these high market prices for base and precious metals, producers will look closely at acquisitions and takeovers rather than constructing brand new mines to increase production. Junior developers just beginning production or nearing mine construction may very well be attractive candidates for such takeovers.
In light of all this, mining companies must re-focus their attention on margins. Pushing throughput has been a priority for mining companies due to high commodities prices and base metals demands, but companies must plan for more challenging conditions and ensure they are operating with strict financial and operational excellence discipline.
Canada and Australia are amongst the dominant players in the mining industry. However, high-growth, emerging countries such as China, Russia, and India are putting pressure on the traditional powers. The four-year total shareholder return growth for emerging market companies was double that of the more established, perennial powers. The traditional players are being outperformed by the emerging markets because of cheaper labour costs and voracious demand within these countries.
As well, industry players know that prices—precious metals prices in particular—are volatile, sometimes falling with stunning speed. Mining companies must look at alternative ways of maintaining revenues in markets with strong headwinds, even if those conditions are not currently upon us.
Reducing operating costs whilst at the same time balancing the need for exploration of new revenue sources is key for mining companies.
Management must investigate and test the cost of mining operations, mining consumables spend, fuel, equipment, and optimizing logistics and transportation networks. The imperative for operators to look closely at relationships with suppliers to emphasize longer-term relationships rather than short-term transactions is higher than ever. Additionally, our experience shows that any cost-cutting programs must involve employees who have the closest vantage point to any waste or inefficiency within the company.
Q. You have worked in the mining industry for decades, but you have also consulted in other industries—including oil and gas, and the high-tech sector. Do you think it’s possible to “cross-pollinate” ideas from one industry to another, even if they are fundamentally different?
A. When I work with mining companies, I am always asked about my pedigree and experience in the industry. It’s a common and valid question. However, I also like to tell people there are a lot of remedies to mining company issues that can be found through best practices in industries outside of mining.
For example, there are very interesting and fertile parallels between mining and oil and gas. Both industries share many of the same functions and both are faced with high operating costs. The challenges emerge when trying to create synergies between the two whilst at the same time capitalizing on the separate strengths of both industries in ventures such as the Tar Sands in Alberta, Canada. Oil companies know oil, but they don’t know mining and vice versa. Additionally, I have been involved in implementation programs in the mining industry where we have borrowed some best practices from such completely foreign industries as retail. With some customization and fine tuning, we made those programs completely invaluable to mining operators. I believe there are $5 solutions to $500,000 problems everywhere. Oftentimes an outside perspective reveals where and how those solutions can be applied.