10 challenges for mining companies in 2016

Weak commodity prices and a falloff in demand from China will continue to weigh on global mining going into 2016, says a new mining trends report from Deloitte.

Read: Poor oil outlook may slow economy

But those aren’t the only headwinds that mining sectors will face over the next year. The report notes regulatory mandates, tax burdens and stakeholder expectations also remain high a threat to growth. “It’s an interesting time in the mining industry,” says Philip Hopwood, Deloitte’s Canadian and Global Mining Leader.

“Just as people imagined prices would go up forever during the super cycle, people now imagine the market will never recover. Neither extreme is true, but cycle times are lengthening, which means it could take years to adjust to current market forces.”

Read: Wait for commodities opportunities

Below is a list of the top 10 issues mining companies will face in 2016.

• 1. Going lean. In an effort to achieve true operational excellence, industry leaders are leveraging best practices from other industries to tackle difficult issues such as labour relations.
• 2. Preparing for exponential change. Innovation is a critical theme for miners. However, many mining companies remain at the early stages of the adoption curve; they place most of their innovation focus on technological optimization of old techniques. To succeed in the short-term, miners should consider adopting strategies such as aligning work processes with energy availability and the use 3-D printing and modularization.
• 3. China’s transition. Given China’s influence on the global economy, miners should understand the global impact of that country’s domestic market trends, particularly as the Chinese Government follows an interventionist path. To prepare for shifts in China’s demand for resources, miners need to: consider extreme scenarios and develop plans based around China’s investment initiatives; and leverage Chinese expertise in areas such as design, construction and financing.
• 4. Adjusting to the new normal. Global commodity demand is down, but production is not falling. So, some producers have ramped up output to reduce unit costs, consolidate market share and/or avoid the costs associated with shutting down older mines.
• 5. The impact of renewable energy projects. The global move towards renewables has threatened the outlook for thermal coal. Although fossil fuels are likely to continue playing a critical role in the global energy mix, the move to alternative power sources is inevitable.
• 6. The changing nature of stakeholder dialogues. Going forward, a new form of stakeholder engagement is needed. So miners should align their investments with the underlying needs of disparate stakeholders, to fully maximize opportunities.
• 7. Difficulty in attracting capital. Attracting investors has become harder as segments of the industry continue running at a loss. In response, companies will likely continue to seek out alternative sources of financing, even when the terms aren’t entirely in their favour.
• 8. Tax challenges. To keep pace with the evolving tax environment, companies need to understand the financial implications of new tax rules as well as assess their operational and corporate structures. They need to assess their management teams and engage with government stakeholders, especially where tax rules related to stability or production agreements threaten to change.
• 9. The M&A paradox. Despite predictions of a pick-up in mining M&A, such deal values and volumes continue to disappoint. The most active deal flow in recent years has come from divestments and rescue-type deals. To take advantage of new opportunities, miners need to consider buying counter-cyclically. Read: Canadian M&A activity lags U.S.

10. Spotlight on safety procedures. Industry risk related to both safety and security continue to grow. To enhance safety records and security postures, miners may want to strengthen their safety procedures.

Click here to read the full report.

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