Commodity Challenges

Slowing global growth, oversupply and rising regulatory demands are pressuring markets and producer stock prices alike. Few industries have felt the squeeze more acutely than the mining sector, which has been forced to take aggressive action to reduce capital spending and operating costs, while retaining shareholder dividend payouts. The current significant downturn in the commodity cycle provides an opportunity for mining companies to re-evaluate their production chains and seek new solutions to old problems. 

The range of factors impacting commodity prices is symptomatic of the increasingly complex global economy. After decades of sustained growth, the World Trade Organization (WTO) has cut the expected rate of global trade growth below 3 percent for the fourth consecutive year. China, the world’s largest consumer of commodities, announced a 6.9 percent GDP figure – the slowest since the depths of the financial crisis. (Given a broad range of economic data points, even that figure exceeded many predictions.) As China’s appetite for resources slows, so do the economies of commodity-rich producing nations like Australia, Canada, Brazil, South Africa, Russia and Indonesia.

Given this landscape, and the high expectations of shareholders and state-run producers, many in the sector are looking to re-prioritize and reduce capital expenditure to improve profitability, while retaining or increasing market share.

Oversupply and Low Demand

In times of fiscal constraint, mining companies first tend to look to reduce development capital or the spending focused on new or expansion projects and infrastructure development. Given the depressed pricing environment, the addition of new capacity, or expansion of existing capacity, further weakens producers’ ability to shore up markets. Headlines around the world have focused on tens of billions of dollars in large-scale capital projects that have been put on hold, re-evaluated, re-shaped or even canceled, pending an upturn in the commodity cycle. Oversupply, fed by slowing demand, has driven down prices and prompted some operators to take aggressive steps. Glencore’s recent announcement that it would cut zinc production equal to nearly four percent of the world’s supply immediately drove up the commodity price, helping to ease concerns about the resource giant.  

A second component of capital being re-evaluated by leadership concerns sustaining capital, or the funds required to maintain current operations. At upwards of 30 percent of total capital expenditure, comprising billions of dollars in annual spend, sustaining capital offers a significant target opportunity for mining organizations to drive down costs. This is particularly the case as miners avail themselves of a range of emerging technologies to improve cost efficiency, productivity and safety.

At every mining site, equipment and machinery has to be replaced and power, water and communications needs must be met. Increasingly, the connections between greater resource efficiency and improved financial performance are being made clear. Low-cost natural gas and renewable energy resources not only create opportunities to reduce power costs but can afford projects greater sustainability and resilience. Water, which often requires significant amounts of energy to treat, pump and transport, offers another major opportunity for operational cost savings. 

From our perspective, the increased focus on sustainability, energy efficiency, resilience and improved financial performance can often be enhanced through focus on efficient management of sustaining capital spend.

Following the Rules 

In mining, like many other resource intensive industries, there is a continuing evolution in the global regulatory landscape that can impact operators to varying degrees. For example, in the United States, the new Clean Power Plan focuses on the electric sector, but may impact the ability of miners to derive power from traditional coal power plants, including on-site units. Unfolding compliance regimes may require miners to consider various planning scenarios including the retirement of coal units or costly retrofits, replacement with natural gas, or the incorporation of renewables into their generation mix.

Resilience planning is another area where opportunities exist to leverage sustaining capital to enhance the organization. Across the globe some of the largest and most important mining projects are in regions identified as susceptible to the impacts of climate change, which include water shortages or flooding and inconsistent power resources. Investments in water treatment and re-use, renewable energy and battery storage, and increasingly, more capable telecommunications networks are keys to risk mitigation and ensuring continuity of operations. While nothing can guarantee that a project site won’t be impacted by water shortages (or excesses) or a power grid failure following a weather or geological event, the ability to restore operations faster can have significant bottom-line effects.

Outside of capital management programs, the sector has an opportunity to apply the lessons of other industries – particularly, the power sector – that have evolved through deregulation or other market forces. Historically, mining projects have been planned as comprehensive projects with mining companies serving as both developer and owner. In many cases, mining firms have owned not just the production site but also the port, railways and other infrastructure that delivered necessary water, fuel and other resources. 

Such strategies may give the operation complete control over the production chain, but they also place the entire capital development cost squarely on the miner’s balance sheet. Such realities make diversification, and its subsequent shedding of risk, an important consideration. 

Off-loading infrastructure elements such as power and water supply can take away significant cost obligations and sharing of risk. Rather than funding, developing and owning their own mega-infrastructure, mining companies are actively investigating the sharing and outsourcing of major infrastructure projects such as water, power, rail and port facilities. This provides the opportunity to remove these assets off-balance sheet and improve the project financials. Alternatives such as long-term power purchasing agreements (PPA), or the leasing or rental of large-scale solar arrays from third-party investors, could allow mines to reap renewables’ benefits without prohibitive upfront costs. 

In some cases, excess electricity can be sold back to the grid for use by nearby consumers. A unique marriage of renewables and the PPA business model was recently unveiled in Australia, where Rio Tinto’s bauxite mine at Weipa will be powered by a 1.7 MW solar array. Under a 15-year PPA, Rio Tinto has agreed to buy electricity generated by the array. Rio Tinto projects that energy from the solar array will save as much as 600,000 litres of diesel annually and sharply cut greenhouse gas emissions.

As stock prices decline, new emphasis is being placed on energy efficiency efforts, significant business restructuring measures and a focus on core, performing assets. These latter efforts may include asset sales and the adoption of new approaches to portfolio development previously implemented in sectors like power and finance. 

Black & Veatch’s team of industry professionals are exploring these scenarios, and how the industry is addressing resilience as climate change impacts their business.

For operators, the sheer scale and time horizon of mining projects creates a built-in buffer to certain elements of shorter-term volatility. Given the cyclical nature of the sector, those companies that are successful in improving productivity and operational efficiencies will drive down costs and be well-positioned to weather the current tough downturn.

Though the industry may now be looking at reducing output and scrutinizing overheads, its leaders are looking at what investments are needed to prepare for the next upswing and where those investments should be made.

Dennis Gibson is chief technical officer for Black & Veatch’s mining business. For more information, visit

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