Produce the highest volumes of ore at the lowest possible cost. For years, this was the cornerstone strategy of some mining companies. That bubble, of course, has long since burst. Yet many mining companies are still struggling to break free from that mindset and in today's complex mining environment, that’s a problem. With the critical shifts now facing the industry, companies must broaden and reposition their strategic outlook.
The last few months have seen a number of announced mergers – Barrick/Randgold; Newmont/Goldcorp; Nevsun/Zijin and of course, last week’s announced bid by Barrick for Newmont. These announcements are only the beginning, and as they play out over the next few months we are likely to see another round of consolidation amongst the remaining gold majors, as well as amongst the mid-tier miners. Some of these will be acquisitions, some mergers and others may pick up assets from the realigned portfolios of the majors. Throughout this wave of M&A, it’s important that companies don’t lose sight of strategy. Companies will need to be clear about their long-term strategy and their ability to deliver on the value creation proposition beyond the initial transaction.
As outlined in Deloitte’s 2019 Tracking the trends report, the industry is moving in ways many executives never anticipated.
New voices, new paradigms
A new strategic approach is more important than ever for mining companies given some emerging trends. Take consumers. Mining companies have never truly had to answer to the broader public—not like consumer-facing businesses. But that’s all changing as users of smart phones (which contain more than 62 different metals) and drivers of electric vehicles (EVs)—which rely on increasingly in-demand commodities such as lithium, graphite, cobalt, copper, titanium, aluminum, nickel, and manganese—are now questioning whether the metals and minerals in their end-products are ethically sourced.
Governments and communities have also become more vocal over the years and possess the power to delay or even shut down projects if their needs are not adequately addressed. As a result, corporate social responsibility (CSR) initiatives, once approached as mere compliance exercises, are now morphing into stakeholder engagement programs. The social license to operate is fast becoming a pivotal strategic issue that can either differentiate or derail a mining company.
A similar strategic struggle is taking place at the portfolio level as mining companies attempt to select the “best” assets. The trouble is that, while certain assets look good on paper, in practice their return profile is compromised. A prime example are world-class ore bodies located in politically risky geographic regions. In this scenario, government demands are taking the form of higher royalties, resource taxes, growing requirements for local beneficiation, and even reclassification of key commodities as “strategic.”
Equally challenging is operating in regions where key inputs, such as energy and water, are scarce. With fluctuating energy prices and the difficulty of placing true value on water, mining companies must continually readjust the relative value of their individual assets—especially in terms of their carbon and water footprints. The strategic implications of this cannot be underestimated.
In the face of this M&A activity and the wider set of strategic trends that mining companies are dealing with, firms should be challenging their strategy across a number of key dimensions by asking some key questions:
Broadening the strategic outlook
This expanding range of issues must be taken into account when a mining company set its corporate strategy today. When done well, strategic planning cycles consider a range of issues in addition to cost, including the role of individual assets in the portfolio, the path to value creation, the balance between risk and return, and how the company is differentiating itself in the market. To help rethink strategy, companies should consider the following:
Forward-thinking mining companies are already taking steps to reposition their outlook by revisiting their underlying business models and making new strategic investments. While it is currently unclear whether these moves will be sufficiently far-reaching or radical, one thing is clear: to break away from outmoded thinking, management teams must put strategy front and center.
Andrew Swart is Deloitte Canada’s Mining & Metals Leader and the Global Mining & Metals Leader.
Andrew is both the Global, and Canadian Leader of the Mining & Metals practice as well as the Global Leader for the sector. In his Global roles, Andrew leads a team from around the world and has the responsibility to set the strategic direction and go-to-market strategy for the global practice. With 20 years of industry and consulting experience, Andrew has a passion for client service, having worked across many major Mining & Metals geographies including Canada, Chile, Russia, Ukraine, Kazakhstan, Brazil, Germany, India, South Africa, UK, and the US. Andrew’s areas of expertise include corporate and competitive strategy engagements, digital and innovation systems and large organizational transformation programs.