PwC’s 2020 Mine report paints a picture of a mining sector in relatively rude health, with Covid-19 likely to shave just 6% off earnings in 2020.
This, after a 4% gain in Ebitda (earnings before interest, tax, depreciation and amortisation) in 2019.
Contrast this with the latest Global Trade Update from the United Nations Conference on Trade and Development, which projects a 27% drop in global trade in the second quarter of this year. The automobile and energy sectors have taken the worst drubbing, with second-quarter trade expected to fall by about 40% and 30% respectively.
The overall health of the mining sector has been lifted by gold’s surge, which has helped offset commodity price declines in other sectors.
Andries Rossouw, PwC Africa Energy Utilities & Resources Leader, says it helped that miners entered the Covid-19 lockdown crisis with relatively strong balance sheets. Had the crisis happened four years ago after a spate of bad acquisitions and large capex investments, the impact would have been more severe. The survey looks at the top 40 mining companies globally.
“It’s because mine balance sheets have been strengthened over the last few years that they will be able to survive this crisis in relatively good shape,” says Rossouw.
“Although mining has been able to keep operating to some extent throughout the Covid-19 pandemic, companies all over the world, including those in South Africa, have had to adapt and evolve. The Top 40 have shown that they can innovate, adapt and respond to this crisis along with the best. Some of these changes include remote workforce planning and a greater use of automation. It is expected that many of these adaptations will become permanent in the long-term.”
The new reality
It may be difficult to envisage social distancing and routine sanitisation as part of everyday mining, particularly in deep-level mines, but this is likely to become the reality going forward. And that, of course, comes at a cost. Automation and digitisation are going to be major themes in mining going forward, and not just as a way to lower costs. These technologies can support remote workforces and reduce on-site presence.
PwC says the Top 40 mines are likely to cut capex by about 20% this year and have allocated $380 million (R6.5 billion) to Covid-19 relief.
One of the key takeaways from the study is the realisation that mining is essential to the economic health of the global economy. Many key mining countries, such as Australia and Brazil, allowed mines to continue operating at a time when other sectors were in lockdown, though SA imposed a one month lockdown on all but the most essential mines (primarily coal mines supplying Eskom).
Despite this positive outlook, the report cautions that mining companies will need to adapt to long-term impacts caused by Covid-19.
Miners may need to think about derisking critical supply chains and investing more in local communities. A shift towards localisation in supply chains and for smaller deals in local markets, as well as different forms of community engagement, may turn out to be enduring consequences of the pandemic.
Derisking supply chains could also come at a cost. There is no doubt that global supply chains helped drive down the costs of mining. Just-in-time techniques, ‘lean principles’ and other production efficiencies allowed mines to lower their supply costs, but the Covid-19 crisis has shown the downside of vesting too much reliance on just one or two distant suppliers.
More support for domestic suppliers
Mining houses such as Anglo American, Nornickel and BHP have already announced initiatives to increase support for their domestic suppliers as a result of the pandemic. Miners are also looking at how they can diversify their markets so they are not reliant on one or two major customers or countries.
Another trend emerging out of this latest PwC study is the need to strengthen ties with local communities in areas where they operate. Mines are doing this better than others, with some providing support of up to $140 million (R2.4 billion) in training, infrastructure and other forms of assistance. Most also placed their health clinics and other facilities at the disposal of local communities during the pandemic. Miners will have to increase investment in local communities for some time, says PwC, as part of the “social licence” under which they operate.
Miners may also find useful lessons that they can incorporate as standard practice. These include: reduced office footprints, an increased local workforce, relocation of non-critical roles from sites, reassessment of investment criteria, redesigned rosters and shift patterns and working groups, as well as priorities towards the large and positive impact mining can have in communities.
The Top 40 have downgraded their copper, nickel and zinc production forecasts by an average of 6-7%. Some of the commodity prices may decline further once Covid-19-related production constraints are resolved.
Gold miners have taken advantage of high metal prices and lower borrowing costs to restructure their balance sheets and finance new projects. In May Newcrest announced an Au$1 billion capital raise. In the same month, the company issued US$1.15 billion of corporate bonds – priced at lower coupon rates – to replace its near-term bond maturities. These recent capital activities demonstrate that while the global economy is facing multiple challenges, capital markets remain relatively liquid, unlike in the global financial crisis in 2008/9 when markets dried up.
China will lead the world out of this slump, with GDP growth in 2020 expected to fall to around 3-4%, surging next year to 9%. There are some risks on the horizon, notably cyber security (as mines become more dependent on automation and data) and tightening ESG (environmental, social and governance) standards. Some big investment houses are divesting themselves of miners with large coal assets, and that is driving a change in mining behaviour.
That said, the mining sector is better positioned than most to ride out the current Covid-19 storm.