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Deloitte’s take on the mining industry

Andrew Lane, energy and resources leader for Africa at Deloitte, unpacks the latest Tracking the Trends report.

WARREN DICK: Deloitte’s Tracking the Trends report is in its seventh year and this year’s edition is entitled Keep Calm and Carry On. With me in studio is Andrew Lane, he’s the energy and resources leader for Africa at Deloitte and he’ll be telling us more about the report. Thanks for joining us, Andrew.

ANDREW LANE: Hi Warren, it’s a pleasure.

WARREN DICK: Great, so I think the title says quite a lot about where the resource sector is at this point in time, can you just tell us a little bit about how you guys went about compiling the report and the kind of resources that you devoted to it?

ANDREW LANE: This is a report that we put together on an annual basis and it’s a global report based on our insights of what our clients are telling us around the world. We work for pretty much most of the major mining companies around the world and once a year we poll our firm and we put together what we’ve learnt from our clients during the course of the year and that comes out in this annual report.

WARREN DICK: We have a sense of just how bad things are at the moment but what are you seeing in terms of what’s happening in the resources sector at the moment.

ANDREW LANE: So certainly we are in tough times at the moment, commodity prices aren’t quite where we would like them to be. If you look at some of the trends that we’ve picked up in the report this year, clearly costs and operational excellence is top of the list as it has been for the last few years. We have an innovation trend coming in this year for the second time, which is also quite an interesting development and imperative in the industry. Also interesting in this year that’s coming through quite strongly is the need for stakeholder engagement and the ability to engage with governments. I think the industry around the world is realising that it’s much more dependent on the stakeholder environment and the government environment than we used to be and that managing that has become more and more important for our clients.

WARREN DICK: Okay that’s very interesting, I think one of the things that – before we go on and discuss some of these things – but one of the things that struck home to me was that we talk about how we’re seeing this big decline in productivity in South African mines, and I think the gold sector is probably the worst hit when we talk about this. Just talk us through how bad that is and where it leaves us in relation to some of the other countries that we compete against in terms of attracting foreign investment and then perhaps we can from there talk about what are some of the answers. I think a lot of what you talked about is innovation as well.

ANDREW LANE: So if you think about what we hear from our clients and from investors wanting to invest on this continent is there are three top of mind issues for them, one of which is the question of government and regulatory certainty, one of which is energy and we can talk about that, and the other one is labour, as you rightly point out. In this country we do have declining productivity and rising cost, and we also have a more and more uncomfortable relationship between employer and employee. It’s difficult, the mining industry is one of those industries which gets harder and harder the longer you do it because mines get deeper, ore grades get lower, things become riskier, so it’s harder and harder to get the stuff out the ground. What we find is that many of our clients are running hard just to stand still, it’s an ongoing process of continuous improvement, operational excellence and that’s just to stand still. We actually have a point of view that this is an industry that is in dire need of a step change to survive. We need a step change in operational performance, we need a step change in safety performance and safety performance has improved over the years but I think a step change is required. We need a step change in how we deal with our social partners, namely government, communities and the people who work for us. So I think in the future mines are going to look a little bit different to what they look today. Just continuing to do it the way that we’ve done it in the past is going to be very difficult to succeed.

WARREN DICK: Well, there’s that old adage that necessity is the mother of invention and I think looking at how companies are being pushed from all angles, from all their stakeholders at the moment is this not ripe for a great period of innovation within the industry and how can mining companies embrace that?

ANDREW LANE: Well, exactly, I think the imperative is there, everyone realises it but the opportunity is also there and when we think about innovation in mining you’ve got to think about a mine as a system, it’s not just an isolated hole in the ground that people go down and dig stuff out, it lives in a socioeconomic context. If you start to think about the components of what makes the mine in the future look different, there’s a mining technology element to it and we know a lot about that, a lot of those technologies already exist, autonomous vehicles, all the clever ways of mining more effectively. Information technology, all of those technologies exist, big data, data analytics, visualization, mobility, whereables, all of those technologies exist. Similarly in energy, we’ve got the components, the renewables and LNG coming up and really the art in getting a step change in performance is going to be putting all of those things together, no one of those on its own is going to get us that step change, it’s when you get the system going that you get the dramatic improvement, when you’re matching you energy demand profile to your supply profile. When you’re matching the nature and profile of work to the profile of your energy and when your information technology is helping you get the most out of both of those systems, using predictive analytics to improve machine downtime, to manage plant performance and all those kinds of things. I think particularly in South Africa we mustn’t forget the socioeconomic system that sits around that because it’s all very well to say that we’re going to be sending fewer better paid higher skilled people down the mine. That’s all very well but we live in a world where the social dividend expectation has not gone down, in fact it’s going up. So I think for survival this industry needs to start thinking at a systems level around all of those components and making changes across all those dimensions to get the step change in overall performance, which I think is now imperative for survival.

WARREN DICK: We talk about the stakeholder relations, obviously I attended the briefing by the Minister of Resources yesterday around the MIGDETT (The Mining Industry Growth Development and Employment Task Team) Process, which talks to a lot of the stakeholder relationships between mining companies and employees and unions and the government as the custodian of the environment, and the communities that many of the workers live in. Almost singing from the same hymn sheet we saw NUM and solidarity come out with statements around how mining companies, it is suggested, are doing these retrenchments ahead of negotiations to try and obtain leverage and what struck me about that was just the deep level of mistrust that seems to exist in the mining sector as a whole. You talk about the stakeholder engagements and improving that, what can the industry do in that regard?

ANDREW LANE: You’re quite right, it’s a highly complex issue and I’ll talk about why it’s complex, and I’ll talk about some of the things one can think about to navigate through it. But it’s complex because you’ve got these conflicting stakeholder interests, if you think about government, governments around the world wrestle with the idea of how much of the return for that resource endowment accrues to the state, versus the average citizen versus the investor. We’re not unique, resource nationalism is around the world, it’s not uniquely a South African problem and different governments are wrestling with that problem in different ways. Obviously investors want to make a return on what they bring to the party, in many of the emerging developing economies the country actually needs the investor because he’s got the capital, he’s got the expertise but at the same time the country wants to develop its own people, create employment and that kind of stuff. You’ve got communities who particularly on this continent and particularly in the post-colonial countries, have a real expectation that that stuff that’s being dug out of the ground belongs to them, a real perception that that is their stuff and that we are stealing their stuff. Right or wrong that’s the perception. If you look at labour, it’s a problem around the worl but in this country it’s particularly unique because we have a 100-year history, whether you like it or not mineworkers in this country still feel like they are being exploited by industry in cahoots with government. Right or wrong that’s the perception that they have. Then you have the role of organised labour, it’s generic around the world but in this country we have a particular situation around organised labour and some of the movements that have been happening there, and some of the discussions that are happening within the ruling alliance. What makes it particularly complicated in this country is, as you say, the lack of trust. We’ve come out of an era where there’s very low trust between these different stakeholders, we’ve come out of an era where everybody is telling everybody else what to do and I think the imperative now and I think there’s an opportunity for the industry to reframe the debate and try to take this debate into a realm where we seek shared value and where we come to the table from a point of view of here’s what I can do to make the system work, rather than here’s what you must do to make the system work. You mentioned this thing of necessity, I think we are getting to the point where people are starting to realise that that’s imperative, that we’re in this together, this industry either sinks or swims collectively and all the role players have a constructive role to play and that dialogue needs to start happening in a very different way. I do think it’s unfortunate that there seems to have been a breakdown in consultation around the announcements in the last couple of days because I think this is a situation where the way we engage with each other is as important as the outcome of the engagement.

WARREN DICK: I think perhaps the vagaries of the commodity markets and I think the tough situation might get everyone to pull together but it really requires effort on behalf of everyone. We’re coming to the end of the interview, Andrew, but I just wanted to get some thought about the energy problem and it’s something that you addressed in the report, it’s not just South Africa that’s suffering with the energy constraints that mining companies face, I think in the report you talk about the huge demand in Chile’s base load power system in terms of supporting its mining activity, we have our own particular unique challenges, what are some of the things that mining companies can do around energy and think about energy in terms of their operations?

ANDREW LANE: I think you are right and, again, this is a global problem but we have it particularly acutely here, this is an energy intensive industry and there is always a supply and demand balance in energy, so we have a situation here where supply is falling short of demand and we see prices rising and we see unreliable supply. I think a lot of our clients have started to realise that this problem is here to stay for the foreseeable future and are starting to do things about it. So more and more people are talking about going off the grid or reducing their dependence on the grid. As you go further up the continent most of the mining companies don’t have grid power and they’re doing things like burning diesel, which is very expensive and not very environmentally friendly. I think our point of view is to look at your energy as a portfolio. So yeah, you want to have renewables but the sun doesn’t shine all the time, the wind doesn’t blow all the time, so you need a bit of something else in there. LNG is starting to show its face as a cost effective way of converting energy, diesel is quite an expensive way and then how do you manage the profile of your work to suit the profile of your energy mix. One of the clever things you can do with regenerative breaking, recycling the heat off a smelter, those kinds of things. So I think one is moving into an era where you have to be very, very smart about energy. It’s no longer just hook up to the grid, pay the bill and off you go. I think we need to be smarter, we have to actually integrate our energy strategy into our business strategy and then manage that accordingly.

WARREN DICK: Okay, great. Andrew, we are going to have to leave it there. That was Andrew Lane, he’s the energy and resources leader for Africa at Deloitte.

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