Whilst there are exceptions to every broad generalisation, it is universally acknowledged that 2015 has been a difficult year in the mining and resources sector.
Lower commodity prices have wreaked havoc across the industry and whilst the responses have not been completely uniform, we have seen the implementation of drastic cost-cutting measures to preserve dwindling cash reserves, the sale of both core and non-core assets, emergency capital raisings, staff reductions, mine closures, the cessation or winding back of exploration programs and, in some extreme cases, the appointment of external administrators.
We are fortunate at Gilbert + Tobin to act for a wide variety of clients, across a broad array of commodities and at different ends of the corporate spectrums. We have listed below some of the things that they are witnessing, some of the issues that they are confronting and some reasons for optimism as we turn the page on another year.
- The issues in the market are cyclical and not structural
Whilst there is little doubt that the “mining boom” is over, the resources sector has always operated in cycles and that premise still remains the case today. As a rule, the market is efficient and generally gets it right, although as A. G Shilling once commented, “it is possible that markets can remain irrational for longer than some companies can remain solvent”.
- We haven’t seen the end of the impact of the wealth transfer to China
Australia remains very well positioned to catch the next wave of investment from Asia and our clients are continuing to see interest from China and other Asian markets for their commodities and the projects that underpin them. This interest is driven by a longer term view of the market fundamentals than most company shareholders are willing to tolerate.
- Exploration and development funding is likely to remain scarce for the foreseeable future
This remains a fundamental concern in the industry – exploration grows the next wave of project developments and provides the learning portal for the next generation of geologists, metallurgists and mining engineers. More incentives are required to attract companies to part with their exploration dollars and exploration success alone is no longer enough.
- Boards are nervous
Every decision, investment, non-investment, disclosure, omission from disclosure, financial statement and forecast is subject to greater scrutiny than ever before. Litigation funders await any misstep. Given that there is not a one size fits all approach to dealing with the current commodity downturn, boards are now wanting more information than ever before and are asking more and more from their management teams.
- Forecasts are just that, forecasts
Whilst few, if any, were able to predict the current commodity price collapse, there are likely to be fewer still that will accurately predict its recovery. What this tells us is that although there are now a few commentators, analysts and industry experts trying to predict the bottom of the cycle, the truth is that no-one really knows.
- The regulatory burden on resources companies seeking to get a project into development remains an industry-wide problem
The complexity of the approvals system and the time-frames involved in seeking and obtaining a myriad of project approvals is an additional obstacle that clients face in attracting capital to fund their projects. This is a problem when times are good, it is an even bigger problem when coupled with lower commodity prices and cautious investor sentiment.
- Innovation is key
Many industry participants and observers may have heard the recent remarks by Prime Minister Malcolm Turnbull, that the future of Australia lies not in what is in the ground but what is in our heads. Whilst many may disagree with this general assertion, it is in part true as it applies to the resources sector itself. Australian companies are now working harder at becoming more efficient and more productive, and innovation and technology are at the core of these changes. We are seeing greater use of automation, smart computing and data analytics allowing Australian resources companies to compete on a global stage in a lower commodity pricing environment.
- Resource companies and investors remain cautious about M&A transactions
Whilst transaction values may have been re-set in recent times and interest in M&A transactions appears to be rising, deals are taking more time to launch and to execute as investors (and their boards and management teams) spend longer considering the relative merits of each transaction.
- The great rate gouge
Our clients remain concerned about the ability (and increasing propensity) of local shires to "rate gouge” mining companies through constant increases in local shire rates notices in order to cover budget shortfalls. We are supporting industry action to address this unfair financial impost on mining companies.
- Mining has always been a risky business
Whilst it is understood that the rewards can be great, there has never been a moment in time where every participant has enjoyed success. It is just that in the current cycle there are far fewer winners. We share in the belief that this is an industry that maintains a unique capacity for resilience, for adaptation, for innovation and for growth.
Here’s hoping that 2016 is a more positive one for the industry.