Australia's mining sector is under pressure due to labour shortages, supply chain concerns and escalating costs. What is the impact on mining companies and mining services providers – and what should they do to manage a volatile environment? To find out, we interviewed key executives in the sector in Western Australia. Learn about our findings and recommendations for the future.

Key takeouts

  • Despite strong performance, the mining and mining services sector's export earnings are projected to drop in FY 2023-24.
  • Our research reflected that the sector is concerned about rising costs, labour shortages, inflationary pressure, supply chain and global macroeconomic issues.
  • Despite short term pressures, the sector is generally optimistic about its long term prospects and the attractiveness of the sector.

Australia's resource and energy export earnings are forecast to rise to a record $419 billion in 2022-23, surpassing the previous record of $405 billion in 2021–22. From Western Australia alone, $191 billion worth of minerals were supplied in 2020-21.

High prices across several commodities, volume growth, a weak Australian dollar and the reliability of Western Australian operations have driven a surge in export earnings. Commodity prices are surging due to increased demand following COVID-19 lockdowns, as well as global production disruptions constraining supply. Given the already low inventories for many commodities, these demand and supply factors pushed many commodity prices to record highs. In light of these statistics, it's not surprising that mining executives in general are optimistic.

However, they note that tougher times may lie ahead.

The mining and mining services sector is experiencing strong performance. However, export earnings are forecast to drop to $338 billion in 2023-24 as supply rises and demand growth moderates. Organisations are grappling with rising costs, labour shortage, inflationary pressure, supply chain and global macroeconomic issues, all of which are likely to remain significant concerns, at least in the short-term. There are also reputational risks for the sector in terms of how it addresses the serious issue of sexual harassment, particularly in the FIFO industry.

The outlook for Australia's mineral exports remains strong, as the world economy rebounds from the impact of the COVID-19 pandemic and energy shortages persist.” Office of the Chief Economic, Resources and Energy Quarterly, June 2022

From June to August 2022, MinterEllison's mining team in Western Australia met with key executives in the mining and mining services sector to explore the sector's evolving challenges and opportunities. The executives provided their comments and views regarding matters such as workforce challenges, impacts of COVID-19, supply chain challenges, and the appetite for mergers and acquisitions or financing.

Ongoing impacts of labour shortages

Labour shortages were top of mind for respondents. Notwithstanding that the mining industry in Western Australia employed a record average of 155,004 people (121,959 FTEs) during 2021.

Respondents noted shortages of both skilled and unskilled workers. This includes geologists, mining engineers, drillers, jumbo operators, blast hole drillers, surveyors, auto-electricians, heavy diesel operators and shift bosses. Executives also highlighted the shortage of head office staff.

Widespread labour issues across the state means that the mining sector is also competing for workers with employers beyond its own industry. As one respondent said, 'even the guy across the road at the coffee shop is short of people'.

In addition to recruitment, many respondents expressed concern about retaining talent. Several spoke of hiring inexperienced people and the significant investment of upskilling and training them, only to have competitors offer something more attractive – mainly higher wages. The cost of this is impacting the industry, with employees looking for increased wages and greater flexibility – as one respondent said, 'every second person is asking for a pay rise'.

Absenteeism due to COVID-19 continues to exacerbate staff shortages. In an industry where certain specialities and amounts of people are required for safety purposes, respondents found there was a constant question around 'can we operate safely with the number and mix of people we have?' One gold company respondent believes the constraints of not having enough people would continue, saying 'we're only about 40% of the way through COVID positives'.

At the recent Jobs and Skills Summit, thirty-six immediate initiatives were agreed, including an increase in the permanent migration program ceiling. 'Governments are starting to get it now that it's not a short term thing, and it's not something that's easily fixed,' said one respondent.

Sexual harassment, diversity and inclusiveness in the FIFO sector

Recent and consistent publicity about sexual harassment in the FIFO sector indicates the importance of this issue – widely discussed in all interviews. All executives agreed that more needs to be done to create safe and inclusive workforces in the FIFO sector.

We need to 'accept that we, as an industry, haven't done as good a job as we could have in the past,' said one respondent. While it was clearly acknowledged that it's a sector-wide issue, some respondents also flagged that it extends beyond that. It's 'a big issue, not just for the industry but for society as a whole,' said one respondent, with another adding that the 'mining industry needs to lead the way on these issues'.

Executives agreed the issues were front of mind, and are focused on improvement. A second report from a recent Parliamentary Inquiry, Enough is Enough – Sexual harassment against women in the FIFO mining industry was widely cited, providing a list of findings and recommendations for improvement.

The WA Parliament's Enough is Enough report included many practical recommendations. Organisations need to conduct a proper risk assessment to make sure that their workplace is safe. This includes creating an environment that is suitable for a diverse range of genders and races” MinterEllison Partner Kathy Reid

Executives interviewed said their companies are responding to the issues presented in the Enough is Enough report – and that staff safety was their utmost priority. Stronger and clearer policies, diligent training, consistent communication, strong leadership, onboarding specialist managers and improved culture were just some ways companies were responding to the recommendations. Most importantly, they said, was ensuring there is zero tolerance for bad behaviour.

Focusing on diversity and inclusion

MinterEllison Partner Kathy Reid said that a broader focus on diversity and inclusion is key to making the mining sector safe and appealing for women – however it is facing a chicken and egg problem. 'You can't really make women feel more comfortable in these workplaces until you've got greater numbers. But of course, it's hard to get greater numbers of women in the industry in the first place.'

She added that the industry is taking positive steps to help make the workplace more inclusive for women:

  • Physical comfort – companies are starting to design uniforms that are comfortable and suitable for different builds.
  • Technology – new technology is enabling women to perform jobs that they previously had been unable to due to the requirement for physical strength.
  • Flexible rosters – rostering practices are being adapted to factor in part time and child care, which affects more women than men.

MinterEllison partner Craig Boyle added: 'Where there is greater diversity and acceptance of people in workplaces, people feel comfortable to be themselves. And that is an important factor for mining companies to retain the staff that they have and attract new employees. This may help to address the labour shortages issue as well.'

Escalating costs, supply chain and logistics challenges

Inflationary pressures are increasing the costs of doing business in the mining sector. Cost escalation is a significant issue dominating boardroom discussions. Wage escalation, supply chain and logistics, diesel, raw materials and 'access to all the things you need to build a mine', are leading to big blow outs in capital expenditure and eroding profit margins. Survey participants noted that 'everything has gone up in price' – and the data backs this up. Unfortunately, for many, there is no easy end in sight. 'In terms of supply chain impacting inflation, I'm not very optimistic about that sorting itself out – and this is largely talking to shipping,' one respondent said.

Exploration cost growth is driven by commodity prices, wage growth and changes in exploration expenditure across Australia. Cost inflation is estimated to have increased by 9% in FY22.

This at a time when, as BIS Oxford Economics puts it, elevated commodity prices are likely to encourage producers to take on higher maintenance spending.

On top of cost increases, companies are also reporting significantly longer lead times and additional difficulties in acquiring equipment. 'Logistics is a massive, massive issue at the moment,' said one respondent.

Delivery times are reportedly blowing out to twice as long as they used to.

In particular, sea containers and seaborne logistics were the most commonly referenced problem, where costs of containers were up, and ships are reportedly backlogged off the coast of China with issues around quarantining for COVID-19. Respondents reported that suppliers are now unwilling to commit to firm delivery dates, creating greater uncertainty. A respondent noted that, previously, it might take 30 weeks to build an underground bogger or a jumbo overseas and 10 weeks to deliver. However, at the moment, equipment suppliers simply will not provide a delivery date – and delivery is taking 12 to 26 weeks.

In the short term, most respondents said their organisations do not have immediate plans for expansion as they deal with these cost and supply chain challenges. Those interviewed were holding off on expanding their mines or conducting additional exploration, with most not looking for finance. Overall, the general plan was to 'wait it out' until cost pressures recede and keep producing and exploring as their finances allow.

Despite the challenges, the sector is broadly optimistic about its long term prospects. Many of the executives interviewed noted they had experienced economic cycles and ridden the waves of boom and bust.

Prospects for M&A and capital investment

After bouncing back from COVID-19 and seeing high levels of corporate activity, many of the executives we spoke to believe the sector is past the high of a busy period. While there will be ongoing activity, including M&A, most feel that a drop-off is inevitable. One respondent said 'the whole market saw a bit of a meltdown from April to June'. According to two respondents, there were roughly 150 companies listed on the ASX over the last couple of years whereas now, IPOs are currently down or being 'pulled'. This, some say, poses a risk for the junior market as they become 'shells'.

Across 2022, global headwinds are creating more uncertainty in the market, though a comparison of first half 2021 and first half 2022 numbers highlights some similarities (61 new listings versus 59 new listings).

The materials sector comprised 80% of all new small cap listings compared to 54% in the same period in 2021. Due to the predominance of the resources sector (made up of materials and energy companies), 71% of new listings came from Western Australia, reflecting the strength of these sectors in the state. Activity is likely to continue in other places though. For example, it is likely opportunities may arise from companies in distress. Capital is also still available in the private equity market, which is seeing value in companies such as those delivering battery minerals.

'Despite the uncertainty in the market, Australia's relatively stable regulatory environment and the long term appeal of Western Australia's mining sector gives the sector confidence. The market environment also presents immediate opportunities for mergers and acquisitions for buyers with sufficient capital prepared to take a longer term view,' said MinterEllison partner Matthew Knox. Many projects still offer attractive returns, such as those aligned with decarbonisation and renewable energy themes, and with a focus on meeting ESG requirements.

'Australian companies – particularly those in emissions-intensive sectors – are under pressure to accelerate their climate risk governance ambitions to ensure access to competitive finance, and to remain attractive to investors. There's a real opportunity for those who can demonstrate Paris Agreement-aligned strategic pathways to attract capital and offer great returns long term,' said MinterEllison partner Shaun McRobert.

Long term, respondents were optimistic that the market will improve in the new year – noting the long term attractiveness of the sector.

Growth is expected to improve, despite inflation headwinds.”

BIS Oxford Economics Pty Ltd, July 2022

'Despite the volatility, our experience shows that the markets are resilient. Long term, the opportunities for acquisition and capital raising in the mining sector will increase. In the meantime, companies have an opportunity to focus on getting their "house in order", ensuring they are financially healthy and ESG-compliant, so that when the market stabilises, funds and investment opportunities come pouring back in,' said Gemey Visscher, MinterEllison Partner.

Next steps for managing the uncertainty

While any fixes to the sector issues were not seen as short term, most respondents believed the industry would see an uptick in a year's time.

Despite the pressure, the mining sector in Western Australia remains a leading jurisdiction for mining investment and is at the forefront of mining and energy innovation. We're seeing great prospects for the industry as it shifts its direction and tackles new challenges and opportunities,”

David Suttner, MinterEllison Partner and Perth office mining lead

The mining and mining services sector can take important steps now to help manage the risks associated with a volatile environment and to prepare for the opportunities that the anticipated uptick is likely to provide. We recommend the follow steps:

  • In dealing with the short term, plan for the long term. Diligent planning and having a medium to long term outlook can assist in riding out some of the short-term supply and inflationary pressures.
  • Focus on culture to change workplace behaviour. A strong culture, supported by appropriate policies and procedures, will assist you to attract and retain labour, and weed out sexual harassment and other unacceptable workplace behaviour.
  • Plan ahead for opportunities in the medium term. Western Australia remains an attractive sector for corporate activity. The current market may present opportunities for acquisitions.
  • Mitigate longer-term risks by seeking advice now. Seeking legal advice at an early stage, for example in relation to a potential dispute or workplace uncertainty, can often assist in risk mitigation and other costs savings in the long run.