Cesar Garza
View from the Top

Facing Financial Challenges in the Mining Industry

Mon, 10/21/2013 - 14:08

Q: How are increasing costs and growing mineral price uncertainty impacting the mining sector internationally?

A: In the past 10 years, metal prices have increased five or six times their previous value. This situation activated many projects in Mexico had been put on hold, because international prices before did not justify extraction and exploitation activities. When the mining industry was activated, many providers of a wide range of inputs were not prepared, resulting in market demands not being quite satisfied. The rising operating costs are one of the most important challenges that mining companies face and not everyone has the technology or resources to overcome this hurdle. For example, the prices for energy and other supplies required in mining operations and transportation, such as heavy machinery, experienced an important increase. On the other hand, there have been periodical shortages of chemical products needed in the industry, affecting the continuity of operations and their profitability. In order to mitigate this, margins are sometimes sacrificed to continue operating. As if this was not enough, as a result of increased demand, the quality of inputs has been lowered significantly, with the consequence that companies must also deal with early replacement costs.

Q: What are the particular challenges that the industry is facing in Mexico?

A: The aforementioned challenges have a direct effect on the operation. However, from the additional total costs perspective there is also another important issue: taxes. In Mexico we do not have big fiscal stimulus or subsidies for the mining industry, as some other countries do. This affects our competitiveness and reduces the size of our operating margins. The trends we have seen in investment in Mexico in the past six years reflect that, even though the costs can be high, operational margins in the country are still very attractive and manageable. Nevertheless, the operational and financial challenges must be kept in mind in order to maintain a realistic perspective on the current situation in the industry. Mexico is a privileged country due to its mineral deposits, and relevant investment will continue as a result of the many deposits and mines that were explored and exploited in the past and are now ready for a second phase. Also, many large Mexican and foreign companies that have decided to focus on specific assets, usually leave behind projects that can be of great value for smaller companies. This will keep the industry very active and creates high expectations for fresh capital entry in the short-term.

Q: What long-term strategies does Deloitte advise its clients to implement in order to deal with these challenges?

A: Deloitte provides consulting services to the mining sector worldwide. We have come a long way with our practices, and have positioned ourselves among the new generation of miners. In some countries, mining generations were lost due to prolonged price volatility, and relatively low mineral prices in general, which in turn led to a significant loss of industry knowledge. This has affected not only operators but also consulting experts who were forced to abandon the sector during these periods, creating important blank spaces. When conditions in the market improved, the lack of specialized talent, such as mining engineers, and financial information specialists, among others, became a challenge. We are looking to be closer to mining companies, studying their challenges, and looking for the best business solutions for them. We have developed specialized services for diagnosing the best way to use each input and resource at each stage of the mining process, in order to create more efficient and cost competitive processes that will generate value for the company. We actively collaborate in the actual operations of our mining clients rather than working from an office; this is what distinguishes us from other firms.

Q: What is your perspective on the growth potential of the mining industry?

A: The industry will continue to grow, without a doubt. Every project is exposed to market volatility and, for as long as there continues to be significant uncertainty in international metal prices as well as financial markets, companies might not have access to the funding they need to continue operating or investing. Nonetheless, operating margins still exist and metal prices analysts consider that the foundations have been laid that are likely to prevent gold and other metals from losing more value in the short term. They believe that conditions exist for prices to resume their upward trajectory. Personally, I believe the industry will experience significant growth in the medium term.