Volatility is the New StabilityWed, 10/16/2019 - 17:06
Q: What is Deloitte’s outlook for the mining industry and what trends will most impact the sector?
A: Every industry trend report tries to figure out what is going on in the mining sector. Mining is an unusual industry because it is truly global as it deals with international supply chains. We strive to understand the market’s drivers to make better-informed investment decisions in the business economy in which we operate. There is a positive outlook for now as commodity prices are coming back. Gold prices are looking good. People are optimistic about copper. Silver has been a little off but there is optimism about this metal because it has the right industrial applications.
Investment and equity are the main topics in the industry because companies need money to develop assets. In the old days, the industry would go to banks to develop or conduct a share raising by issuing stocks to get funding. Today, it is harder to do that. Banks are not lending to the mining sector as much as they used to. The financing landscape has changed in terms of where to get money for projects. Royalties, streaming agreements and private equity are ever more relevant.
Q: What strategies can miners deploy to succeed in a dynamic mining environment marked by volatility, talent shortages and a tainted reputation?
A: In the complex financial scenario in which miners operate, success comes down to strategy. Which commodities companies operate is a key component to consider. We see that miners are betting on copper due to the world’s need to develop infrastructure and electric vehicles. The brown metal has manifold applications but these will change with time. For example, electric vehicles are driving demand now but that may not be the case going forward as the millennials of the future may not necessarily want to have a car. In this context, copper is also favored by the demand for charging stations for electric vehicles. The electric grid of cities will have to be redeveloped to comply with higher electric demand, again boosting copper. When it comes to the expectations for lithium, the story of its boom has been around for over 10 years. I do not know what demand for the metal will look like going forward because I do not think that anybody really knows. We are in the middle of the exponential curve described by Moore’s Law.
When considering the demand for minerals, their provenance has also become more important. As a consumer, I want to know where my copper, nickel, cobalt, lithium and all other metals come from. They have to come from legal sources and be ethically-sourced. Nobody wants to be buying commodities from countries with human right violations.
Going back to the strategy conversation, it is about making choices regarding the specific commodity but also from which countries. Because companies look at the same reports, they all go to the same safe jurisdictions to look for the same commodities. By doing that, the industry is ignoring locations with great potential. If the industry wants to be successful, it has to broaden their thinking regarding which mining jurisdictions they will work in. For me, this means that Mexico needs to be on the mining agenda.
When it comes to knowing how and where to invest in such a volatile industry, we really need to look at the real supply and demand scenario. For example, silver, whose best mines are in Mexico, has consistently underperformed in the last five years, dropping to US$15 per ounce from US$45 in this period. The demand is good, as this metal has many industrial applications, it mainly comes from safe jurisdictions and as we have built silver mines for so long, its supply has started to dry up. These factors build a case for higher silver prices but we could all grow old before this happens because, in spite of the accuracy of supply and demand laws, nobody can really predict prices. Volatility is the new stability.