Politicians, environmentalists, labour activists, dissident shareholders – all can create major problems for today’s mining executive, particularly in a time of falling commodity prices.
LONDON (Mineweb) – Pity today’s mining company executive! Not only do today’s mining company boards have to weigh up the technical and environmental considerations of mining projects and dealing with ‘mining-friendly’ governments keen to use natural resource development as building blocks to advance their economies , but also deal with a major downturn in commodity prices, resource nationalism issues in less mining friendly nations, environmental activism, dissident shareholders and workforces with high expectations.
To a great extent all the above are connected – by a period of very strong commodity prices – often called the commodity supercycle – which is currently in remission. The commodity price benefits achieved because of the huge surge in demand, while supply struggled to keep up, might have seemed like boom times for the miners, but in retrospect may be seen to be the root of many of its most recent problems too.
High commodity prices meant high profits and stock prices for miner, developer and explorer alike, but high profitability, or potential profitability, has led to often excessively high expectations from the stakeholders – governments, investors, workforces etc. and when an inevitable downturn arises the mining companies are seen to be underperforming and the expectations of these stakeholders are just not achievable.
Consider the principal worries being seen by the industry:
Resource Nationalism: In times of high commodity prices and mining company profits, the companies start to be seen as greedy entities making undue returns from a country’s natural resources – or that is how it can be presented by astute politicians looking for popular appeal. It is easy to forget, or ignore that mining companies developing these resources may be investing billions of dollars of risk capital in them and it is the commodity price good times which makes this all worthwhile.
Resource nationalism takes many forms, of which the extreme is state takeover, or nationalisation. Luckily for the mining companies, in most cases government leaders realise they do not have the expertise, or the capital to nationalise companies and operations and run them as well as the major mining companies, but there are countries, like Venezuela, which have gone down this route and the jury is still out as to whether these moves to take over foreign miners are beneficial to the country in the long run or not.
But even talk of possible nationalisation, or of taking a majority stake in a company’s operations – if this is seen as a serious possibility even in the medium or long term – has to be moved into the risk assessment analysis for miners and explorers. It will inevitably lead to that country almost overnight being seen as a riskier place to invest which affects all kind of decisions to proceed, not least increasing the costs of finance from banks and institutions without which most major projects could not go ahead. No longer can mining companies finance major new mine developments from their own resources – the costs are just too high.
Of course there is a more insidious form of resource nationalism which companies need to take into account. Even countries which purportedly embrace capitalism and the free market can see mining as a cash cow to be milked and can increase royalties, taxes and other demands to levels which are not commensurate with the risks involved in new mine development – or sometimes keeping a mine operating as a going concern if, and when, commodity prices enter a period of weakness.
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