(Repeats column published earlier with no changes to text)
By Clyde Russell
LAUNCESTON, Australia, Sept 21 (Reuters) - - If one was to
compile a list of the biggest risk to metals and mining
companies right now, it's unlikely that planning and executing a
renewed growth strategy would the top issue.
But that's exactly the view of consultants Ernst & Young
(EY), who recently produced a report highlighting the top risks
for metals and mining companies in the next year, and how these
have evolved since the peak of the commodity cycle in 2008.
There is obviously merit in the idea of thinking ahead and
preparing for an upswing in commodity demand and prices, even if
that recovery is nowhere to be seen presently and to many in the
industry seems like it's not even on the horizon.
"Pro-cyclical, short-term behaviour currently prevails, with
the collective industry mindset focused on consolidation and
capital returns in a low-growth environment," EY said in the
report.
"But standing still is not an option: we believe now
is the time to prepare for a switch to growth."
There's very little to argue with in EY's reasoning, but
it's also hard to imagine any board of directors in a metals or
mining company putting expansion planning atop their to-do list.
Most companies are currently still in a siege mentality,
battling low prices and muted demand growth for their products.
Take iron ore, for example, where even the lowest cost
producers such as the Anglo-Australian pair of Rio Tinto (LONDON:RIO)
RIO.AX and BHP Billiton (LONDON:BLT) BHP.AX are very much focused on
cutting costs and driving productivity.
In their recent investor presentations after reporting steep
declines in profits, both companies talked a lot about what they
were doing to run their businesses at maximum efficiency, and
very little about what their future expansion plans were.
In some ways, the EY report is on the money, as it's always
a good idea to buy assets when they are distressed and when the
price cycle for the commodities they produce is near the bottom.
But very few companies will find themselves in a position
where their balance sheet is strong enough to fund major
acquisitions, even assuming their shareholders had the appetite
to support ambitious growth plans.
Perhaps large entities with the backing of governments with
deep pockets, such as China's state-owned enterprises, could
consider takeovers or costly new projects, but even they seem
more focused on managing the transition of the world's
second-largest economy to a more consumer-driven model.
The difficulty of developing new mines is also shown by the
travails of India's Adani ADEL.NS in getting its $16 billion
Carmichael coal mine in Australia's Queensland state started.
The project has been repeatedly delayed by court actions by
environmentalists, difficulties in obtaining finance and
continuing concern over the economics of the project, so much so
that Adani recently halted engineering work.
The difficulties of doing major acquisitions or new projects
shouldn't mean companies should abandon all growth
opportunities, but a more realistic assessment of the current
situation is that most mining and metals companies will be more
modest in ambition, perhaps seeking joint ventures as a way to
grow without much capital input.
CHALLENGES CAN BE OVERCOME
If growth is the top risk, what else does EY have on its
list?
Number two is productivity improvement, followed by access
to capital, and these speak more to the present situation of
trying to survive in a market where most commodities are priced
at multi-year lows.
Rounding out the top five are resource nationalism and
social licence to operate.
Resource nationalism tends to be more of an issue in
developing countries, as can be seen by Indonesia's policies to
ensure local ownership shares in coal mines and the restriction
on the export of raw ores.
The social licence to operate is more of an issue in
developed nations such as Australia and Canada, where
environmentalists are often able to forge partnerships with
rural or indigenous groups to challenge the development or
expansion of mines.
Comparing EY's business risks for today with those at the
height of the commodities boom in 2008 shows social licence was
the only common one in the top five.
The number one risk in 2008 was skills shortage, followed by
industry consolidation and access to infrastructure.
It seems the mining and metals industry was largely
successful in dealing with the skills issue, albeit at the cost
of skyrocketing wages, which are now trending down as companies
cut projects and strive for efficiencies.
Industry consolidation was perhaps less successful, with
several prominent acquisitions not delivering shareholder value,
a good example being Rio Tinto's $3.9 billion purchase of
Mozambican coal assets, which were later written off and sold
for $50 million.
Access to infrastructure is another issue that appears to
have been largely successfully dealt with, although again at
massive expense given the cost of building new mines, railways
and ports or expanding existing facilities.
A common element is that the challenges of 2008 were solved
by investment, perhaps over-investment in certain cases.
The challenges of 2015 are more likely to be met by
innovation and strategic nous, as the industry can no longer
rely on the promise of an extended commodity super-cycle.
(Editing by Tom Hogue)