TORONTO (miningweekly.com) – Consider the resource supercycle; it was a once-in-a-generation event driven by China becoming the world’s workshop. The country’s demand for commodities seemed insatiable and pushed many metal and mineral prices to historic highs.

The mantra for most mining seniors became “big is beautiful” and their mergers and acquisition (M&A) activity was soon geared towards fulfilling this.

Today, the supercycle is on hiatus and subdued prices are likely to last for some time to come. The industry continues to clean out its Augean Stables and, just like the Herculean labour, the task has been both messy and necessary, with the spate of write-downs, divestments and spin-offs reflecting this.

Compounding matters are the ongoing economic headwinds, the unnerving volatility and the ability for some prices to sink still further. For example, the iron-ore sector continues to struggle after the price plunge during the second half of 2014.

CAPITAL IDEAS
Aside from cutting costs and reducing cash burn, the seniors are also focusing on improving their productivity and their competitive edge. This was identified as the number one issue in multinational professional services firm EY's 'Business risks facing mining and metals 2014 to 2015'.

Central to achieving this, companies needed to seek an across-the-board transformation that included re-evaluating mine plans, re-assessing mining methods and increasing the level of automation where applicable, EY said.

Companies were also advised to learn from the recent past but remain open to innovation, while refinancing their debt if necessary, while conducting continuous performance reviews was suggested to inform broader corporate strategy.

However, these suggestions could sometimes be easier said than done, particularly for severely diluted juniors without the necessary projects to interest or excite. For them, the battle was merely to stay alive.

On the other hand, many of the astute juniors – those blessed with the right projects – had already sought out fiscal alternatives or other means to advance their projects. Many achieved tangible successes in 2014 and the coming year would certainly witness more positive news in this regard.

PRINCIPLES THAT COUNT
Away from fiscal issues, the spectrum of risk relating to government action remained a pressing concern and ranged from a government making amendments to a country’s mining code to acts of outright expropriation.

However, it was worth noting that the level of government intervention had declined as the industry’s difficulties became increasingly apparent in bureaucratic circles.

“It’s taken the past year-and-half, or two years, for many governments to realise there’s been a downcycle in the mining industry,” Control Risks MD of global client services, Americas, Daniel Linsker told Mining Weekly Online. “The incentive for resource nationalism has declined because prices have fallen from their highs, while the incentive to renegotiate terms has massively declined.”

The perennial threat of shake-downs, corruption and bribery remained, of course, although this had also receded in the face of the downturn. Nonetheless it remained vital that companies continued to bolster their defences and consider the growing trend towards mandatory transparency and anticorruption measures.

To this end, companies needed to strive to develop nuanced anticorruption programmes that were implemented with full management support, Linsker stated.

Companies should also recognise that the use of subcontractors in early-stage exploration and prospecting could often aggravate corruption and bribery, he added. In response, management needed to ensure all third parties understood and adhered to their company’s anticorruption and antibribery policies.

Linsker also advised that management should introduce the proper mechanisms for following up and investigating corruption allegations.

GET ENGAGED
The risk of protests and stakeholder action was also pronounced, with the potential for fiscal damage growing in this quarter. For example, a serious community conflict could cost large-scale mines up to $20-million a week, EY pointed out.

Because of this risk, due diligence before M&A, or partnering, was increasingly of concern with regard to a project or operation’s reputational profile, as well as its geological and economic profiles, Linsker noted.

“Reputational background checks are essential and this doesn’t only apply to corruption, but also to human rights, community expectations and environmental legacies,” he added.

Therefore, it was increasingly likely that juniors and explorers would have to engage in meaningful corporate social responsibility (CSR) and consultation work whether they wanted to or not. Those that failed to do so reduced their and their project’s appeal by a considerable measure.

“The rise in stakeholder programmes will continue, even in the face of depressed prices, because the costs of conflict are simply too high,” founder and principal of Enodo Rights Yousuf Aftab told Mining Weekly Online, adding that this had repeatedly been shown to be the case.

MORE FOR LESS
Because of the current conditions, most companies would have to achieve more with less. Fortunately, the new model of CSR was more thoughtful and effective in delivering lasting success if handled with care, Aftab said.

The old CSR model was often a case of spending or donating money without paying enough attention to detail.

Assisting companies had seen the rise in metrics that monitor and measure CSR and engagement success. However, companies needed to recognise that each project or operation was unique and required specific analysis; using a one-size-fits-all set of metrics would be of limited assistance, Aftab stressed.

Those who still maintained that CSR, consultation and engagement was a noncore consideration forgot the new dynamic of globalised social media. One major mistake, or even just a spot of bad publicity, could bring censure from nongovernment organisations and members of the public worldwide, damaging both reputation and sometimes inflaming the situation.

“The pressure exists not because of a single user on Twitter, but because you can now have globally-coordinated actions that are complemented not only with public relations campaigns but with pressure exerted on governments – both host and home governments,” Aftab pointed out.

As risk patterns waxed and waned in 2015, capital and expenditure issues would almost certainly remain the top priority. However, companies could not afford to take their eyes off anticorruption planning and the maintenance of a social licence to operate. Those that rejected this did so at their own peril.