The cost of doing business was rated as the number one challenge for mining companies for the second consecutive year, according to global advisory firm Deloitte’s ‘Tracking the trends 2013’ report, which was released last month.

“Across the board, operating costs and the costs of water, power and labour are increasing,” said Deloitte advisory mining industry leader Abrie Olivier at a media roundtable.

According to the report, as a result of these factors, mining costs were reaching unsustainable highs and, for certain operations, production costs for key commodities, such as copper and nickel, had already reached or exceeded London Metal Exchange prices.
“Unless mining companies improve operational efficiency, proactively control maintenance costs and invest in cost-reducing technologies, this trend is likely to continue,” the report stated.

Meanwhile, Deloitte African mining industry leader Tony Zoghby pointed out, also during the media roundtable, that while South Africa often believed that its challenges were unique, this was not the case.

“The report gathers the ideas of Deloitte mining specialists around the world and, therefore, when you read the report, you will realise that the issues we regard as localised actually do occur in many other jurisdictions,” he said.

However, Zoghby did acknowledge that there currently was a heightened sense of risk pertaining to investment in South Africa.

“Marikana put the South African mining industry and the country as a whole in a bad light. Mining companies might rather choose to invest in what they consider to be safer jurisdictions.

“However, while South Africa may not currently be attractive from an investor point of view, it still has vast mineral resources and the investors will return,” Zoghby said.

According to the report, South Africa was in the midrange with regard to projected mining investment between 2012 and 2031, Olivier said, adding that “while this situation was not ideal, all was not lost”.

It further stated that the projected mining investment into mining projects in South Africa was $3-billion over the next 19 years, compared with $55-billion in Australia, $33-billion in Brazil and $12-billion in Canada.

According to Deloitte, the second- biggest challenge facing mining companies was demand uncertainty.

“In today’s interconnected global economy, events in China often have a disproportionate effect on the rest of the world. This is particularly true for mining companies, whose fortunes have hinged on China’s voracious appetite for commodities, and with indicators that China’s rate of economic growth is slowing, commodity prices and corporate investment decisions are being affected,” the report stated.

Zoghby added that while China’s commodity demand is slowing, which will cause a drop in the prices of important commodities, such as iron-ore and coal, it was expected to be a steady decline and not a dramatic price crash.

Meanwhile, the report indicated that capital project challenges have increased in importance, compared with those contained in the 2012 report.

Although mining executives were hesitant to authorise new capital expenditures at a time of tightened margins and ongoing pressure to pay shareholder dividends, the report suggested that the correct response could be to make disciplined investment decisions through measures such as project rationalisation, improved capital efficiency, data analytics and project delivery quality assurance, as opposed to freezing projects.

Further, an increased volume of mergers and acquisitions (M&As) was also expected in 2013, Olivier said.

“As a result of limited debt financing, some mining companies are seeking to enter deals pre-emptively with partners of their choice through proactive and rescue M&As, with transaction volumes likely to rise into 2013 and Asian investors remaining frequent providers of debt capital,” the report stated.