Financial risk management, solutions and insights company Fitch Solutions Country Risk and Industry Research (Fitch Solutions) says mining production and investment across most minerals, except for thermal coal, are likely to finish the year stronger than in the first half of the year as a result of firms being unencumbered by restrictive lockdowns.
As economies enter the second half of the year, Fitch Solutions expects both output and investment to fare relatively better than in the first half of the year.
In this regard, Fitch Solutions points out that within firms' second quarter results so far, their outlooks over the coming quarters have generally leaned toward the positive side, under the assumption that operational activity will not be reduced again by heavy government restrictions.
During the first half of the year, Fitch Solutions notes that mining operations faced varying degrees of disruption as the world grappled with the onset of the Covid-19 pandemic.
Those hit hardest were generally a result of the effects of government restrictions, which at the strictest end of the spectrum reduced mining operations to just critical activities for multiple weeks.
For example, the firm points out that in Peru, the production of key minerals such as copper, zinc and gold fell by 20.4%, 23.7% and 34.7%, respectively, over the first half of the year. As such, Fitch Solutions states that, mining investment in the country also fell by 25% for the same period.
Further, the firm highlights that the gold sector, for example, has passed the period in which it would be most disrupted this year, barring a second round of global lockdowns.
The removal of restrictions over the second quarter has opened the opportunity for mining and metals firms to ramp up output, as well as return to investing in growth projects. For example, firms are beginning to ramp up activity on large mining projects, such as Anglo American, which is ramping up work on its $5.3-billion Quellaveco project, in Peru, over the second half of the year after non-critical activities were suspended owing to Covid-19.
However, Fitch Solutions notes that nearly all firms so far are highlighting downside risks depending on the development of the pandemic.
Looking to 2021, Fitch Solutions notes that firms are generally maintaining guidance for both mining output and capital expenditure (capex) spending, with both output and capex expected to increase in 2021 compared with 2020 levels.
This current guidance reflects low base effects, a general vision to return to pre-planned levels of activity and an assumed lack of lockdowns, which would, once again, hamper miners' capabilities, the firm says.
In terms of project development, Fitch Solutions expects global mining investment to grow, similar to the narrative seen on the production side. As such, miners that have released capex guidance beyond this year have, so far, been reluctant to make drastic shifts downward, the firm says.
Despite positive spending outlooks among firms, Fitch Solutions highlights risks to its mine production growth forecasts in the medium term as a result of delays in project completion timelines and a reduction in mine development works.
Fitch Solutions says that, as a result of the uncertainty at the beginning of the pandemic and government mandates, firms began to slow down or halt project development altogether as they gauged the pandemic's impact on cash flows or owing to supply chain constraints where a firm was unable to secure necessary equipment to progress development. The firm says this impact was, by no means, consistent across all firms, but nonetheless was experienced by some.
The firm states that this raises downside risk to its mine production growth forecasts over 2021 and 2022, while at the same time raising upside risk to its 2023 forecasts as project completion and subsequent production ramp-ups are delayed.
Further, Fitch Solutions notes downside risks to its forecast as firms that significantly reduced mine development works could see future output impacted over the short- to medium term.
The firm also notes that the pandemic has acted like a stress test on operations' necessary personnel count.
With governments implementing restrictions, such as reducing personnel count to those just needed for critical activities or firms implementing physical distancing measures, this has acted like a stress test on how firms can minimise on-site personnel, while increasing value.
In some cases, Fitch Solutions says firms have noted that they are understanding where they can become more efficient with fewer people. For example, Chilean miner Antofagasta stated that it has expanded mine development and maintenance activities after gaining experience working safely with two-thirds of its normal workforce.
Rio Tinto is also experiencing something similar as management noted in its second quarter investor call that it is rethinking parts of its business model; in particular, it noted that it is discovering that it does not need as many people as originally thought to run a site.