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SPRING 2013

Mining Executives Remain Wary Of Economic Disruption

This is the BDO 2013 International Natural Resources Study, with an emphasis on the mining industry. The research was conducted among senior management executives representing a broad mix of companies and geographic areas, including Australia, Canada, South Africa, U.K. and U.S. Topic coverage was highly diverse including, but not limited to: key drivers of growth for the global mining industry, access to capital and credit, strategies for enhancing profitability, impact of regulations, key targets for geographic expansion and the identification of important threats facing the global mining industry. The survey was independently managed by Market Measurement, Inc., a market research consulting firm who fielded the survey during December 2012 through February 2013. For more information on BDO’s service offerings to this industry vertical, please contact one of the regional service leaders below:

International mining executives cite global economic disruptions as the leading risk impacting their organisation in 2013.

Contact:

T

Charles Dewhurst, United States +1 713-986-3127 CDewhurst@bdo.com

his concern has left mining executives with mixed feelings about their ability to access capital and credit in 2013. Despite financial pressures, international mining executives plan to invest in technology to drive profitability and supplement a diminishing workforce. From December 2012 to February 2013, BDO conducted its inaugural study of 130 C-Level and senior financial executives at mining companies in the United States (U.S.), South Africa, United Kingdom (U.K.), Australia and Canada. The survey sought their opinions on the challenges and opportunities their companies faced in 2012 as well as their predictions for the industry in 2013.

u  Demand for Resources Driving Mining Industry Growth Short and long-term demand for resources is driving industry growth around the globe, according to 42 percent of surveyed executives. The demand from maturing marketplaces like India and Brazil will help the mining industry maintain momentum as China begins to slow its demand. Deviating from the survey norm, the U.K. ranked ‘access to capital or credit’ as its primary industry growth factor (47 percent among U.K. executives; 37 percent among all survey participants). Across all surveyed countries, increased commodity prices (13 percent) rounded out the top three factors for growth.  Read more

Sherif Andrawes, Australia +61 8 6382 4763 Sherif.Andrawes@bdo.com.au

Scott Knight, United Kingdom +44 20 7486 5888 Scott.Knight@bdo.co.uk Michael Madsen, Canada +1 604-443-4732 MMadsen@bdo.ca Ursula van Eck, South Africa +27 10 060 5068 uvaneck@bdo.co.za


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BDO 2013 International Natural Resources Study: Mining

“While most commodity prices continue to be near record levels, macroeconomic issues around the globe continue to impact the mining community at large. As mining companies ride the ebb and flow of commodity prices, they should remain aware that other risks, including the high cost of infrastructure, geopolitical unrest and regulatory issues, challenge the profitability and long-term sustainability of their operations.” – Charles Dewhurst, Global Natural Resources Leader, Natural Resources industry group at BDO

Top Risks by Country

Factors Driving Growth in the Mining Industry 2% Demand for resources

5%

Access to capital or credit

13%

Increased commodity prices 42%

New production technologies Geographical expansion

37%

u  Global Economic

the U.S. government is contemplating new environmental and regulatory programmes, parts of which have not been updated since 1872.

Disruption Leading Risk Facing the Mining Industry Despite positive factors allowing the mining industry to grow, executives cited a myriad of risks facing the industry. Of surveyed executives, 44 percent cited ‘global economic disruption,’ followed by ‘environmental and regulatory issues’ and ‘geopolitical unrest’ at 18 percent each, as top risks. Executives from the U.S., however, list ‘environmental and regulatory issues’ as their top concern. This is predictable, as

u  Mixed Sentiment on Ability to Access Capital and Credit The concern over global economic disruptions has left mining executives across all countries with mixed feelings about their ability to access capital and credit in 2013. While 37 percent feel that 2013 will mirror

100% 90% 80% 70% 60%

40%

50% 40% 30% 20% 10% 0%

Total

Australia

Canada

South Africa

UK

U.S.

Environmental restrictions and regulations

0.18

0.21

0.16

0.06

-

0.36

Geopolitical unrest

0.18

0.08

0.10

0.38

0.33

0.18

Global economic disruption

0.44

0.42

0.58

0.44

0.50

0.32

Inability to expand reserves

0.08

0.17

0.07

-

0.11

0.04

Supply chain interruption

0.06

0.08

0.03

0.06

0.06

0.07

Infrastructure

0.06

0.04

0.07

0.06

-

0.04

 Read more


BDO 2013 International Natural Resources Study: Mining

2012, 31 percent feel their ability to access capital or credit will improve, and 32 percent feel it will be worse.

u  International Expansion

Primary Tactic for Future Growth

With the ability to access capital and credit, mining organisations are looking to grow their businesses. To expand, 40 percent of executives plan further international expansion, followed by domestic expansion (27 percent) and merger and acquisition activity (23 percent). With limited resources on their shores, the U.K. has the largest focus on international expansion, with 71 percent of U.K.-based mining executives looking overseas for growth. The U.S. deviates from the collective trend, with 25 percent citing research and development as a preferred means to grow their organisation compared to an average of only 10 percent across all countries.

“A company’s ability to expand internationally will be a competitive advantage as resources become more challenging to mine around the globe. Yet, expansion without properly managing the financial risk and exposure can seriously impact a company’s success. As countries around the globe consider new tax regulations and royalty requirements, it is critical they weigh the risk and reward of expanding operations.” – Michael Madsen, leader of the Energy & Natural Resources practice at BDO Canada

u  Majority of Companies

Operate Internationally; Looking to Africa to Expand Collectively, 76 percent of mining companies surveyed currently have international operations, with an additional 5 percent planning to expand internationally in the next six to twelve months. Those surveyed cite Africa (32 percent) as their primary target for expansion, followed by North America (23 percent) and Latin America (17 percent). Interestingly, each country notes some domestic expansion activity, yet motivations for international development differ between countries. For instance, South African companies are exclusively looking to expand further into Africa in 2013, while Canadian companies (56 percent) anticipate that North America will be a key component of expansion plans, suggesting that an expansive geographic footprint is a challenge for mining companies. One-third (33 percent) of all executives from the U.S. are eyeing Latin America for future development, almost double the study average of 17 percent. Mining executives are employing a variety of tactics to enter foreign markets, including joint ventures with local companies (39 percent), acquisitions in the country of interest (31 percent) and independently

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establishing operations (24 percent). While their strategies for entry into a foreign market differ, there are some commonalities. For example: South Africa (36 percent), the U.S. (50 percent) and Australia (48 percent) prefer joint partnerships, while Canada (40 percent) and the U.K. (44 percent) favour acquiring a company in their target region.

“Political and sovereign risks are still outweighed by the benefits in the eyes of investors. Increasingly, other African countries are overtaking South Africa in creating favourable conditions for investment. In South Africa, there is talk of further taxes on mining companies while in contrast many African countries are implementing investor-friendly legislation, in terms of tax regimes.” – Ursula van Eck, head of Mining for Natural Resources industry group at BDO South Africa

 Read more


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BDO 2013 International Natural Resources Study: Mining

u  Financing Options Vary

Around the Globe

Of those surveyed, 28 percent note private equity as a means to aid business growth across all countries. This is a positive indicator for the private equity market after natural resources funds experienced a slow year in investments in 2012. The U.S and South Africa are embracing project financing, with 39 percent of U.S. executives and 29 percent South African executives citing this as a key financing option. The results follow a recent trend of U.S. banks increasing their project financing transactions.

u  Industry Bracing for Impact of the Increasing Lack of a Skilled Workforce Of the surveyed mining executives, 79 percent feel the lack of a skilled workforce will have a negative impact on their business in 2013. While environmental policy tops executives’ domestic regulatory concerns, with 34 percent citing it as a potential issue in the year ahead, labour and employment issues are a close second, with 30 percent of executives noting it as a major concern. While executives around the globe grapple with labour and employment issues, 63 percent of South African executives note this as their primary concern - twice the survey average - due in large part to high regional unemployment rates and sustained labour unrest driven by working conditions related to wages and social issues. Despite their broader concerns surrounding labour and employment, 42 percent of mining executives believe that their total number of employees in 2013 will remain about the same, and 38 percent feel the size of their workforce will increase throughout the year.

Primary Financing Options Worldwide 28% 24%

12%

11%

11%

9% 2%

Private equity

Project financing

Debt restructuring

Foreign direct investment

u  Technology Supporting Labour Needs and Profitability Mining executives are facing labour shortages head-on with technology. The industry has an opportunity to be at the forefront of innovation, improving both production and prospecting with new technologies that will increase efficiency and produce greater returns. In fact, 50 percent of executives believe that substituting technology for labour will have a positive impact on their business in 2013, creating a new intersection in the industry of old and new techniques. As commodity prices continue to rise, mining executives desire to increase production to maximize revenues. With 30 percent of executives noting that new technology will improve profitability in 2013, many are reinvesting their profits into technology that will improve and sustain their business in the future. Across the board, mining executives are placing a stronger focus on the development of internal business processes (65 percent) to drive profitability in 2013. Although new technologies are the second most popular strategy overall at 30 percent, U.S. executives are more heavily focused on investments in technology, with 50 percent of executives anticipating that it will improve their bottom line.

Preproduction offtake agreements

Asset sales

Metals streaming arrangements

2% Sovereign wealth funds

“We are in the midst of a transition in the mining industry from a blue collar to a white collar workforce. With advancements in technology – from new software that makes prospecting easier, to advancements in mineral transportation – the industry is at a critical juncture. Technology and the individuals who are skilled in developing and utilising these tools are now more important than ever, as demands for greater returns and increased productivity are forcing the industry to innovate.” – Sherif Andrawes, chairman and leader of the Natural Resources Industry Group at BDO Australia u  Mining Executives

Split On Environmental Priorities While 34 percent of international mining executives are concerned about domestic environmental policies, the way they will direct their resources to address these concerns varies. Water pollution, including acid mine drainage and runoff, is the most-funded environmental concern at 48  Read more


BDO 2013 International Natural Resources Study: Mining

percent. Australia bucks this trend, with only a quarter of its executives citing it as a major project (25 percent). Instead, 38 percent of Australian executives indicate that they are focused on ecosystem disruption, the second most prominent area of funding globally (23 percent). Carbon dioxide emissions round out the top three environmental concerns for mining executives, with one in five citing it as a major issue. In fact, South Africa recently began discussions on taxing carbon emissions, potentially making it one of the largest sources of tax revenue in the country.

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Preferred Strategy to Improve Profitability

A stronger focus on internal business processes

22%

Cutting back on exploration

7% 65%

26%

New technologies Outsourcing Reducing staff levels

9% 30%

Reducing the scale of mining activities

12%

Vertical integration through acquisitions

u  Anti-Bribery/Corruption

Legislation a Top Domestic Regulatory Concern Of executives surveyed in the U.K., 23 percent cite this legislation as a worry; triple the survey average of 7 percent. This reflects the fact that the U.K. implemented strict new anti-bribery laws with extra-territorial reach in late 2010. With much of the U.K.’s mining operations occurring beyond its borders, executives are closely monitoring regulatory developments that may impact the way they do business.

Top Environmental Concerns Where Executives Are Directing Resources 3% Water pollution (i.e.: acid mine drainage, runoff)

4%

Ecosystem disruption as a result of exploration and production activities 21%

CO2 emissions 48%

Environmental impact of hydraulic fracturing Deforestation

23%

u  Corporate Social

Responsibility Programmes Focus on Employees and Local Communities Forty-six percent of surveyed mining executives say that their corporate social responsibility plans invest most heavily in employee health and safety programmes. Community outreach (30 percent) and environmental stewardship (18 percent) rank second and third amongst investment areas for the industry.

u  Resource Nationalism

Impacting Mining Companies Around the Globe

“As of 2010, the U.K. Bribery Bill brought into law new offences that impacted nearly every international organisation with a U.K. trading arm. This was the most radical revision to anti-corruption law the U.K. had seen for over 100 years with. Since most U.K. listed mining companies operate in Africa and the former Soviet Union they have had to put in place controls programmes to mitigate their bribery risks and be able to demonstrate they have done so, or risk potential criminal prosecution. It would be bold for executives to risk a bribery charge due to the lack of necessary controls to identify bribery and corruption throughout their entire organisation.” – Scott Knight, head of the Natural Resources practice at BDO United Kingdom

Of executives surveyed, 61 percent note that resource nationalism will have an impact on their businesses in 2013. Their concern also extends to tax imposition and increases: 67 percent anticipate an impact on their business this year as Australia’s ‘super tax’ takes shape and countries like South Africa plan for similar tax burdens.  Read more


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Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

This is the BDO 2013 International Natural Resources Study, with an emphasis on the mining industry. The research was conducted among senior management executives representing a broad mix of companies and geographic areas. Topic coverage was highly diverse including, but not limited to, key drivers of growth for the global mining industry, access to capital and credit, strategies for enhancing profitability, impact of regulations, key targets for geographic expansion and the identification of important threats facing the global mining industry. This multi-country executive survey was designed and managed by Market Measurement, Inc. in close consultation with BDO. Questionnaire content was in the native language of each country. The study findings are based upon attitudes, behaviors and perceptions among 132 mining executives with similar levels of representation in the study data across the U.S., Australia, Canada, South Africa, Russia, and the United Kingdom. Study participants were identified through major trade and professional associations, subscribers to industry publications and similar sources. Additional characteristics of this important research initiative include: • Job titles: More than one-third (35 percent) are the chairman, CEO, president or managing director of the organisation, with a similar level of representation from CFOs/controllers/directors of finance (28 percent). •  Geographic coverage: More than three-quarters (76 percent) have international operations. •  Sales revenue: Almost one-half (45 percent) of the participating companies report annual worldwide revenues in excess of $50 million.

BDO International 2013 Natural Resources Study: Mining  

This is the initial BDO International Natural Resources Study, with emphasis on the mining industry.

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