OREANDA-NEWS. August 23, 2016. Mining is a cyclical industry, what goes up must come down, and the inverse is true: mining cannot stay depressed forever. Many in the industry are predicting the first green shoots emerging of the next wave of exploration, as well as less volatility ahead.

In fact, renewed growth in gold due to its investment safehaven status, and active steps finally taken by major iron ore producers to right the current oversupply, are building upon the foundation for the next swing, regardless of reduced Chinese demand.

However, in the current period this may be brutal market economics at play rather than a full recovery.

To increase production

According to Deloitte data, commodity production is still not falling as fast as economic factors should dictate, as a weaker Australian dollar and readjustment in labour costs keep marginal assets artificially buoyant.

“In other cases, majors are producing certain commodities, like iron ore, in a bid to consolidate market share,” Deloitte said.

These actions were posited by UBS analyst Daniel Morgan, who warned, “Prices can get too low, and the power of the major producers may increase too much, returning the industry to the oligopoly.”

“Other commodities with flat cost curves, like potash, may be subject to similar market plays, with Belarus’ state-owned producer Belaruskali reportedly running mines at almost full capacity and aggressively discounting prices to gain a foothold in the US and China,” Deloitte said.

“This has introduced new supply side dynamics into the mining industry, as mid-cap producers in bulk commodities are increasingly edged out of the market.”

To avoide rehabilitation costs

The high costs of rehabilitation have also seen some operations keep their doors open rather than incur prohibitive site remediation costs, or even sell their operations at basement prices in an effort to divest themselves of their environmental obligations.

Motivations such as these saw Rio Tinto sell its Blair Athol mine for \\\$1, handing over all environmental rehabilitation costs to Linc Energy as part of the deal, whilst Vale and Sumitomo carried out a similar deal, selling the Isaac Plains coal mine to Stanmore Coal for \\\$1, with Stanmore taking on the \\\$32 million rehabilitation obligations.

To continue exploration

In terms of looking forward, Deloitte also pointed to the need to begin refocusing on exploration.

It noted although current oversupplies muddy the water in terms of future shortages, given the often long lead time from discovery through to production, long term thinking is required

“Exploration is the lifeblood of a business based on finite resources; unfortunately investment in exploration remains subdued,” Deloitte stated.

“According to SNL Metals & Mining, global exploration spend declined 26 per cent in 2014, with budgets falling to US\\\$11.4 billion, compared to a peak of US\\\$22 billion in 2012.”

In 2015 the situation became even more dire, with many miners such as BHP and Rio Tinto looking to make quick cost savings by dramatically slashing their exploration budgets, with BHP announcing last year it saved US\\\$142 million through cutting exploration expenditure alone.

This in turn led to a consistent decline in geoscientist and geotechnician employment levels, rising to more than 40 per cent as of the first quarter of 2016.

“Big cuts in growth capex and exploration budgets may have far-reaching consequences for miners,” Deloitte Chile’s mining leader Christopher Lyon said.

“Whilst supply adjustments make sense given current industry fundamentals and price signals, is the mining industry taking this too far?” he asked.

“If the industry does not find ways to ensure a pipeline of new deposits and think through the viability of traditional mining methods, it may find itself without a great deal of growth optionality.”

The need to position for growth becomes even starker when you consider the difficulties associated with finding high grade assets in stable regions, Deloitte said.

“Companies that don’t take the opportunity to stake early claims will find themselves competing for key reserves once markets turn, hampering their long-term prospects and profitability.”

This sentiment was echoed by Queensland Resources Council chief executive Michael Roche, who said, “Exploration is the R&D, or building blocks, for the resources sector, getting the sector ready for the inevitable future upswing.”

However, the message appears to have finally reached the major players – and Australia’s governments – as they refocus on exploration activities.

BHP has announced a renewed focus on exploration as part of its rejigged strategy.

Speaking at the Bank of America Merrill Lynch conference last month, BHP head Andrew Mackenzie outlined the miner’s focus on strengthening its assets and taking proactive action to build now for future commodity strength.

“Although we remain confident in the long term outlook for commodities, we are not waiting for prices to recover. We have everything we need in our portfolio right now to significantly increase the value of the Company,” he said.

Part of this value adding will be through increased exploration and identification of new potential assets.

“We are increasing our exploration activity to take advantage of falling costs as others pull back,” Mackenzie stated.

“We have embarked upon one of our most significant oil exploration programs, accelerating activity in our three priority basins,” he said.

“Following the positive exploration results at Shenzi North, we plan to drill a further exploration well (Caicos) in July 2016 on our nearby Green Canyon 564 lease. We will also increase the number of copper targets we test this year by 38 per cent.

“We have established a new global technology function to implement integrated programs to unlock resources and lower costs. We have opportunities identified at a number of our major assets that we expect to create significant value over time.”

This focus on exploration came only days after the Australian Government announced its intention to support resources exploration in the country, allocating more than \\\$100 million to the industry over the next four years.

The initiative, dubbed The National Resources Development Strategy – Exploring for the Future, is a program designed to boost productivity and competiveness of the sector.

“At a challenging time for the resources sector, this important initiative will help ensure that Australia’s strength in innovation is furthered, and that we maintain our competitive edge in this world-leading sector,” national resources minister Josh Frydenberg said.

At a state level, Western Australia is also supporting future growth with the announcement of \\\$30 million in funding from 2017 to 2020 for the Exploration Incentive Scheme.

“The support of the EIS also perfectly complements the \\\$100 million announced in the Federal Budget last week for the Exploring for the Future initiative which enables Geoscience Australia to make available pre-competitive data for State based geological survey divisions and industry,” the Association of Mining and Exploration Companies said.

Other initiatives can also be taken to move out the slump, which is nearing its end.

By focusing on agility, and the capability of scaling production, labour and other inputs/outputs as needed; the aforementioned predictive analytics capabilities created through the innovative use of Big Data have help organisations prepare their sites for events that may shift market and operational fundamentals.

Deloitte also called on miners to work collaboratively, both in terms of partnerships and in working together to cut oversupply and right market fundamentals.

“Miners are playing a sector-wide game of chicken, wither everyone hoping someone else will blink first,” Deloitte said.

“Whilst not universally acceptable, it likely follows that companies will ease back on production in an attempt to bring balance back to the market rather than waiting to be pushed against the wall.”