Should Mining Companies Diversify? The Case For and Against.
How would the world change if mining industry came to a halt? Who would be affected? Would certain industries be turned upside down? The answers to these questions are too elaborate and far-reaching to cover in a single blog post – but the short version is that everything would change. Ore is one of the fundamental building blocks of global industry. With no supply of new material, existing resources would be picked apart and recycled like never before. Prices for even the lowest-quality ore would skyrocket.
Ironically, the importance of ore does not translate to a steady balance of supply and demand. As we all know, market conditions fluctuate through time. Sometimes these fluctuations are extreme. A sudden boom leads to a spike in capex ventures as operators move to secure a bigger piece of the expanding pie. A bust follows closely behind, driving demand down and forcing operators to re-examine their approach.
Diversification is an increasingly common response to this rollercoaster of supply and demand. Many large mining companies have expanded over the last decade in order to meet Chinese demand, and are now dealing with a bad hangover of debt and poor performance. On top of this (or beneath it, as the case may be), ore deposits are receding deeper underground, with fewer unexplored sites to be found.
Given this formidable set of challenges, it makes sense that executive branches would look toward diversification as a way to insulate their profitability. But is this a productive approach, or will it prove to be a kneejerk reaction?
Certain companies that previously led the charge in diversification, such as Anglo American and BHP Billiton, have recently divested and narrowed their focus onto the most profitable commodities in their portfolios. Indeed, divestment and specialisation have been the prevailing trend amongst multi-national mining companies.
Of course, there have been exceptions. Glencore, the multinational minerals and energy giant, sold 40% of its agricultural business to a Canadian pension fund. Now, in 2018, Glencore is looking to expand that side of its business. Other mining companies like Randgold, who steered clear of the pitfalls (e.g. debt) of the most recent commodity cycle, are likewise making fresh inroads toward diversification.
So – five or ten years down the road, what will the common wisdom be? Will companies who are currently retreating from diversification turn on their heels, once again seeking new commodities to fortify their profitability?
Perhaps – but even if this happens, it seems fair to say that a number of important lessons have been learned so far this century. In other words, the trend toward more efficient and profitable mines is here to stay. One of the arguments set forth in a 2016 article written by BHP Billiton’s Head of Planning, Studies and Access, Minerals Australia, Mark Eames, is that specialisation compels operators to make more intelligent and sustainable decisions over the long term – an attitude that is notably absent when demand goes (and stays) through the roof.
Consider the fact that companies that work in the optimisation of mining sites, as well as the service and maintenance of key equipment, have posted strong financial growth during the most recent downturn. Westrac, Australia’s leader in the sale and maintenance of Caterpillar machinery, is one example. New equipment sales have been down, but the company’s revenue from maintenance activities has soared in recent years. That’s because operators are looking for ways to work smarter, not harder.
Premium blasting solutions are another area of increased focus. For many mining companies, the productivity gains available through sophisticated blasting and drilling techniques remain woefully untapped. According to Carolyn Krynauw, a former analyst with the global research firm Frost & Sullivan, “the need for cost containment is driving explosives innovation…There is opportunity to produce products that will enable deeper mining efforts and further improve precision blasting, while facilitating cost containment strategies.”
Fortunately, there are leaders in blasting and blast detonation who have pioneered new technology for centuries, and have applied that technology at mining sites throughout the world. It may well be this type of specialised partnership – rather than a foray into new commodities – that allows more mining companies to chart a steady and stable course through shifting market tides.
This article originally appeared on www.daveybickford.com