Exploring mining's outlook: Insights from key executives

12 minute read  02.08.2024 Mike Hales, Edward Fearis

MinterEllison's Perth-based team met with key mining executives to delve deeper into the sector's evolving trends and outlook

 


Key takeouts


  • The mining sector continues to show strong performance, particularly in industries benefiting from geopolitical uncertainty.
  • Our interviews with executives revealed concerns about obtaining traditional owner surveys and government approvals, as well as price volatility in critical minerals and cyber threats.
  • Executives are optimistic about the sector's long term prospects. One such example is the opportunities presented by the clean energy transition.

Australia's mining sector is undergoing a period of change. From geopolitical uncertainty to the clean energy transition and developments in AI, the changes present challenges and opportunities to the industry. In May and June 2024, we interviewed key executives in Western Australia's mining sector to understand how the industry is grappling with these changes. The executives commented on a range of matters including geopolitical challenges, cyber security, labour issues, the influence of ESG, and the impact of AI. While the executives were positive about the sector's outlook over the longer term, concerns were raised about the geopolitical landscape, price volatility in critical minerals, cyber threats, and other issues which we explore in this report. Below, we present our main findings and recommendations for the future.

Australia's mining sector

The mining sector's contribution to Australia's and particularly Western Australia's economy is well-recognised. With exports worth $300 billion, the mining sector contributes around 13% of Australia's GDP, accounts for more than two-thirds of Australia's merchandise exports, and directly employs around 300,000 people. In Western Australia, the sector contributes around 50% of the Gross State Product and employs approximately 130,000 people. Despite this position of strength, the sector is volatile and vulnerable to external forces.

Geopolitical challenges

The uncertain geopolitical climate was top of mind for the executives we interviewed. While the past two years have resulted in a brighter outlook as the impact of the COVID-19 pandemic has reduced, the geopolitical climate has worsened as a result of the Russia / Ukraine and Israel / Hamas wars and tensions in the South China Sea.

Many executives expressed concern about the relationship between Australia and China. Their concerns focussed on China's domination of the critical minerals market and supply chains. One executive referred to the mining sector as being "at the mercy of China". The executives were encouraged by the recent visit of Chinese Premier Li Qiang to Western Australia (the first visit to Australia by a Chinese Premier in seven years) and particularly the warmth with which he was received and the various announcements made during his visit. However, the executives recognised there will always be tensions in Australia's relationship with China, as the recent allegations about Chinese state sponsored cyber espionage through APT40 demonstrate.

From one giant economy to another, many of the executives were grappling with the effect of the Inflation Reduction Act and the guidance notes that the US government has issued. Whilst the Act may provide opportunities to Australian miners, it is also seen as a current source of price volatility, particularly in relation to nickel.

Some executives involved in the gold industry noted that the uncertain geopolitical climate had had a positive impact on their businesses. "Gold is always loved when there is uncertainty in the world", one executive said. The direct correlation between the gold price and geopolitical uncertainty is well-understood and the past two years has seen the gold price steadily increase by over 30%, benefiting gold producers. This rise amply demonstrates global concern about the current geopolitical risks.

Cyber security

Threats are also coming from overseas in a different form. Most executives reported concerns about cyber attacks, particularly in light of the recent incident involving Northern Minerals. These concerns are consistent with the broader business community's concerns. For example, MinterEllison's ninth annual "Perspectives on Cyber Risk" survey conducted between January and March 2024 revealed 72% of respondents ranked cyber risk as a top five priority within their organisation (a 16% increase from 2023). One executive's organisation had been the victim of an attack and all but one of the executives regarded it as a significant threat. Some of the executives we interviewed were particularly concerned about the potential for cyber attacks at an airport or port and the impact this would have. Exploration companies were especially anxious about cyber security as their value is entirely in their drilling data. Some businesses may not regard cyber attacks as a risk to their business because they are not heavy users of IT or they just do not consider themselves to be a target. In our view, this ignores the automated and random nature of attacks and undervalues the problems they would face if locked out of their IT systems.

Cyber security is likely to (and should) be an important budgetary spend for the mining sector in the years ahead.

Labour shortages

While the executives agreed that labour shortages had improved in recent times, they all reported difficulty in attracting experienced personnel in occupations ranging from mining engineers and geologists to truck drivers and maintenance staff. Further, some executives reported concerns about new workplace norms, for example, in relation to working from home, and queried their sustainability and whether they impacted productivity.

A number of executives remarked on the shortage of mining engineering and geology graduates. One commented on a shortage of native title specialists. Although mining is set to increase with the need for critical minerals, it is still not attracting young people as an industry. Another observation was that attracting labour was especially difficult for the junior end of the market as they could not match the salaries offered by the bigger players.

Other executives linked the labour shortages to broader economic issues such as the housing crisis and immigration. One executive, for example, noted that the availability of housing in a particular regional mining town was one of the first questions candidates raised in interviews. Another executive expressed concern that Commonwealth government and opposition policies to reduce immigration would likely exacerbate skilled and unskilled labour shortages.

 

Several executives noted that the sector would have to continue efforts to attract and retain women, which would also address labour shortages. This will involve continued efforts to make the workplace a safe and respectful space. Others noted that efforts would have to be made to "sell the sector" to climate-conscious young people, particularly by communicating the mining sector's critical role in the clean energy transition.

Meanwhile, all mining employers are currently grappling with the most significant rounds of workplace law reform in a generation: the 'Closing Loopholes' legislation.

 

Closing Loopholes has increased the compliance burden for mining industry employers and made our industrial relations framework even more complex. Amongst other new challenges, mining employers now have less ability to flex their workforces in line with supply and demand given the new constraints on the use of labour hire workers, fixed-term employees and casual employees.”
Craig Boyle, Partner - Workplace

Costs pressures

Similar to labour costs, executives reported that cost pressures had lessened to some degree. Much of this was attributed to the COVID-19 pandemic: "Lots of the shocks from COVID have worked their way through the system", one executive said.

It was noted in particular that exploration costs had come down as a result of the increased availability of drilling rigs. This was not a sign of lessening activity, but the result of the reduction in the backlog of exploration that had built up during COVID-19. For the same reason, whilst assay laboratory costs have not reduced, the waiting time for laboratory testing has fallen.

Concerns remain about particular costs. For example, one executive noted that the cost and availability of spare parts was a major issue for his company. Others remarked that the current and proposed amended industrial relations regime would put further pressure on high labour costs. In a different context, one executive stressed the significance of rise and fall provisions in contracts, whether one is a principal or contractor, in helping to manage costs risks.

Approvals

There were significant concerns about the timeframes for obtaining traditional owner surveys and Commonwealth and State government approvals. Most executives described the delays as a "key challenge" for their companies. Obviously, in an environment where costs are continually increasing, delays to project progression result in increased costs, which may make projects unviable. Improving the efficiency of the approvals process continues to be a key challenge for government. There was a widespread view that the WA State government is understaffed to deal with approvals.

A number of the executives reported having to change or abandon mining plans due to the time and expense involved in obtaining approvals. The Commonwealth and State government have a significant role to play in accelerating the approvals process and the State government's U turn over the Aboriginal Cultural Heritage Act 2021 (WA) is seen as a particular cause of delay. A backlog of approval applications developed in the leadup to the Act coming into force and the backlog worsened with the Act's repeal.

The executives provided support and suggested measures to accelerate approvals. These included the government providing open access geoscience, bespoke native title assistance and perhaps a dedicated office to prioritise critical minerals applications.

Prospects for merger and acquisitions, and equity or debt raising

The mood was mixed amongst executives when it came to the topic of mergers and acquisitions, and equity or debt raising. Many executives said they were always interested in joint venture opportunities; however, fewer were actively looking for acquisitions. This sentiment reflects the broader market, where M&A activity is down compared to previous years.

There remain opportunities in the market, particularly in nickel and lithium and industries focussed on the clean energy transition. One executive predicted the clean energy transition would likely fuel mergers and acquisitions activity in the copper sector. Electrical vehicles require four times as much copper as comparable models using internal combustion engines, and copper is also used in renewable energy infrastructure and energy storage systems. A high profile example of increased activity in the copper industry already occurring is BHP's attempted takeover bid for Anglo-American. Read more about key lessons from this and other failed M&A deals in our 2024 M&A Meltdowns report.

Equity fundraising is heavily dependent on share price and therefore on the underlying commodity prices of the business involved. For many commodities, the current subdued pricing means that equity fundraising is not on the radar.

Executives working for explorers noted that it was still a challenge to raise funds, largely because of the risks involved and the length of time before there is a return on the investment. This is exacerbated by the delays in obtaining approvals.

The importance of ESG

There was a clear sense that ESG was no longer a 'nice to have' and that these issues are being taken seriously by the sector. ESG issues were variously described as "non-negotiable and a priority consideration", "critical", "more and more important", and "good for everyone in the world".

Often, executives remarked that ESG issues had a direct financial impact on their companies. This could be in the form of, for example, attracting and retaining top talent, attracting capital from large funds, and cost savings (e.g., using renewable energy sources to reduce energy costs).

Some executives cautioned that ESG issues should not fall back in boards' priorities in a more depressed economic environment. They emphasised the importance of setting realistic ESG expectations and targets so they would not be the first areas to be cut back if harder times were to hit.

There were also notes of caution about the use of renewable energy in mining projects, both in relation to establishing it and the amount of power it was capable of generating.

How AI is impacting mining

Some executives were already integrating AI into their company's operations. One executive noted that his company used "intelligent CCTV" to monitor operations and reduce risk.

Most executives did not currently use AI in their companies but saw the opportunities for the mining sector and economy generally. "AI is about the most transformative thing that will hit society in the next 36 months", one executive commented. A few executives foresaw that AI could be used to interpret geological data or land forms in the search for minerals and other resources, with obvious cost saving consequences. Another executive predicted that AI could be used to anticipate (and therefore avoid) safety incidents.

 

In mine planning the ability to optimise pattern recognition is such a big thing. When you look at geology, a lot of it is assumptions. Using AI to start to work on that is really significant and that's been something which the exploration industry has been trying to do for decades. I think AI will take that to a new level”
Mining Executive

 

Interestingly, one executive saw the growth of AI as a specific revenue opportunity for his company, a uranium producer. He noted that AI software required an incredible amount of power, and that it had been estimated that an AI search used ten times more power than a Google search. In this context, he noted that Amazon had recently purchased a nuclear-powered data centre and that Google and Microsoft had similarly expressed an interest to "go nuclear" with their data centres.

The outlook and clean energy transition

Despite their concerns, overall, executives were positive about the outlook for the mining sector. As one executive put it, "Aussies are good miners. We always see through adversity. We are ever optimistic."

On commodities, gold was seen as the star performer due to geopolitical issues, although one executive thought it might suffer if crypto-currency also became a safe haven. Iron ore was recognised to be remaining strong although unlikely to hit previous peaks as global supply improved. Critical minerals were seen as being in a slump presently, generally volatile but over the long term, bound to improve because of the underlying fundamentals. Copper was seen to be in high demand and likely to remain strong over the long term, although the cost of extracting copper in Australia is high. Uranium also raised comments. There was a consensus that it was likely to improve but there were no strong predications as to when and how much. Politics would obviously play a big part in this.

Executives were excited about the opportunities presented by the clean energy transition. Indeed, one compared this to the transition that occurred at the turn of the 20th century, when the world moved from horses and carts to internal combustion engines.

In short, mining investment has steadily increased over the last four years and the sentiment was that the world's demand for commodities was not going to reduce. Prices might fluctuate but the market as a whole was sound and would remain that way.

What has changed since our 2022 Mining Outlook survey?

Our Mining Outlook surveys are snapshots with a modest sample size. Nonetheless, it is informative to look at how views have changed since our last survey in 2022. Sexual harassment at mine sites is less of a talking point. We think this is because the importance of the issue is now well understood and businesses have policies in place to improve workplace culture. Labour costs and shortages are also less of an issue now than two years ago although there is a new concern about complying with complex new workplace laws.

While problems over shipping logistics have reduced, geopolitical concerns have grown significantly. This is no surprise given that two major wars have commenced since our last survey and show no real sign of ending and concerns around the energy transition and supply chains arising out of the wars and COVID-19 have increased China's dominance. AI is a newcomer since our last survey, similarly, cyber security is now recognised as a much more significant threat.

Risk mitigation for all organisations

Our interviews with executives have raised a number of insights and opportunities for risk mitigation, with some important considerations for all organisations, including:

  • Think beyond legal compliance: ESG is not just a compliance discipline, it is a mechanism to manage forward risk, capture opportunities and create strategic and brand value.
  • Embrace the AI advantage: Understand the benefits presented by AI, but also the risks involved. Find out more about the responsible use of AI and how this can facilitate ESG compliance and reporting processes.
  • Contract with caution: Costs risks can be managed by well drafted contracts, whether contracts for goods, services or labour. Pay particular attention to rise and fall clauses to make sure they will work successfully over the term of the contract given the current market volatility.
  • Stay on top of cyber: Whilst it is a significant cost, there is no excuse for not having a robust cyber security strategy. As attacks are inevitable, it is crucial for companies to prioritise cyber security as a strategic investment to protect their assets, customers and overall business interests.

About MinterEllison

Our Perth-based mining legal specialists are a key part of our national Energy and Resources industry team. They provide a range of legal services to companies involved in mining exploration, production and services industries. Headed by Mike Hales, Gemey Visscher, David Perks and Craig Boyle, our Perth mining team includes industry-leading specialists who are well positioned to assist clients with disputes, equity capital markets and mergers and acquisitions, finance, workplace and insurance requirements.


Contact us to explore the trends further and discuss how you can manage risks and capitalise on the opportunities.

 

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