Energy & Mining International - Winter 2016 - 17

COLUMNS | REDUCING COSTS

Winter 2016

S

lowing global growth, oversupply and rising regulatory
demands are pressuring markets and producer stock prices
alike. Few industries have
felt the squeeze more acutely than the
mining sector, which has been forced to
take aggressive action to reduce capital
spending and operating costs, while retaining shareholder dividend payouts.
The current significant downturn in the
commodity cycle provides an opportunity for mining companies to re-evaluate their production chains and seek
new solutions to old problems.
The range of factors impacting commodity prices is symptomatic of the
increasingly complex global economy.
After decades of sustained growth, the
World Trade Organization (WTO) has
cut the expected rate of global trade
growth below 3 percent for the fourth
consecutive year. China, the world's
largest consumer of commodities, announced a 6.9 percent GDP figure - the
slowest since the depths of the financial
crisis. (Given a broad range of economic
data points, even that figure exceeded
many predictions.) As China's appetite
for resources slows, so do the economies of commodity-rich producing
nations like Australia, Canada, Brazil,
South Africa, Russia and Indonesia.
Given this landscape, and the high
expectations of shareholders and
state-run producers, many in the
sector are looking to re-prioritize and
reduce capital expenditure to improve profitability, while retaining or
increasing market share.

OVERSUPPLY AND LOW DEMAND
In times of fiscal constraint, mining
companies first tend to look to reduce
development capital or the spending
focused on new or expansion projects
and infrastructure development. Given

the depressed pricing environment, the
addition of new capacity, or expansion
of existing capacity, further weakens
producers' ability to shore up markets. Headlines around the world have
focused on tens of billions of dollars
in large-scale capital projects that
have been put on hold, re-evaluated,
re-shaped or even canceled, pending
an upturn in the commodity cycle.
Oversupply, fed by slowing demand,
has driven down prices and prompted some operators to take aggressive
steps. Glencore's recent announcement
that it would cut zinc production equal
to nearly four percent of the world's
supply immediately drove up the commodity price, helping to ease concerns
about the resource giant.
A second component of capital being
re-evaluated by leadership concerns
sustaining capital, or the funds required to maintain current operations.
At upwards of 30 percent of total capital
expenditure, comprising billions of dollars in annual spend, sustaining capital
offers a significant target opportunity
for mining organizations to drive down
costs. This is particularly the case as
miners avail themselves of a range of
emerging technologies to improve cost
efficiency, productivity and safety.
At every mining site, equipment and
machinery has to be replaced and power, water and communications needs
must be met. Increasingly, the connections between greater resource efficiency and improved financial performance
are being made clear. Low-cost natural
gas and renewable energy resources
not only create opportunities to reduce
power costs but can afford projects
greater sustainability and resilience.
Water, which often requires significant
amounts of energy to treat, pump and
transport, offers another major opportunity for operational cost savings.

+

From our perspective, the increased
focus on sustainability, energy efficiency, resilience and improved financial
performance can often be enhanced
through focus on efficient management
of sustaining capital spend.

FOLLOWING THE RULES
In mining, like many other resource
intensive industries, there is a continuing evolution in the global regulatory landscape that can impact operators to varying degrees. For example,
in the United States, the new Clean
Power Plan focuses on the electric
sector, but may impact the ability of
miners to derive power from traditional coal power plants, including on-site
units. Unfolding compliance regimes
may require miners to consider various planning scenarios including the
retirement of coal units or costly retrofits, replacement with natural gas, or
the incorporation of renewables into
their generation mix.
Resilience planning is another area
where opportunities exist to leverage sustaining capital to enhance the
organization. Across the globe some of
the largest and most important mining
projects are in regions identified as
susceptible to the impacts of climate
change, which include water shortages
or flooding and inconsistent power
resources. Investments in water treatment and re-use, renewable energy
and battery storage, and increasingly,
more capable telecommunications
networks are keys to risk mitigation
and ensuring continuity of operations.
While nothing can guarantee that a
project site won't be impacted by water shortages (or excesses) or a power
grid failure following a weather or
geological event, the ability to restore
operations faster can have significant
bottom-line effects.

emi-magazine.com 17


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Table of Contents for the Digital Edition of Energy & Mining International - Winter 2016

Contents
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Energy & Mining International - Winter 2016 - Cover2
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