The mining industry had a very depressing 2013. Commodity prices were stagnant or falling, global economic growth was barely puttering along, capital was flighty, and a nothing seemed to be going right. 2014 promises to better. Not great. Not a banner year. But better. Global growth is starting to pick up, which is always positive for commodity stocks. And many of the world’s big mining firms have shed non-core assets, tightened up costs, and generally returned themselves to fighting fitness, which should mean that they’ll be able to focus more on shareholder returns this year, and less on operational issues. But, as Mayer Brown Global Head Ian Coles, cautions, it’s not yet time to pop the champagne. The climate is still tough, and commodity prices remain depressed in the face of ongoing stagnation in Europe (not to mention the potential for deflation there). Worse still, emerging markets have seen a lot of capital outflows as investors shun risky bets. That means that mining exploration companies are finding capital to be scarce. Expect a year of steady improvement, and plenty of M&A, but no fireworks. – FD
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ALEC HOGG: Ian Coles who is the Global Head of Mayer Brown joins us now from London. We have a big conference here in Cape Town next week, Ian. I’m sure you’re well aware of it – the mining Indaba. Are you making the trip?
IAN COLES: I very much am; I’ve been to every one and just looking forward to being in your fair city next week – very much.
ALEC HOGG: Wonderful. I wonder what the mood is likely to be at the Indaba this year.
IAN COLES: Well, it’s interesting because I think the mood last year was pretty low. It was reflected in other mining conferences throughout the world. I think the feeling is that maybe things are starting to pick up a little bit, that we’ve finished the fall and hopefully, activity will be there, but we will see. It’s the first big conference of the year and it’s always interesting to see what the mood is.
ALEC HOGG: A little better than last year – perhaps – but certainly not gangbusters yet.
IAN COLES: It’s certainly not gangbusters. The commodity price is continuing to be a challenge and of course, there is a continuing dearth of equity in the market and exploration companies need equity. It’s still not there, unfortunately.
ALEC HOGG: Are there any parts of the world that are bucking this general trend?
IAN COLES: Not really. I think South America’s projects are going well, but they tend to be the bigger projects, which have a longer life so they can continue, but there’s no real region one could pick out as doing much better than any other region. Mining is a global industry. Capital is very mobile, so we find it’s the same phenomenon throughout the world.
GUGULETHU MFUPHI: Ian, despite the modest growth in the mining sector, are we expecting better results from global multi-commodity players?
IAN COLES: I think the multi-global commodity players have struggled over the years. I think they have now focused on shareholder returns. I think many of them seem to have dealt with their issues and are now – sort of – moving forward. It will be interesting to see what they do in terms of helping the rest of the smaller players, whether or not that’s going to be something that will be a feature of 2014.
ALEC HOGG: I had a very interesting conversation last week with the new Prime Minister of Australia – Tony Abbott. He was telling us – it was a relatively small group – that the reason why he had a landslide victory over the incumbent, was because of their decision or their platform of repealing carbon tax and mining taxes. Now, that’s a big move and a big change in the perception from just a few years ago. Do you think it’s likely that this is going to pick up worldwide?
IAN COLES: Well, we’ve seen it in other jurisdictions – it happened in Ghana. The trend, while the commodity cycle was rampant, was for countries to see how they could enhance their take out of the mining industry, but our observation at Mayer Brown, is that this is very much in decline and what you’ve seen in Australia will be repeated elsewhere. It is a very competitive market nowadays and the countries cannot afford to be taking more money out.
GUGULETHU MFUPHI: Ian, in your report you mentioned that access to finance for mining companies, is another challenge. Tell us why.
IAN COLES: Well, it’s particularly access to the equity markets. The usual source of equity – the biggest one has been Canada, followed by Australia. Those markets are down considerably. The debt markets, interestingly, are coming back a little bit, so for the right projects, there is debt available from commercial lenders but again, the equity squeeze continues.
ALEC HOGG: Corporate action usually comes into play when you have juniors who don’t have access to finance. Are you starting to see this as an emerging trend?
IAN COLES: Yes, very much so. Companies with producing projects are able to use that cash flow to acquire exploration companies that are starved of equity and we’re seeing quite a lot of consolidation going on, particularly in the gold sector across Africa and elsewhere.
ALEC HOGG: So the opportunity for an investor now will be to try to spot those juniors that have been smashed, on the hope that some big major will come along and perhaps pick them up. Do you have any particular areas that investors should be looking at?
IAN COLES: As I said, gold: there’s a lot of consolidation going on there. I don’t think it will be the majors, however, that will be playing there. They tend not to be interested in pure exploration plays, which is where the equity issue is, so I think it’s going to be the mid-sized companies that you see picking up companies like that and trying to have some economy scale. You see it particularly in Africa. There have been several deals towards the end of 2013, and I think that will continue into 2014.
GUGULETHU MFUPHI: Ian, what is your take on the use of technology in mining? Is it a possible opportunity or is it a threat?
IAN COLES: Technology is always very important, although interestingly, new technologies in nickel for example, have been responsible for many projects falling over, so I think people are rightfully cautious about the use of new technologies, particularly in connection with extracting minerals from rocks. There have been several projects, as I’ve said. There’s one in Sweden and several elsewhere, which have experienced great difficulty with new technology.
ALEC HOGG: Just to close off with Ian, I had a fascinating discussion again – this time, with the President of Iran who was saying that they have massive reserves and massive mining opportunities in that country. He felt that international miners would, once things normalise, start jumping in again. Do you have any visibility on what exactly is in Iran? If so, would that affect commodity prices negatively in the future?
IAN COLES: Well, that’s very interesting because we at Mayer Brown here, have been helping the government of Afghanistan for the past three years to develop their mining industry. I think Iran has copper. It probably has some gold. The issue there of course, is the long lead-time to develop a huge copper pore for a deposit. It probably takes 20 years from exploration, so big mining companies are very interested in new jurisdictions, but whether or not they’re going to move the needle in the short-term, I very much doubt.
