Mined Commodities: On the Verge of a Breakout?

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Both speakers and attendees offered plenty of gloomy viewpoints at last week's 118th National Western Mining Conference & Exhibition, held in Denver, Colorado. But a far brighter outlook was offered by mining veteran Bernard (Barney) Guarnera, president of Broadlands Mineral Advisory Services (Las Vegas, Nevada) and a director of mining consultancy Behre Dolbear Group Incorporated (Denver, Colorado).

"There is hope," he said last Wednesday at the conference sponsored by the Colorado Mining Association (CMA) (Denver, Colorado). "There will be an upside. The dollar will get weaker. The supply-demand fundamentals are very compelling. We could be on the verge of a breakout."

Guarnera acknowledged the difficulties confronting the Metals & Minerals Industry. Financing is "difficult in most venues except under very onerous terms," he said. "Major companies are debt-burdened and are selling off their best assets to stay alive. Private equity firms are buying assets, but decisions are being made by young MBAs who think they can run a mine on a high-tech business model. The stocks of publicly traded companies are selling for a 30% discount to their net asset value."

So yes, Guarnera acknowledged the reason for a downbeat view about the industry's future. But he suggested the industry could be poised for a rebound. Inventories of commodities, particularly copper and zinc, are dropping. Processing costs are falling by 25% or more. And the quality of ore being mined in some places is rising. "We're operating in a high-grade ore environment, but we are stuck in a low-grade market" that is unduly driven by crisis-management and short-term decision-making, he said.

"The current wave of highly profitable projects is coming to an end, and there are no new mines coming online of any meaningful size," said Guarnera, who has over five decades of experience in the Metals & Minerals Industry. Last year, demand grew for copper and zinc, and that trend is expected to continue in 2016, he said. Large copper and zinc mines have gone offline, further narrowing the gap between supply and demand, he told conference attendees.

Even coal has a brighter future than many at the conference seemed to believe. Guarnera showed projected consumption would remain flat at about 50 quadrillion British thermal units (Btu) for countries in the Organization for Economic Cooperation & Development (OECD). But over time--he didn't specify how much time--consumption in non-OECD countries would rise from the current level of about 65 quadrillion Btu to about 160 quadrillion Btu. "Coal use outside the OECD is doing very well," he said.

So while Guarnera expressed faith that the supply and demand fundamentals would come into balance in the not-too-distant future, he did identify four challenges the industry needed to continue working to solve:

Social issues are the most important challenge facing the industry, Guarnera said. "Social issues are behind project delays and cost escalations," he said. Roughly 70 big banks have signed the Ecuador Principles, which sharply curtails lending for coal projects. It takes an average of 23 years to bring a new mine into operation, he said, remarking: "Finding is not the same as mining." He offered no specific solutions to attendees, though some companies in the industry have made significant efforts to engage stakeholders and operate in a transparent manner in recent years.

The industry also needs to work harder at controlling costs, he said, adding that projects are experiencing cost overruns averaging 37%, and operating costs are 17% over budget, on average. He attributed this to "poor management and unrealistic expectations from Wall Street." Mining companies need to do a better job controlling costs and managing the expectations of investors, he said.

Lowering a government's "take" is the third area where mining companies need to improve. "Mining companies take all the risks, but a government's 'take' in the form of royalties, taxes and the like is nearly 50%," he said. "If the government 'take' exceeds 50%, your project will fail." Mining companies, therefore, need to become better negotiators.

To secure access to capital, Guarnera advised mining companies to bypass private equity firms and turn to state-owned enterprises. "State-owned enterprises will play a larger role in financing the mines of the future," he predicted.

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