EY - Mining in rapid growth economies

Mining in rapid growth economies

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Rapid growth economies: future growth engine for the mining industry

Rapid growth markets (RGMs) have played a significant role in the global mining and metals sector, particularly in the last decade.

The minerals price boom in the last decade (most specifically during 2003–08) was primarily due to global demand for minerals from these economies.

In addition, growth of global minerals supply from rapid growth economies has far outweighed the supply from developed economies.

Global distribution of mineral reserves in 2012

EY - global mineral reserves distribution 2012

Source: United States Geological Survey

Major factors shifting mining to rapid growth economies

Some of the factors that have led to the growth of the mining sector in rapid growth markets are:

  • Commodity demand and price boom: Mining companies have continued to seek large tier one assets in RGMs, as these have been depleting in the developed world. The resource boom of 2003–08 and the consequent rise in minerals prices have made the development of these untapped mineral resources viable in RGMs. Higher minerals prices have also strengthened the balance sheet of mining companies, enabling investment in riskier projects. The availability of cheap labor in these markets has helped curtail costs.
  • Liberalization of minerals policies: RGMs have opened up large tracts of land to foreign investors and have improved their policy settings and institutions. As countries opened up their economies, domestic mining companies were no longer tightly controlled by the state and were able to acquire new skills, better manage their operations, and easily access capital.
  • Advances in technology: Increased technological uptake has enabled effective exploration, viable processing of low-grade and complex minerals, as well as safer mining operations. It has increased the effectiveness of exploration and has allowed operations in previously un-penetrated areas.
  • Resource-hungry China has made significant investments in other RGMs: China consumes almost a quarter of the world’s base metals supplies and almost 45% of the global steel. To secure its raw material supply, China has made aggressive greenfield investments in mineral resources globally — both in rapid growth and developed markets. Backed by the Government, Chinese companies have been more aggressive in investing in RGMs than companies from other mineral-rich countries. Adding to this, China’s Twelfth Five-year Plan has further emphasized the acceleration of China’s “Going Global” strategy for resource security.

Key challenges in RGMs

Despite their large potential, the challenges associated with investing in these markets cannot be ignored. Miners in the RGMs are finding it harder to secure capital as investors become more risk averse and increasingly conservative around their portfolios. Challenges include:

  • Corruption — RGMs usually rank further down Transparency International’s Corruption Perceptions Index 2012. Regions with less stringent laws can see heightened exposure of miners to government patronage of third-party agents, vendors or job applicants.
  • Resource nationalism — Rising taxes and royalties, mandated beneficiation, government ownership and the restriction of exports is prolific and spreading. These policies often hinder investment in these markets.
  • Access to infrastructure — With mining and metals companies turning to new deposits in frontier countries, the lack of infrastructure is a substantial hurdle. High costs and capital constraints are creating an infrastructure funding gap where neither governments nor miners are able to fund all of infrastructure needs.
  • Social license to operate — Activists have become more vocal through the use of social media around concerns over climate change, competition for water and the impact of mining on communities. Regulators are increasingly seeking to fill the gap between community expectations and existing laws with increased regulation.
  • Sharing the spoils — Stakeholders are increasing their call for a bigger piece of the pie despite lower margins. This risk is characterized by a push and pull: more vocal stakeholders with increased demands versus falling commodity prices and higher costs.

Recommendations for governments and miners

  • Promote transparency and regulatory certainty — RGM governments should create a transparent policy framework that encourages investment, and closely monitor the progress of every mining concession to ensure consistency of approach.
  • Fund exploration — Governments should consider allocation of funds to exploration agencies to encourage investment. The role of the private sector, particularly exploration experts, should be encouraged.
  • Reform mining taxation — Governments should focus on taxation reforms to attract investment into the sector and retain current investments. This can be achieved by including incentives/concessions to undertake exploration and to create a competitive framework for taxes.
  • Develop special mining regions and special purpose vehicles (SPVs) — To circumvent continued challenges in land acquisition and environmental clearances, major mining hubs should be identified and SPVs created for each hub. Resources raised could be partially used to develop social and physical infrastructure, thus enabling efficient mining operations and meeting community expectations of inclusive growth.
  • Create strategic alliances — As mining companies progress into more remote areas, mining can become increasingly complex and expensive. Also, grade depletion calls for technology innovation. It is also important to secure water, energy and suitable infrastructure. Mining companies can form strategic alliances with infrastructure players, technology and equipment providers and financiers in innovative ways, such as through the public-private partnership (PPP) model.
  • Create an economic model for benefit sharing — Stakeholders have continued to press for a larger share of the pie, without recognizing the need to make profits sustainable. An economic model should be designed such that benefits are fair to all stakeholders; this would include a good understanding of what creates value in the entire chain from mine to market.

For a guide on the challenges, tax and regulatory landscape and growth factors in Africa, Latin America, Brazil, China, India and Russia, download the full report.

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