Strong capital discipline is helping miners weather volatility, but bolder investment decisions may maximize returns in recovery.
This is part of a series of articles relating to the impact of COVID-19 on the mining and metals value chain, supplemented by results from the latest EY Global Capital Confidence Barometer.
Increased volatility in commodity prices and weakened supply and demand for some commodities has challenged companies across the world, although the degree of impact has varied across markets. We’ve seen a sharp drop in the prices of base metals, such as copper, and a surge in gold as investors seek a safe haven from global uncertainty. Across the sector, the impact on capital and liquidity is significant and requires companies to think carefully about navigating immediate pressures while preparing for the future.
Now: strengthen liquidity and reduce costs
Throughout this crisis, the priority of mining and metals companies has been to protect their people. But they also acted fast to maximize liquidity by preserving capital, reducing costs and prioritizing the operation of lower-cost assets. These moves reinforce several years of focused effort across the industry to strengthen balance sheets by reducing debt, extending debt profiles and instilling capital discipline. These are now paying off and will continue to yield benefits through what we expect to be a prolonged decline in commodity prices and lower demand over the next 12 to 18 months. The impact of country-specific stimulus packages and their focus on infrastructure spend vs. general economic spend will have a direct impact on many parts of the sector.
With this in mind, companies are taking a cautious approach to capital spending, delaying investment decisions, reducing capex guidance and deferring dividend payouts. We expect to see declining exploration budgets and preproduction assets put on hold, as well as a deferral of sustaining capital and nonessential maintenance.
As companies reduce costs, they still need to be mindful of managing contractual obligations to spend and take a long-term view. Disputes may arise, but these are more likely to be resolved through penalties and renegotiation than default.
Next: consider opportunistic M&A