The Mining Sector in 2017 - What Happened and What's Coming in 2018?
Happy New Year!
Like everyone else, those of us here in the Global Mining & Metals Group at Baker McKenzie usually take this time to reflect on the year that has passed and the year coming up. We focus on the usual questions of what ended up being important in the last year and what do we expect to be important in the coming year. The idea being that if we didn't get something right before, we want to see if we can avoid missing it this time around. Waving my Canadian flag for a minute, as Wayne Gretzky is quoted as saying: "Skate to where the puck is going, not where it has been."
This is always an important time of the year for us on the strategy front. Our Firm spends a lot of time and effort sending our team to places to listen to our clients and industry friends. Two such events coming up are Mining Indaba in Cape Town (February 6-9, 2018) and the PDAC International Convention in Toronto (4-7 March 2018) (please say hello if you will be at either event). In this day and age, in person meetings like these are perhaps even more relevant than ever. How do you drink from the firehouse of information that is the internet? There are hundreds of articles daily on every imaginable topic, but we feel there is value in good old fashioned face-to-face meetings where people honestly answer the important question of "what's keeping you awake at night?", not what does the internet tell you should be keeping you awake at night.
Like many other industries, the pace of change in the mining and metals space seems to have accelerated significantly in the last few years. We used to talk about trends whereas now it seems to be all about volatility. As a result, we don't have as long to think about the impact of a change and evaluate our options as we used to. In part that's maybe due to the instant availability of information, but I think it's also due to the fact that companies are becoming more efficient and making decisions faster.
So with that, what changed in 2017 and what did we learn from it? My random observations based on no scientific methodology other than what I saw are as follows:
1. China continued to play a role in major commodity markets, no surprise there (I promise no stories about iron ore in this summary). But it wasn't the same old discussion of what raw commodities markets was China moving. As noted below, China now has a few other roles to play in our industry, including President Xi's visions for the One Belt - One Road strategy.
2. Closing at over $1,300 an ounce, gold continued to be a source of interest to investors who weren't distracted by Bitcoin. What did surprise me was that the cheapest places to mine gold based on 2017 information were Russia, Philippines, Indonesia, Turkey and Peru (source: Mining.com).
3. Heading into 2018, the world's 50 largest listed mining firms are worth a collective $896 billion, adding $141 billion in combined market capitalization year-to-date, with the bulk of those gains recorded since July 2017 (source: Mining.com). I knew 2017 was a recovery year for this industry, I just didn't realize it had been that positive.
4. While the concept of "big data" has been around for a while now, 2017 seemed to bring an increased focus for some of our clients on what it could be used for and how it could be better collected. We expect 2018 to bring continued emphasis on data collection, but also increased attention on issues such as employee privacy, cyber security and data transfer issues. Particularly when mining companies begin to do what other industries have done for a while and outsource their IT functions.
5. Perhaps the buzz word for 2017 (and maybe even 2016), is innovation. Innovation means different things to different people in different industries, but in the mining industry, I think it means simply being smarter about the things we do. Some things the industry has no control over: where an asset physically is, what the government regime surrounding it is or what weather conditions await extraction efforts. But there are lots of opportunities in other areas that can offer changes to established procedures. At Baker McKenzie, we're excited about working with clients in our new Whitespace Legal Collab, part of our global innovation program, which aims to address changing client needs, new industry dynamics, and the broader role of digitization across the economy. Reach out if innovation is on your company's agenda.
6. Not letting go of innovation just yet, when looking at 2017, the five innovations that got my attention were: the potential for 3D printing (as a former mechanical engineer in the steel industry, the idea of being able to create parts on site is revolutionary), mining simulators, drones, 3D mapping and the impact of alternative energy (everything from remote solar power supplies to battery operated mine equipment). Lots to watch in these spaces in 2018.
7. Some mining companies continue to show they are interested in providing people with a place where they want to work and feel valued. Initiatives like Glencore's MATES in Mining, a suicide prevention resource in Australia, and a global trend to correct disparities in gender diversity are examples of our industry not waiting to be told they have to do something.
8. Labour conditions and relations will continue to be a gating issue for miners. Disputes instantly get social and traditional media attention and governments are putting increased pressure on each other to adopt progressive workplace policies. My advice in most cases is that you have two hours to react to a significant event and control the message. After that, you are going to be reacting to everyone else's message. Put the right policies in place so your company isn't caught off guard.
9. Jurisdictions around the world continue to find ways to work with indigenous communities while securing supply of valuable commodities. For example, 2017 saw the opening of the first mine in Australia that will be owned and operated by Aboriginals.
10. Tokyo Electric Power Company (TEPCO) has received approval to operate nuclear reactors for the first time since the Fukushima disaster in 2011. Japan’s Nuclear Regulation Authority (NRA) gave Tepco the go ahead to restart reactors at its Kashiwazaki-Kariwa nuclear power plant following public hearings. This is an important development for both Japan and other countries that support the industry.
11. But that wasn't the only development that will likely impact the uranium markets. Just like that, uranium markets got shocked late in the year when Kazakhstan’s state-owned Kazatomprom announced in December 2017 that it would reduce its output of U3O8 by 20% or 11,000 tonnes over the next three years beginning in January 2018.
12. The electric vehicle industry continued to hum along. It's impossible to talk about electric vehicles without considering lithium, copper and cobalt. Copper had a great run, but not for all the reasons predicted. For example, the expected U.S. infrastructure boom didn't result in increased copper demand, but labour issues did cut back production. The race to acquire the right lithium assets doesn't seem to be slowing, with China taking a leading role. Countries like Chile are actively assessing how they can get a piece of the supply pie. China not only has a role in the supply side, but offers one of the world's largest markets for these vehicles. When you see pronouncements requiring the Communist Party to use new energy vehicles, you know they are taking it seriously.
13. Ranking in the big leagues of mining power house countries, Brazil made it into the headlines yet again in 2017. At the end of 2017, mining companies operating in Brazil reacted to news that the government had started the approval process for a bill that hikes royalties for iron ore and gold.
14. In part to help further strengthen ties between two global mining powerhouse countries, Export Development Canada officially established a presence in Australia as is looking for even more ways to work with companies working in these two countries.
Finally, there are a couple of things that are going to have an as yet undetermined impact in the mining industry in 2018:
1. As legalization of both medical and recreational marijuana rolls out around the world, it brings with it a whole suite of mine workplace issuers for operators.
2. Drones 2.0. Currently used in the mining sector for positive things like remote site checking, the rules around operation haven't kept up in most jurisdictions. For example, can environmental groups use drones to monitor your mine property? How will the use of drones by employers interact with employee rights, which have typically resisted employers filming employees.
To sum up, I think 2018 will be an interesting year for the mining sector. Aside from the "usual" supply and demand issues, we will have a number of developments in the resource nationalization, innovation and workplace privacy and safety areas. Each of the issues noted above brings interesting business and legal challenges. They will require us to think and act differently and adapt, all at a pace which we haven't seen before. We look forward to working with our clients in 2018 and helping them embrace these challenges.