KPMG Australia frames mining sector ‘way forward’ in COVID-19 era

Underlying resilience of Australian mining key to successfully crossing “the bridge” says KPMG Australia mining leader.

Recent national data and the success of the sector’s business continuity plans together show that mining remains one of Australia’s most resilient (and critical) industries through the COVID-19 crisis according to Trevor Hart KPMG Global and Australian head of mining. Indeed, he says these factors will be key to the broader ability of the Australian economy and society to successfully cross “the bridge” to the other side of the current COVID challenges.

“We’ve noted the recent rise in iron ore prices, export earnings forecasts, and the sector’s underlying stability,” said Mr Hart. “KPMG Australia is looking ahead to the June 2020 quarter, and in that context, we have framed five key risks and opportunities specific to the mining sector to inform the most positive strategies for managing through this period.”

He confirmed that miners have been working hard since COVID-19 came onto their radar late in 2019 and now have their crisis management plans and initial business continuity planning phases largely bedded down and being executed upon.

Trevor Hart said: “Although many commodity prices remain volatile, those of Australia’s major mining exports are robust; that is coupled with a weaker Australian dollar and lower fuel prices. In addition, we are seeing continued profitability, underpinning about 250,000 thousand jobs directly and many more indirectly, through critical supply.”

He said the Australian mining industry also continues to provide vital supply lines to critical regional economies such as China, Japan, South Korea and more.

Continued challenging environment

Turning to the global landscape, Trevor Hart noted the World Bank, OECD and UN are all reforecasting dramatic falls in economic growth for major economies of the world, with recent scenarios seeing China at essentially zero growth.

“However, the latest KPMG analysis has reflected the positive developments in China as they seek to emerge from the COVID-19 lockdown and resume economic activity,” said Mr Hart. “With a view to stimulating investment and consumption, China accounts for 38 percent of Australia’s exports, much of it mining, and our firm thinks this should see commodity demand stabilize in the next quarter. China is definitely a stabilising factor though other sectors may tell a different story.”

Turning to Australia, Trevor Hart said different commodities are facing different market pressures and price volatility with associated issues relating to cashflow and liquidity. In the March 2020 quarter, copper, nickel, and aluminium fell up to 20 percent. Battery minerals pricing continued to fall, while iron ore and gold remained relatively steady. Currencies continue to experience significant short-term volatilities.

“All these are factors to watch in the next quarter and through 2020 however, the Australian mining industry is a truly world class sector. In spite of the COVID-19 challenges mining remains one of the most resilient and technologically advanced mining industries in the world,” said Mr Hart. “Much depends on the COVID status of each jurisdiction and the reaction of their governments where there are different laws in different states – and indeed across different countries. Collectively from a management and leadership perspective this means that a ‘one size fits all’ response won’t work.”

Mr Hart framed five critical issues facing miners at the moment:

Current Critical Risk Strategies for Mining

Keep your people safe and well

Mining was forecast to employ about 250,000 people directly this year to generate $218 billion in export earnings for Australia. It accounts for approximately 60 percent of the nation’s exports, representing an essential industry, critical to continue operating. Across approximately 430 Australian mine sites an enormous 24/7 effort and focus is required just to keep everyone safe and healthy at this time. That is about moving vast numbers of FIFO workers to remote sites every day and maintaining production in a COVID free environment. That means safety, which is an ongoing key focus of the mining sector, and well-being and hygiene must be front and centre.

Demonstrate strong leadership through positive communication

COVID-19 is heightening the focus on leadership and the need for positivity and strength. The leaders of mining organisations must remember to invest in effective communication. All stakeholders, not just shareholders, want to remain informed. Organisations and the mining industry more broadly can come through this stronger with high quality, timely communication to employees, communities, government, suppliers and customers.

Understand your supply chain and key suppliers

Monitoring end-to-end supply chain risks and adapting as issues emerge is vital. This requires a very clear understanding of where heightened risk of bottlenecks, equipment or supplier failure might occur and that contingency plans to manage those are clear. Particular issues include critical spares, aviation, departure/destination ports.

Understand that global recession impacts demand and reduces prices

As a result of COVID-19, the World Bank, OECD and UN are all reforecasting dramatic falls in economic growth for major economies of the world, with recent scenarios seeing China at essentially zero growth. Although there will also be global supply disruption it is likely there will be reduction in demand and prices for most commodities. Affected miners will need to focus on cost out and productivity to remain at the lowest end of the cost curve. Of course, significant global government stimulus packages will reduce this impact.

In addition we have seen the gold producers enjoy record $A prices this quarter as investors seek safe haven investments.

Manage uncertainty with offshore operations

Many miners have support services located in overseas locations, each of which are experiencing COVID-19 impacts, some quite profoundly. We are seeing companies rebuild onshore capability in Australia to instill further protection for business continuity.

Forward “Crossing the Bridge” Opportunities for Mining

1. Australia’s relationship with China

China will likely be the first to emerge from both the health and economic crisis that COVID-19 has presented. In 2019, the Australian energy and natural resources sector exported over $110 billion of products to China with many long term and deep trading relationships in place. Current market reports confirm that China’s is rapidly getting economic activity back on track, with PMI readings starting to rebuild. “I would say that the Australian mining industry’s relationship with China is a clear strength that can’t be taken for granted but which represents an opportunity on which to build,” said Mr Hart.

2. Resilience in the DNA

The Australian mining industry has crisis management built into its DNA and strong skills in particular withstanding commodity price cycles from different causes. Reserves don’t deteriorate and global government stimulus will drive a need for the products miners produce. The last five years has seen the industry reduce debt and position balance sheets to withstand economic volatility.

“The gearing ratio of large cap miners at or less than 0.5X EBITDA together with significant cash and undrawn facility balances underscores their position,” said Mr Hart. In addition, they are well-placed to not only ride out the economic fallout from COVID-19 but to also rebound as a strong sector responding quickly to post COVID global stimulus demand.”

3. Strong demand for what we produce

Australia’s largest mining export commodities in iron ore, coal and gold, which make up about 80 percent of the commodities the industry exports, have enjoyed relatively healthy stable, pricing so far. Through the first quarter to March, gold set $A price records, peaking at about $2,750 an ounce. Iron ore maintained prices in excess of US$80 per tonne and both thermal and metallurgical coal pricing remained steady.

“With gold output poised to place Australia as the largest producer in the world in 2021 together with record prices, it maintains its status a safe harbour in volatile times,” said Mr Hart. “We note the gold sector is currently attracting investment and expansion, earning $20billion in exports in 2019, and forecast to increase by 30 percent in 2020 off the back of export volumes increasing by 19 percent to 389 tonnes. Gold is also driving exploration spend in Australia, increasing 19 percent during 2019 to represent about 40 percent of our $1.1billion investment. This should lead to new opportunities, growth and expansion.”

KPMG Australia says the “big unknown” as the world emerges from COVID-19 is the capacity for coordinated global government stimulus to boost demand in the medium to long term. This is especially relevant as miners continue to respond to the changes in consumption patterns and requirements of a post COVID world.

4. Strategically positioned post COVID-19

Whilst current oil price slumps are challenging the pace of renewable energy transition and, in turn, demand for battery minerals, climate change remains real.

“In addition to supplying base metals for stimulus post COVID, I expect that the energy agenda will continue to see transition to a greater role for renewables over time, which in turn drives demand for battery storage” said Trevor Hart. “Australian miners produce over half the world’s lithium, hold the second largest copper resources and more than a quarter of global nickel resources.”

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