Focus: Productivity for Producers, Survival for Juniors

A continued crisis of investor confidence and an ever-softening outlook for prices of the most important metals produced in Latin America mean mining companies in the region are in for a challenging 2015 in terms of improving productivity, making decisions about investment and rounding up financing.

Although slower production and construction in China and poor performance in the euro zone have been casting doubt on global growth, the economy is expected to grow slightly faster in 2015.  The International Monetary Fund (IMF) forecasts GDP growth of 3.3% in 2014 and 3.8% next year, with the rate rising above 4% in 2016.

The United States in particular is seen accelerating growth in the coming quarters and China and Europe are likely to use stimulus measures to prevent growth from falling below targeted levels.

"More 'synchronized' economic growth is expected by 2015, moderately supportive of stronger commodity prices," said Scotiabank economist Patricia Mohr in a presentation at the recent BNamericas Mexico Mining Summit. However, metals prices are facing specific headwinds that could impact their performance despite the positive economic outlook.

The lower the metals prices, the more urgent productivity and efficiency efforts become, and these will remain at the forefront in 2015. Companies must delve deeper into their organizations and processes, as most of the quick wins - capital and production cuts, layoffs - have already been captured. Majors will continue to seek opportunities to divest high-cost assets, but to create long-term value companies must look for efficiencies via technology and innovation and commit to a deeper transformation of the status quo.

Consultancy Ernst&Young (EY) says that no one organization has managed to fully and effectively apply the "broad transformational approach" that is necessary and ranks productivity as the top business risk for the mining industry due to the depth of change required.

"There is great concern in the international mining industry about excessive cost increases. Peru has had average annual mining inflation in the order of 20% in the last 3-4 years. If that inflation increases, it will make many mining projects unviable," says Mario Cedrón, mining engineer, professor at Peru's Universidad Católica and board member at Latin American mining organization Olami.

Falling oil prices could help to reduce energy costs, meaning one of the issues facing miners in certain countries could heal itself to some degree in 2015.

For juniors, the longer and lower the price trend, the more difficult it will be to hope for a recovery of financing and exploration activity. Financing activity on the Toronto Venture Exchange (TSX-V) has improved moderately in 2014, with the average value of equity deals by mining companies up 30% in January-July versus the average 2013 deal value.

In nations like Peru and Mexico, which saw a surge in junior spending during the commodities boom, exploration spending has dropped significantly, in part due to the large proportion of exploration spending attributable to juniors. In Chile, on the other hand, spending has increased as a percentage of the world total because copper majors there have continued brownfield exploration programs. This trend is likely to continue in 2015, with Mexico hit especially hard as more of its projects are gold-silver focused.

While some market watchers believe the junior sector has already hit bottom, the proof is in the pudding. If metal prices do not improve, 2015 will be another very difficult year, in which only a select few junior projects can obtain significant financing and the rest will struggle to hang on.

Initiatives to watch in 2015 will be projects in Peru and Chile to facilitate exploration financing at the local level. Both countries are working on agreements with the TSX-V to allow dual-listing of Canadian-listed companies. Chile is also looking at changing its concession rules to free up idle areas to junior activity.

Still, confidence must return to the market if a new era of exploration is to occur. Much of this is out of countries' hands, but having more attractive conditions than neighbors will help them take a bigger piece of the albeit smaller pie.

But although the juniors will continue to suffer and the majors are tapping the brakes, there is still plenty of opportunity to be had in the region. Chile's total mining development pipeline remains over US$100bn, Peru's is more than US$60bn and miners in Mexico will spend more than US$6bn in 2015. 

Figure 1: GDP Growth, Selected Countries and Regions

Figure 2: Equity Capital Raised by TSX-V Listed Mining Companies


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