Engineering Inc. - September/October 2015 - (Page 4)

MarketWatch BY GERRY DONOHUE Mining Sector Seeks Daylight A defining characteristic of the mining sector has long been the high volatility of commodity prices. To succeed, engineering firms serving mining clients had to figure out how to balance their operations through often tumultuous market cycles. In the past few years, the mining industry has slogged through a prolonged slump, and commodity prices have stabilized at historic lows. "People are no longer thinking about the cyclicality of commodity prices," says Hiran Bhadra, the national lead for KPMG's mining sector practice. "They're wondering how to adopt a different operating model for a low-price regime that may last for a long time." One of those adaptations has been to cut back on the development and opening of new mines, which has hit engineering firms hard. Though engineers serve their clients in all phases of a mine's life cycle, from geological exploration to mine closure, the bulk of their work is in the early stages. "We're project-focused," says Duane Gingrich, president of mining and metals in the Americas at Amec Foster Wheeler. "We do some work in existing operations, but the majority of our work is in developing new projects. So when that slows, we feel it." Supply and Demand The sluggish mining market has a few more years to run, according to BMI Research, which forecasts just 1.9 percent annual growth through 2019. Three factors are holding the market back. Primarily, the slowdown of two of the world's largest economies-China and Europe-has reduced demand for most key minerals around the world. And, says Bhadra, "These two economic centers are not promising to come back to a significantly higher trajectory in the near term." Additionally, regulatory actions by the United States and other countries that limit the use of coal in power generation have significantly dampened demand for one of the industry's biggest products. And third, says Bhadra, "Some large mining companies are not expected to reduce production levels even in the current low-price regime as a competitive strategy. By leveraging their large and low-costof-production deposits, they Global Spending on Non-Ferrous Metals Exploration (billions of U.S. dollars) 2010 $12.1 2011 $18.2 2012 $21.5 2013 $15.2 2014 $11.4 2015 $10.0 (est.) Source: SNL Metals & Mining Corporate Exploration Strategies 4 ENGINEERING INC. SEPTEMBER / OCTOBER 2015 are aiming to retain and grow market share by trying to reduce participation of smaller mining companies with higher marginal cost of operations." This extended period of low pricing has damaged mining companies' financial positions. According to Statista, the net profit margin of the top 40 mining companies, which account for almost all industry activity, fell from 25 percent in 2010 to just 2 percent in 2013, before climbing back up to 10 percent in 2014. Without the funds to invest, global mining exploration is expected to fall 10 to 15 percent to $10 billion in 2015, according to SNL Metals & Mining. The decrease would be the third consecutive annual drop and would leave global spending at the lowest level since 2009. Remote Mines, Higher Risk At the same time, the cost of developing a new mine has never been higher. "The large, easily accessible properties are more mature and being mined out," says Gingrich. "We're seeing development in more remote, higher-risk locations, such as Mongolia, parts of Africa, and the arctic in Canada." According to the World Economic Forum (WEF), about 40 percent of mining exploration investment in recent years "has focused on remote regions in South America and Africa." These distant and isolated mining projects tend to be larger scale, with higher costs and more complex infrastructure requirements. WEF esti- mates that 60 to 80 percent of project costs for distant mines are just for infrastructure. An additional factor adding to the complexity and expense, says Gingrich, is that while "larger tonnage mines have tended to be open pit, we're seeing more underground mine development." Finally, mining operations are under increasing regulatory pressure in both developed and developing countries to limit emissions, waste and water use. Market Strategies Engineering firms are choosing different paths to succeed within these difficult market conditions. "Even in a soft market, clients are still producing," says Kevin Beauchamp, principal and mining business leader at Golder Associates. "The challenge for us is to understand their business and provide solutions that work for our clients." For example, several commodities, specifically copper, nickel and base metals, are strengthening, he says. While Amec Foster Wheeler offers its mining clients a full slate of mining services, Gingrich says one of the most active services has been helping firms fine-tune their business processes. "We've been more active in financial analysis, process engineering, due diligence," says Gingrich. "We are looking through their processes and methodologies to find capital efficiencies." MWH Global is using its water expertise to capitalize on the increased environmental

Table of Contents for the Digital Edition of Engineering Inc. - September/October 2015

Engineering Inc. - September/October 2015
Contents
From ACEC to You
Market Watch
Legislative Action
Unlocking the Ocean’s Secrets
Positive Impressions
Low Water, High Hopes
International Corruption
Leading the Way, Lending a Hand
Guest Column
2015 Fall Conference
Guest Column
Guest Column
Business Insights
Members in the News
Mergers and Acquisitions

Engineering Inc. - September/October 2015