Editorial: Does mining have an ROI problem?

In mid-January, The Northern Miner was once again privileged to host the latest in our popular series of Roundtable discussions featuring a who’s who of mining leaders in Canada. Held in downtown Toronto and sponsored by accounting powerhouse PwC, the discussion was moderated by Northern Miner publisher Anthony Vaccaro, and we asked: Does mining have a return on investment (ROI) problem?

As we enter our fifth — and hopefully last — year of the commodities downturn, and the crazy days of growth-for-growth’s sake of the mid-2000s are long behind us, it’s hard to disagree on the need for a solid ROI to restore robust financial health to our industry.

And while there’s little that mining industry professionals can do to change the nature of mineral deposits or the current metal prices, there’s wide scope for taking a fresh look at how we do things, whether it be financing alternatives, smarter exploration or more enlightened management decision-making.

Our Roundtable participants were an all-star panel representing diverse industry viewpoints: Geoff Burns, a director and recently retired head of Pan American Silver; Andrew Cheatle, executive director of the Prospectors & Developers Association of Canada; Catharine Farrow, CEO of Hope Bay gold developer TMAC Resources; Chuck Jeannes, president and CEO of Goldcorp; Chris MacIntyre, vice-president of corporate development at junior Reservoir Minerals, which is having great success in Serbia; Rob McEwen, gold mogul and executive chairman of McEwen Mining; Jason Neal, managing director & global co-head of BMO Metals & Mining group; Doug Pollitt, analyst at boutique brokerage house Pollitt & Co.; Calum K. Semple, partner and global mining consulting leader at PwC; and David Smith, senior vice-president of finance and CFO at gold major Agnico Eagle Mines.

Goldcorp’s Jeannes was blunt about some the industry’s past problems: “Something that Goldcorp shared as a sin along with a lot of other companies was that, as the gold price was rising and as revenues were rising, we chased ounces … As a whole, our industry allowed cut-off rates to decline just about as fast as the gold price was going up. And the net result, everybody always says, ‘Well, we couldn’t help what the costs were.’ They were going up on a per-ounce basis, because there was cost inflation, but also because we were chasing the top line growth. And by lowering those cut-off rates the tons of material that you had to move to make an ounce of gold went up, so the cost per ounce went up.”

If you haven’t already, please click through to Trish Saywell’s coverage of the discussion’s highlights. A full report will follow during the PDAC convention in March.

In our own survey of readers carried out in early January, 55% of respondents agreed that miners had strayed from best practices in recent years, and that ROI had suffered as a result.

In the eyes of the respondents, the single worst ROI driver has been: over-optimistic commodity price predictions over the mine’s life (41%); overestimated capital expenses (22%); longer project development time, owing to more regulations and slower permitting (16%); and new deposits being lower grade and located in remote areas (9%).

Our readers had a few prescriptions of their own for the one best way to improve ROI, including: better financial discipline in deciding which projects to develop (47%); better cost estimation in feasibility studies (20%); better financial discipline in mergers and acquisitions (10%); and more pressure from shareholders on management to focus on ROI (7%).

Survey respondents also had an appetite for the old days when major mining companies reduced project risk at the expense of ROI by slowing down new mine production ramp-up, versus the modern style of kicking off with a mega-project. Respondents were also keen for major mining companies get involved earlier in the exploration game to grab more of a project’s upside, in the mold of today’s Agnico Eagle Mines.