Commodity rout continues to take toll on global mining industry

RUTH GREEN

Plummeting commodity prices and China’s waning appetite for natural resources forced many of the world’s mining companies to dramatically rein in spending and sell off loss-making assets in 2015.

As the commodity rout continues, miners will continue to be faced with challenges in 2016, says Florencia Heredia, a founding partner of HOLT Abogados in Buenos Aires and Chair of the IBA’s Mining Law Committee. ‘These are undoubtedly very difficult times for the mining industry,’ she says. ‘This cycle of down prices seems to be much longer than expected and therefore companies are being forced to reduce or get rid of certain operations. However, the assessment of which may or could be unprofitable operations is the real challenge and creativity, efficiency and innovation are to be seen as key elements these days as well.’

Although the junior and mid-cap end of the industry has been struggling in the difficult commodity environment for some time, 2015 was clearly a critical year for large, diversified mining companies.

In 2011, at the peak of the most recent commodities boom, Glencore achieved the biggest stock exchange flotation in the history of the FTSE 100 and had a market capitalisation just shy of $60bn. Yet last September the world’s largest diversified commodities trader announced it was embarking on a $10bn debt reduction programme, along with plans to scrap its dividend, cut spending and sell off unprofitable assets.

And Glencore wasn’t even the worst performer on the FTSE 100 in 2015. That accolade went to fellow mining giant Anglo American, which revealed in December it was suspending its dividend payments alongside launching a restructuring plan which included disposing of more than half of its mines and the loss of 85,000 jobs – equivalent to 63 per cent of its workforce.

The majors aren’t the only companies facing tough decisions though. For mining companies of all shapes and sizes, the time, money and personnel involved means the decision to shut a mine can’t be taken lightly, says Charles Lawton, former general counsel at Rio Tinto and former chair of the IBA’s Section on Energy, Environment, Natural Resources and Infrastructure Law.

‘Mining is one of those industries that has an incredibly long lead time between taking a decision in the boardroom and production at the end of the mining process,’ he says. ‘Of course for the big projects it is immensely expensive as you’re committing billions of US dollars to the expansion of a mine or to build a new mine and miners were falling over themselves to meet Chinese demand, which was extraordinary and there was this concept of the ‘super-cycle’, which now we can see was clearly a misreading of the situation.’

Though the commodity rout has arguably hit the oil industry even harder, with prices slumping to 12-year lows, Pedro Freitas, managing partner at Veirano Advogados in Rio de Janeiro and a senior vice-chair of the IBA’s Mining Law Committee, says the stakes are often higher for mining companies. ‘The mining industry involves usually more infrastructure and impacts more from a stakeholder’s perspective since operations are more complex and therefore have higher costs involving a larger workforce,’ he says.

Lawton agrees the two industries face very different challenges. ‘Mines are much more difficult to switch off than oil fields. Mothballing a mine is difficult in itself because of all the issues of pollution, laying off staff and so on – it’s a completely different industry to oil & gas.’

‘I also think there’s a certain amount of predatory pricing at the moment by OPEC to try and drive out some of the higher cost producers,’ he says. ‘’That is a dynamic that simply doesn’t exist in the minerals industry. I don’t think there’s anyone producing vast quantities of material with a view to driving out the weaker players, but ultimately that probably will happen as you can’t easily turn on and off production so the higher cost producers will probably be forced out, at least temporarily.

‘There will be closures and I suspect the weaker players will fail, but it’s rather like a supertanker, you can’t turn it around very quickly and it’s enormously expensive to do so.’

In terms of legal work though, there is still plenty to keep the sector’s private practice advisers busy, according to Hubert André-Dumont, a partner at McGuireWoods in Brussels and a senior vice-chair of the Mining Law Committee. ‘[It’s] very true that these times are good for M&A and restructuring and typically M&A lawyers are busier in expanding and depressed times,’ he says. ’Notwithstanding this, and in contrast to previous times, there are not as many M&A operations to be seen in the mining industry. Maybe this is due to the fact that operations are run generally in a more efficient manner. Other opportunities for legal work relate to the more complex regulatory frameworks that apply in many host countries.’

As so many mining companies operating in emerging markets have learnt, gaining consent and approvals from local governments can be hard work. Rio Tinto learnt the hard way with its Oyu Tolgoi copper and gold mine in Mongolia. After starting the project in 2006 the company has continued to be at loggerheads with the Mongolian government, which owns a 34% stake in the project. In December 2015 the company secured a US$4.4bn financing package to finally get it off the ground.

Although Lawton retired from Rio long before the financing deal was brokered, he says resource nationalism can add a further layer of complexity when metal prices are low. ‘There’s this constant battle between companies and the host governments where on the one hand when metal prices are higher they say they want equity and dividends and when metal prices are low, like they are now, they want to go back to a royalty type of return.’

Community consent is another area that Heredia believes will be increasingly important in the mining industry in 2016. ‘In my view one of the strongest legal trends in recent years is related to community agreements and work related to engage communities with due consent in mining projects,’ she says. ‘I think this trend will continue as one of the main drivers of a successful project lies with the community support.’