While the USA, the world's largest economy, has been recovering slowly, Europe continues to face a sovereign debt crisis. In response to this, the European Union has undertaken deep structural reforms, including various financial support mechanisms such as bailouts and austerity programmes for countries with troubled economies. While this may have temporarily appeased markets, the memory of the Eurozone crisis is likely to remain fresh in investors' minds in years to come.
With limited post-recession growth prospects in the USA and Europe, companies have looked to Asia to drive global demand. China's expected growth rate of 8. While the global economic outlook for these key economies remains constrained, the ongoing trend towards industrialization and urbanization is likely to sustain long-term demand for resources.
In addition to the current decline in demand, mining companies face further challenges to profitability in the form of unfavourable commodity prices and tougher mining conditions.
While commodity prices have improved since their lows, prices remain stagnant or falling, limiting revenue potential. Declining ore grades at current depths also mean that mining companies have to mine deeper to reach new deposits, significantly increasing the cost of extraction.
Mining at these depths also introduces additional safety issues due to the high risk of rockfalls, flooding, gas discharges, seismic events, and ventilation problems. Compounding these economic and operational factors, mining companies also face regulatory uncertainty following a global trend of resource nationalism. Governments throughout the world are looking to increase their share of mining profits as a means to bolster slow economies and drive socio-economic development.
State interventions in the mining industry vary from the introduction of new resource-based taxes to transferring of mining rights to state-owned companies, as shown in Figure 2. This regulatory uncertainty poses a significant challenge to mining companies' long-term strategic planning. Despite the particularly uncertain regulatory environment in Africa, global mining companies cannot ignore the substantial growth prospects that the continent offers.
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Mining companies looking to operate on the African continent face unique challenges. While most companies benefit from long-term certainty and predictability, these market characteristics are even more important to long-term businesses like mining.
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Mining companies require a degree of political stability, investment-friendliness, appropriate transportation infrastructure, and balanced fiscal regimes to operate successfully. There are several issues prevalent across the African continent that run counter to these requirements, and which contribute to the perception of Africa as a risky destination for business. Poor governance, the prevalence or perception of corruption, tenuous legislative frameworks, fragile security of tenure, and unclear royalty and tax regimes make strategic decisions difficult.
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Furthermore, long-standing issues such as civil unrest, insurgency, and a history of ethnic conflict pose additional operational risks in certain countries. Besides socio-economic and political complexities, the lack of appropriate infrastructure across Africa is a further barrier for mining companies. The required infrastructure capital is far more than the current infrastructure spend, leaving a substantial spending shortfall. This development constraint leaves investors with little confidence that public-sector infrastructure development will improve sufficiently to facilitate operations.
African governments are turning to mining companies themselves to accelerate infrastructure development, linking mining licence issuance to huge infrastructure projects McNitt, These multi-billion dollar foreign investments are likely to have a far greater impact on African infrastructure development than public-sector spending.
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The relationship between mining companies and host countries' governments is challenging. Despite this economic dependence on a prosperous mining industry, host governments habitually treat mining companies with suspicion. Mining operations are viewed as operations in isolation without the necessary linkages and benefits to other sectors of the economy or alignment with local aspirations. Furthermore, the history of colonialism across Africa has often resulted in foreign-owned mining companies being viewed by communities as entities with no long-term commitment to the country.
Communities often perceive companies as generating wealth and repatriating dividends, leaving behind a damaged environment with little lasting benefit for the community. The South African situation.
In addition to the complex factors affecting mining companies at a global level, companies with South African operations face further complexities. Mining has historically been a very important sector to the South African economy. Like many other African countries, South Africa has vast mineral wealth with immense value generation potential.
With more than 52 commodities under its surface, South Africa has the world's largest reserves of platinum, manganese, chrome, vanadium, and gold, as well as major reserves of coal, iron ore, zirconium, and titanium minerals Monitor Deloitte analysis. The industry's substantial wealth has supported the country's growth with strong resource exports and job creation. However, the mining industry's relative contribution to the economy has declined due to growth in the financial and real estate sectors. To an even greater extent than their global counterparts, South African mining companies' margins are under pressure.
The combination of stagnant or falling global commodity prices and rising input costs is forcing mining companies to make difficult decisions in an attempt to sustain short-term operations, while still aligning these decisions with long-term objectives. In particular, increases in labour and energy costs have exceeded inflation. The annual 'strike season' is characterized by ever-increasing demands by unions and mineworkers who may not have a full appreciation of the challenging operating environment that mining companies face.
In addition to the requirements by workers, there are rising demands by government as to the role mines should play in society. The government increasingly expects mining companies to fulfil social needs typically addressed by government in developed countries, such as the provision of basic services, education, and health care.
These expectations are often not clearly defined, and are compounded by local communities' demands for employment opportunities, skills development opportunities, education, and modern healthcare facilities.
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Communities expect mining companies to become engines of socio-economic development of their areas' - Susan Shabangu, Minister of Minerals. The perception of a lack of or inadequate progress in these key areas is often met with vocal opposition, strikes, and unrest. This can have a significant impact on project development through costly operational delays and reputa-tional damage to mining companies. This puts mining companies in a tenuous position, with corporate social responsibility CSR today extending well beyond the minimum legal requirements.
South African mining companies require a deep understanding of shifting community and government expectations and a commitment to a high level of transparency and operational sustainability to address the demands of relevant stakeholder groups. Government's requirements are further obscured by a local environment loaded with rhetoric.
Some government officials have criticized the country's inability to translate its mineral wealth into sustainable economic development at grassroots levels. The government has been criticized for being seemingly slow to address what the previous Mineral Resources Minister, Susan Shabangu, called South Africa's 'evil triplets' of poverty, inequality, and unemployment Sowetan, In this highly political context, proponents of radical state intervention in the South African mining industry have asserted that the mineral wealth of the country ends up in the pockets of 'monopoly capital' rather than benefiting the broader population Monitor Deloitte analysis.
While the government has ultimately declared that it has no short-term agenda to pursue resource nationalization, the widely reported rhetoric has cost the country a sharp decrease in its attractiveness as a mining destination, resulting in billions of dollars in deferred or abandoned investments The National, This negative local sentiment is likely to have gained additional momentum due to the global trend towards resource nationalism and community activism, especially across the developing world.
The overarching challenge in Africa and particularly in South Africa is to strike an equitable balance of interests, ensuring that mining is productive and profitable, as well as being fair to foreign investors, host states, and affected local communities alike. These challenges, at both a local and global level, make strategy critically important for mining companies. The strategy of decision-making.
Companies choose to do certain things and not to do other things as opposed to tactics, which are about how to execute on the choices made.
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The complex operating environment in which mining companies function results in difficult choices. This necessitates a deep understanding of the factors that influence mine profitability, as well as those affecting the company's reputation and relationship with stakeholders. Adopting a structured approach to making choices at a corporate and business unit level is essential.
Strategy is an integrated set of choices that includes both strategic positioning choices and strategic activation choices. Monitor Deloitte assists mining companies to make difficult decisions based on a series of cascading choices, as shown in Figure 3. Mining companies should be able to answer each question successively, working down the cascade. Where a question leads executives to re-evaluate their initial propositions, they can trace back up the cascade to redefine aspects until the strategy is cohesive. These questions allow mining companies to successively focus on key aspects of their high-level and operational strategies, which collectively form the basis for long-term strategic planning and short-term prioritization.
The questions shown in Figure 3 can be adapted to the mining context as follows. What are our aspirations? Mining companies should be able to clearly define both the financial such as achieving year-on-year increases in average IRR and non-financial objectives such as consistently achieving zero harm, or making a positive social impact in host countries.
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These objectives should be aligned with the company's overall vision, as they will guide investment decisions. Where will we play? Mining companies must choose the resource portfolio that they wish to develop and the countries in which they will operate. They must also decide which parts of the value stream they will target, and where in the project life cycle they should enter or exit. How will we win in chosen markets? Mining companies should identify sources of sustainable advantage, and use these as the basis for business model development.