MIKE TEKE: Dropping the baton before the supercycle

The economic cycle in the mining industry can be divided into three periods. The first is when the cycle is at its bottom, with prices of almost all commodities at their lowest. The second is when the prices are recovering but moderate, which rarely excites mine operators. Finally there is the third period, the boom, when commodity prices soar.

The first period, to me, is akin to “a long cold winter” and the third “a short, beautiful summer”. Long and cold winters are miserable for most living beings. It’s a period of hibernation and curtailing of activity. In this period of the economic cycle most miners tend not to spend aggressively on growth, while other shrewd miners take more risks on their investment.

Companies tend to impose serious measures to curtail spending during the winter cycle. While many CEOs are dovish in their approach to leading their businesses during this uncertain time, astute CEOs continue to look for growth opportunities, which may include acquisitions.

During the short, beautiful summers, however, CEOs become emboldened, wanting to invest in growth capital, looking for acquisitions and generally becoming more enthusiastic about the prospect of a rise in commodity prices. Often, though, this is not well-timed. By the time decisions are made and actions taken to begin growing a business, the boom is often gone again. Sadly, it is true that most stakeholders in this industry drop the baton by missing the opportunity to create value during the long, cold winter.

My journey in the mining industry began in 1994 after joining Bayer, a German multinational. During my career I have seen that it is often uncomfortable for mining CEOs to hear the same point made repeatedly — that we missed the commodity supercycle. Is it impossible to be fully prepared for a potential boom in commodity prices, avoiding the regrets and grumbles of missing it?

We are all aware that the recent boom has been spectacular in that we have seen several commodities setting record prices. Iron ore hit almost $230/tonne in May. Gold reached more than $2,020/oz last August. Palladium and rhodium prices hit highs in April. Even coal prices are enabling coal miners to trade most profitably.

We have seen global mining companies and many more local ones reporting great results accompanied by great dividends. In some cases, special dividends have even been paid, which is something that has not happened for a long time. Again, CEOs are being emboldened to look for organic growth and acquisitions.

But in most cases it’s already too late to catch the supercycle. This does not mean these supercycles have been completely missed, but the general view is that more could have been achieved to create greater value, through capital growth and returning that value to shareholders through dividends.

It is always the case that as the autumn period approaches we sit around and reflect on whether we created enough value, and what could we have done differently.

I offer a few thoughts below:

• First, we should have invested in better market intelligence to understand when the long cold winter would subside and the beautiful summer would be ushered in. This would better prepare us to take advantage of the boom. Again, there are masterminds in the industry who are good at this, but this skill or area of expertise can still be sharpened. We have an advantage with great local universities that have strong mining and related departments and it’s time that we better harnessed those skills and expertise.
• Second, the alignment between business and government should be stronger and, in the case of mining, government should ensure the regulatory environment is not restrictive, curtailing investment. This does not mean leniency on regulation, but rather creating an enabling environment for industry to focus on producing profitable and safe tonnes and ounces.
• Third, the parastatals that work with the mining industry, which include logistics and power generation as well as other services that enable the functioning across the different value chains, must be at their best to support the industry when these booms happen. It is extremely unhelpful, and just too late, to have workshops and meetings to discuss bottlenecks and constraints right in the middle of the commodity boom.
• Fourth, a culture of alignment is always necessary among all critical stakeholders to create value and to avoid the post-boom regrets of having missed it.
• Fifth, zero harm is critical in this industry, and the more we invest in health and safety for all employees the better we perform without injuries and fatalities. Not only is this the right thing to do, but it also makes us more efficient and better able to create value.

As industry role players we must remember that we in SA are not the only show in town: Australia, Brazil, Colombia, Argentina, China, the US, Canada, Russia and many more are operating in the mining space and compete with us for the same investment dollars.

We continue to hear the same rhetoric after the boom: we missed it; we could have done better. Let us not drop the baton, again.

• Teke is CEO of Seriti Resources.