I was back in Perth to visit my family for Christmas 2016 and thought I’d take a morning walk. Standing in the hot Western Australian sun, batting away flies, the “For Lease” signs stretched as far as the eye could see in the previously buzzing mining hub of West Perth. What happened?
After the largest and most sustained commodity boom in history, the mining sector suffered its largest downturn on record from 2012-2016. From a peak of nearly A$100bn in 2012-13, investment in resource sector projects in Australia fell c.70% through to 2016 according to BIS Oxford Economics. This translated into the loss of over 46,000 full time mining jobs in Western Australia between 2013 and 2015, devastating many local communities. Shareholders also suffered, with most mining firms seeing significant share price falls and a number of storied mining houses facing serious financial hardship.
The culprit was the same as prior mining downturns: too much exuberance. According to Bernstein Research, US$1 trillion of shareholder money was invested during the boom period in capex and M&A. While the early part of this investment was an appropriate supply-side response to strong growth in emerging markets (and China in particular), the capital discipline of many miners eventually broke down. This resulted in a number of ill-advised new projects which came on stream just as China was slowing, causing supply to overwhelm demand and resulting in a lengthy correction.
In the period post 2016/17, mining firms have faced a difficult balancing act. Demand has recovered, with strong growth in the global economy leading into and coming out of COVID-19. However, the sector’s credibility with investors post the downturn was impaired with most institutional investors demanding healthy cash returns and strong capital discipline.
So what has happened and how have miners balanced the requirements of their shareholders and customers? At a superficial level, things are looking better. West Perth is no longer blighted by vacant office space and has in fact recovered much of its dynamism. Miners have also been able to deliver for their customers and meet the constantly growing demand for commodities. However, unlike prior mining upcycles, this mining recovery has been achieved whilst miners have maintained capital discipline and delivered strong cash returns to shareholders.
A key enabler of this has been the use of technology; put simply, miners have been able to use technology to extract more from their existing assets in a capital efficient way. Potentia witnessed this first hand through our investment in Micromine, a leading global provider of mining software. In the 2016-2020 period, Micromine has partnered with a number of leading global miners to implement software to facilitate more automated practices. For example, Micromine’s Pitram fleet management and mine control system has recently been installed in a number of existing mines to record data related to equipment, personnel and materials, providing an overall view of current mine status and enabling improved control over operations to boost production, reduce costs and improving safety and business intelligence. Similarly, the Micromine General Mine Planning (“GMP”) product has seen record volume growth with >70% higher unit sales in the September Quarter 2020 compared to the prior year.
As we stare out into the post-COVID world, the outlook for commodities demand again looks bright. This is particularly so in base metals given the growing electrification of automotive drivetrain technology and huge forecast growth in renewables, both of which will underwrite record demand for copper, nickel and lithium. We expect mining technology to become an even more critical tool for miners to maintain the difficult balancing act of satisfying shareholders while continuing to deliver record volumes to customers.