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Exclusive Mining Journal Q&A: BDO's 2020 mining vision

BDO’s recent series of reports on the future of mining in different parts of the world contained many startling insights and observations. But it also raised many questions. Here BDO Australia corporate finance partner Adam Myers, the group’s natural resources assurance director Jon Heideman, and BDO Canada national mining leader Sean Bredin, answer some of them.
Exclusive Mining Journal Q&A: BDO's 2020 mining vision Exclusive Mining Journal Q&A: BDO's 2020 mining vision Exclusive Mining Journal Q&A: BDO's 2020 mining vision Exclusive Mining Journal Q&A: BDO's 2020 mining vision Exclusive Mining Journal Q&A: BDO's 2020 mining vision

Richard Roberts

Mining Journal: Your eye-opening predictions about robots and greater use of automation and autonomous/semi-autonomous machines in mining come with a related prediction that half the former machine operators in the industry will be "retrained to run the technology controlling the robots". Firstly, any estimate of what this retraining will cost the industry? And then, on current indications, how will the industry get to the high level of robot-replacement of people (50% of the workforce) by 2020?

Adam Myers: We are of the view that the push to use technology will be driven by two main factors. First and foremost, this will be safety. Having autonomous machines allows operations to occur in environments where human operators are exposed to significant and potentially unacceptable levels of risk. The cost of the transition will ultimately be offset by either the extension to production that could not otherwise continue or the reduction of safety costs which are only required when operating in such an environment.

For the industry to realise this prediction there must be an economic benefit. The industry is too competitive for a participant to have a significant increase in costs, so these changes have to be at worst cost neutral.

We expect that the pace of change will escalate rapidly. Several companies are conducting trials with robots to identify how they can be leveraged in high risk, remote environments. These trials cannot be cheap, but it just illustrates how significant the existing cost structures and expected benefits are to justify moving down this path.

Mining Journal:  If robotics and automation are truly going to be this disruptive to mining, the industry will become/represent a significant technology market - which it hasn't been in the past. What are the implications of this prediction becoming reality to a) the size of the mining tech market as a key vertical for both traditional and non-traditional tech suppliers; and b) potential job numbers in this part of the industry?

Adam Myers: This is already taking place. Global mining giants have already opened innovation centres to develop their own autonomous technology. In our view, successful suppliers will be those who collaborate effectively across disciplines. Putting the best tech on subpar equipment or vice versa won't cut it.

The successful suppliers have always been those who develop a solution with an appreciation of the unique operating environment of each project. Our observation of the purchasing habits of mining companies is that they like to see proof that something works, but they are inherently flexible. As they learn more about their orebody, they change approach throughout the life of a mine.

It is this characteristic that we believe will lead to a rapid change of adoption once an understanding of autonomous operations is widespread. It is interesting to consider what a traditional non-tech supplier actually is. If you look at drilling tools for example, the transition to use tools that provide more data and information is largely already underway.

If you look at the autonomous haulage space you will see that all the large players are offering autonomous solutions, as well as offering packages to retrofit existing vehicles. In this sub-segment, I expect the prediction to be met earlier based on current momentum. The speed of progress will vary by commodity, but for those exposed to bulk commodities with adequate global supply the pressure to maintain a low cost yet safe mine will necessitate change to enable operators to compete.

Mining Journal: BDO says that "most mining companies will grow to spend 10% of revenue on IT by 2020, compared to just 1% in 2015". What do these numbers look like in USD terms? How are they derived?

Jon Heideman: US GDP from mining averages $302 billion since 2005, so we would expect the spending to be about $30 billion by 2020. Discretionary spending on items such as exploration and IT are heavily dependent on commodity prices. Historically, investing in technology has taken a backseat to developing mineral resources and expanding mine life. Most industries spend 5-7% on IT annually while the natural resources sector overall only spends around 1%. 

Mining companies are starting to realize that exploration and digitization go hand in hand—allocating dollars to new tech now will pay dividends in maximizing production and achieving operational leanness in the future.

A growing emphasis on increasing safety, the opportunities that the Internet of Things affords mining companies, and heightened cybersecurity risk in recent years, are the core factors spurring the industry to increase their focus on new tech.

We expect mining companies to increase discretionary spending on technology to protect assets, increase efficiency, and increase mines' safety to align themselves with industry standards. Mining companies will need to ‘catch up' from previous years of lack of capital spent IT over the previous few years.

Mining Journal: Given the cost/margin/profit implications of these investments, what happens to mining companies who don't keep pace, and don't make the requisite investments?

Jon Heideman: For those who don't keep pace, constriction in the mining market, either through M&A or mine closure, is likely to occur. With rising costs and unpredictable metals prices, mining companies will need technology to control cost of production. Entities that cannot control costs and do not invest in new technology, could face financial strain. In extreme cases, shareholders and investors could seek to recoup their initial investments and may look to management to potentially sell assets or entire companies.

Mining Journal: BDO suggests an unknown mineral, ‘Mineral X', will become a key part of the US energy mix by 2020. Why is a new mineral needed? What does "integral part [of the energy mix)" mean?

Jon Heideman: Just a few decades ago, zinc was used very little in the industry. Today, it has many uses, including galvanizing other metals and rust prevention. Mineral X will do the same. The 35 minerals named on the draft list of "critical minerals" of the US Secretary of the Interior include lithium, niobium, and scandium, which are metals that have been previously underutilized, undersupplied, and under produced by the US, but could have a revolutionary impact on the US transportation, telecommunication, electronics, and aerospace industries. Making current galvanized metals, such as steel and other alloys, more light-weight and stronger could lead to safer, more reliable, and more efficient cars, phones, and airplanes in the US.

Mining Journal: BDO says, "more than 10% of US national infrastructure projects funded through 2020 will be projects in the mining sector". Again, what USD does this translate to? Where is the money going to be spent?

Jon Heideman: The US GDP for construction averages $635 billion since 2005, with a high of $782 billion, so 10% would equal anywhere from $60-70 billion dollars. Several factors are likely to drive this increase in investments. An Executive Order issued by the current presidential administration in the last 12 months implemented expedited environmental reviews for priority infrastructure projects, removing one barrier for companies. On the private sector side, US companies that realize tax savings following the passage of tax reform could put money into mining projects. Companies across diverse industries are dependent on a reliable, cost-effective commodity supply and could choose to invest in the sector to make their companies better in the long run.

Mining Journal: Does this have real implications for the rebirth/rejuvenation of the US mining industry, in economic decline for a number of years?

Jon Heideman: Yes, increased investment in the sector's infrastructure will play a key role in the rebirth/rejuvenation of the US mining industry. The current administration has also demonstrated a commitment to easing regulations mining companies are subjected to, a plan that is expected to strengthen the US mining industry.

Mining Journal: Why will Canadian miners adopt/integrate blockchain into their enterprise/supply chains faster than others - or will they?

Sean Bredin: We think Canadian miners are paying a lot of lip service to blockchain, but most of them are still struggling with the basics like Big Data, ERP, cloud, mobile, and enterprise asset management. Blockchain is a nice to have, but not necessarily being brought up with any sense of urgency from what we have seen from mining hotpots like Vancouver and Toronto. Having said that, there are some good examples of miners who are adopting blockchain in some unique ways and like most industries there needs to be first movers who prove out the technology. Once the herd mentality has been created, it doesn't take long for others to follow.

For junior miners, blockchain becomes an interesting value proposition specifically to security in the supply chain. Given a junior's focus on cash and exploration, IT security is the last thing a junior miner wants to think about. All of their cash flow is going to fund exploration and getting the mine site into production. Because of this, they often leave their financial processes open to risk when dealing with third parties and subcontractors.

Many juniors rely heavily on email, dropbox, and other risky platforms for sharing financial information. We see across the board a total lack of governance, cyber policies and internal controls to mitigate foreign bodies and hackers from penetrating their financial platforms. Far from hindering the leap to production, blockchain is a security solution that improves results and safety for miners that do business in some areas of the world where fraud and tampering is commonplace without platforms and policies in place to mitigate unlawful behaviour. Spreadsheets could be a thing of the past if uptake of blockchain continues. Mining is a dangerous job so anything that can be done to ensure good practice is a step in the right direction.

Mining Journal: Does the industry necessarily face significant cost/investment to make blockchain a way of doing business?

Sean Bredin: With blockchain, one can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared. Middle men like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction and total transparency. This is the immense potential of blockchain.

True blockchain-led transformation for mining companies, we believe, is still many years away

But there are a lot of caveats with any new technology that need be ironed out. Indeed, virtually everyone has heard the claim that blockchain will revolutionize business and redefine companies and economies.

Although most supply chain folk share the enthusiasm for its potential, a lot of the frenzy for blockchain has been hand in hand with the meteoric rise of digital currencies that rely heavily on the blockchain. It's not just security issues - such as the 2014 collapse of one bitcoin exchange and the more recent hacks of others - that concern us. Across our advisory and tech teams here at BDO we have spent the better part of 20 years advising and delivering thousands of IT projects. History tells us that if there's to be a blockchain revolution, many barriers - technological, governance, organizational, and even societal - will have to fall to drive a speedy adoption of this new medium of exchange. It would be a mistake to rush headlong into blockchain innovation without understanding how it is likely to take hold of our clients' business.

True blockchain-led transformation for mining companies, we believe, is still many years away.

Miners are just not adopting technology at a rapid enough pace. That's because blockchain is not a "disruptive" technology, which can attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly like we have seen with the shift from data centres to cloud services providers.

Blockchain is a foundational technology. It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into the global supply chain until other industries that have much stronger balance sheets with an appetite take hold of the blockchain and prove out its usefulness so other industries like mining can follow without running the risk of deviating from their core business model.

The process of adoption will be gradual and steady, not sudden, as waves of technological and institutional change gain momentum from government entities, financial institutions and leaders in supply chain automation, along with mining leaders.