The global Top 40 mining companies are so far weathering the Covid-19 storm mostly unscathed, but the longer-term impacts remain uncertain and ongoing disruption is likely, according to PwC's Mine 2020 report.
The International Monetary Fund (IMF) predicts a 3% contraction in the global economy for 2020, but sees the mining sector in good condition on the back of a solid financial performance in 2019 and prudent capital expenditure.
PwC's forecast for 2020 suggests the biggest companies will take a hit to EBITDA of approximately 6%. This follows strong financial performance in 2019, with revenue up 4% to US$692-billion from the previous year, largely owing to higher commodity prices.
"We estimate that volatility in commodity prices and production as a result of the outbreak will only moderately impact the Top 40's profitability in 2020," PwC says. "The market appears to agree, with the Top 40's share price recovering more quickly than some of the major indices in the last five months."
PwC doesn't expect many mega-deals to take place in 2020 due to increased economic uncertainty, but says that the current conditions provide opportunities for the Top 40 to capitalize on smaller acquisitions in their local markets.
De-risk supply chains
Global supply chains have proven highly effective in driving down the cost of mining, as has a focus on hyper-efficiency, lean principles and just-in-time techniques. But the pandemic has exposed the vulnerabilities of this model, PwC says.
When borders closed and factories went into lockdown, those miners reliant on transient workforces, minimal inventories and low diversification struggled the most.
According to PwC, those miners may need to consider an alternative approach, improving inventory management combining with globally diversified or locally sourced and financially viable resources.
Anglo American (LSE: AAL), Nornickel and BHP (NYSE: BHP; LSE: BHP) recently announced initiatives to increase support for their domestic suppliers as a result of the pandemic.
Trends
Miners have been under pressure to set, track and report against environmental, social and governance (ESG) goals for some time. Over the last few years, stakeholders have ramped up their expectation, and ESG is now a fundamental part of investment and supply chain decisions.
"The Top 40 miners need to keep on the trends that existed pre-Covid-19, particularly ESG and cybersecurity. Currently, just 12% of mining and metals companies' CEOs are extremely concerned about cyber."
It's also likely that miners will need to boost investment in local communities for some time as the full impact of Covid-19 continues to play out.
According to the International Labour Organisation, the crisis is expected to wipe out 6.7% of working hours globally in the second quarter of 2020 - equivalent to 195 million full-time workers.
"Even mature, shock-absorbent mining businesses cannot endure such an impact in isolation," says PwC.
- This article first appeared in our sister publication, MINING.com.