Extracting Value in a Down Economy – The Mining Industry in Canada
Helen Mallovy Hicks
Paul Murphy, the national leader for the Mining industry group of PwC Canada, and Normand Champigny formerly with the firm's Mining Centre of Excellence in Canada discuss how the economy has changed the mining industry.
Dean: Welcome to Strategy Talks with Dean and Helen, part of the PricewaterhouseCoopers Managing in a Downturn podcast series. I'm Dean Mullett, co-head of our Restructuring and Distress Strategy Group, and a member of our Credit Crisis Task Force.
Helen: And I'm Helen Mallovy Hicks, a Partner in the Advisory Practice of PricewaterhouseCoopers in the Dispute Analysis & Valuations group.
Dean: The current state of the economy is understandably of great concern for most Canadian businesses. This series of audio podcast discussions with a variety of subject matter and industry guests are designed to help your business weather the storm by exploring some of today's hottest issues related to the economic crisis.
Dean: Good afternoon, this is Dean Mullet. I'm flying solo today Helen is away on special assignment. Joining us is Paul Murphy, an audit and assurance group partner and a national leader in the PwC mining industry group. Joining via telephone from our Montreal office is Normand Champigny, senior consultant within the PwC mining group. Welcome gentleman.
Dean: I think that the mining industry captures the attention a lot of the Canadian people and the media and we read a lot of information of news and information on a daily basis. Today I'd like to talk about three broad categories and get your perspective as participants in the mining industry and share that with out listenership. I'd like to talk about people and human capital, the image of mining and financial implications. Why don't we start with people and human capital? This downturn, as we have seen, has lead to many plant redundancies across the industry. I believe that PwC Mine annual report has said about 40 thousand people. This often happens with seniority involved, and you see a lot of the younger generation exiting the industry, right at the time when a lot of them were actually flocking to the industry. What type of implications does this have for the overall outlook for the industry within Canada?
Paul: It has long lasting implications. This industry was, as always been global, has had a tremendous global focus. And really, the countries that have been the core of the industry for a number of industries have been Australia, South America, several countries in South America and Canada. They tend to have the educational institutions for training people as well there is a great camaraderie and working group out there that trains people in the industry. The industry, prior to the last few years, went through some very difficult times where consume capital people weren't earning their returns that they expected, metal prices were in real terms probably in all time lows.
Then we've gone through these few years where it has really ramped up and a lot of people have come to the industries because it's fascinating and it's high tech and it requires a lot of training. It takes a few years to build up that work force, and five years has not made up for the twenty years that went before that. People, including myself, are getting kind of on in years, there definitely needs to be some excitement and opportunity and a chance for younger people to come forward in the industry, and I guess really be bitten by the bug because it's a very fascinating, exciting place to be.
Dean: If you look at some planned redundancies that have been out there and if we take a look over the past six months and prospects, no pun intended, for the mining industry for that period of time — has been a bit of a rollercoaster. So planned redundancies — it is difficult to plan redundancies when the market is up and down. So maybe Normand you can comment on how some of the thinking around these planned redundancies is changing, or perhaps there is a bit of a retrenching to kind of rebuild some of that talent pool.
Normand: That's a good question and an important issue. A number of companies have been laying off a number of people compared to what they used to do a number of years ago. They will cut costs elsewhere before thinking about the redundancies; it does happen when they are shut down mines obviously or terminate plant expansion. There are a number of efforts at the same time to attract high quality people. For example, there is a workshop held by the industry in Canada, what is considered top quality talent that is very much needed.
There is also an effort to bring people from broader considered top talent for the large companies that can do this. Industry associations, governments and, very importantly, Aboriginal people in our part of the country, are working together on a number of initiatives to make sure that the industry is here to grow despite of the ups and downs. And there has to be local college programs, there has to be specific programs that will serve in mines in and around the areas that they are for better and provide for the town tomorrow. I think we are making progress through this at first by government and Aboriginal people. But making the progress is a bit worse because it does take time to attract new people, especially if you want the best talent available. At the same time of course the industry it is applying more and more technology which requires a high level of skills so we have to make sure that we have the right skill sets, so quite a bit of time has been devoted to identify what is going to be skill sets required for the mine of tomorrow.
Dean: I think that's a great segue into the category of image for the mining industry. Because you talk about the mine of tomorrow and we start talking about image, and historically mining has had this certain image and has maybe retained some of those characteristics in the public's mind and their perception around the industry around safety, environmental, corporate and social responsibility and things of that nature. I know that there are many things going on to address that, position mining is a different industry for the mining of tomorrow, differently than it has been in the past. Maybe we can discuss that a little bit.
Paul: Sure, maybe I'll start off and I'm sure Normand has a lot of views on this as well. It varies by country. In some countries, mining adds quite a bit to the gross domestic product. If you look to Australia, South Africa and Canada as well, maybe not as much — and it doesn't attract the headlines the following and the financial community as it does in the previous countries that I mentioned. This is a very high technology and we're talking a little bit about the people before, the easy mines to find were found a long time ago in the developed world. There probably are wonderful opportunities in the underdeveloped world, but the taxation, land tenure and various other issues have been established. In our developed world where we deal with most with mining, I guess with the majority of our work and clients are, there is a social license.
The industry is very aware of this, these projects require a tremendous amount of capital — usually a banking syndicate, protective security and the involvement of local governments as well as local people in the benefits come out of these projects. You see more and more companies embracing a social sustainability report that is, in some cases, subject to third party attestation and some cases it's just the company themselves trying to put forward the facts. As well, we see companies being more transparent about their total tax contribution; anyone can look to see what people file on their income tax return, but in terms of the employment you create, the multiplier effect in the communities, the pay roll taxes, the duties and the various taxes and royalties that these companies pay, it's always almost more than the income tax burden that a project bares. That has not gotten enough attention over the years as well.
Dean: Do you think that these transparencies Paul, that you're talking about, albeit being a total tax contribution and other social responsibilities, is that the industry responding because that's what the market is demanding, and perhaps there's an element of that, but do we see companies that absolutely get it and are leap frogging maybe competitors on the leading edge of really addressing some of those things?
Paul: It's increasingly to companies and we have some projects that we're working on for Alaska, we're doing some work in S. America, we're mining tax regimes that aren't terribly developed and the industry is pushing this and really trying to educate legislators as to because you're not getting income taxes doesn't mean you're not getting a benefit from this project and it will go on for a number of years.
Dean: If you start talking about maybe responsible exploration because that seems to be something that catches people's attention, because I think that some of things that people read in the press are about the mining industry of yesterday was perceived and that continues to come fore front of the press and it makes it difficult to change that image going forward.
Normand: It does take a long time to change the image; it clearly sends it to the past often but not forgotten, but talk about initiative and being involved myself, talk about Quebec which I think has leading initiative with ties in reclamation and expiration.
Paul: Yeah I think that the level of oversight has increased tremendously of course the years. But within the industry as well some of the strongest environmentalists are the people, the mine managers, the mill managers and they're interested in a long term social license to operate these properties. You look at the clean up that has happened in Elliot Lake, and I find myself on weekends occasionally up in the Sudbury area where years ago those lakes were poisoned. There were no fish and there were no trees and it's been tremendous the way that that has come back through the efforts of the operators of the area and mother nature itself.
Dean: Back in the latter part of 2008 and the first part of 2009, obviously the world is going through its financial crisis and close to home the mining industry was pretty hard hit by it. So I guess what we've started to see is maybe some improvements to that and maybe gentleman maybe you can talk just a little bit about how you see some of the flow of capital start to show some life.
Paul: Dean I have a couple of comments and then turn it over to Normand. I think it breaks down between; you can look at the industry and break it down between those companies with wonderful projects, wonderful opportunities, and companies with extremely strong management and with really strong balance sheet. As we went into these, certainly some of the gold companies had really strong balance sheets, they were sitting on hundreds o f millions of dollars and they could do deals. The worst part of November/December of last year, and I've alluded to it earlier, no matter how good your project was or how good your management was you couldn't raise money. There was just no liquidity.
That has gotten much better, now the industry has the ability to raise money and it's going to follow, the projects and the strong management and there are some very very good projects that are under development and those projects are going to be able to raise money. There are some juniors that have promising projects and they'll be able to raise certain amount of money but not what they were able to a year ago and they may have to team up with the stronger players in the industry. So I think you'll see a fair amount of M&A activity and you know the gold industry will continue to remain separate the base metals industry and you'll have gold doing gold deals and you'll have base metal companies doing their own deals as well. Maybe at that point I should turn it over to Normand and not hog it over all the time here.
Normand: We have seen a number increasing number of deals in the last two to three months and more transactions and that shows that there is a gain of confidence among industry players to get active again. The better projects are getting financed not the same level that they used to. Unfortunately the same companies that made deals that are now viewed as expensive are now viewed are suffering because they have a huge debt to repay and they have to sell assets, what they call non core assets, because they cannot match their commitments and they have to dilute themselves. They have, still today, two categories of players, the have and have nots, the have happen to have cash are able to move ahead and have nots are still suffering from expensive deals and debt to repay and restructuring for some time.
Dean: So the story that we'll continue to hear is capital markets is that are some that are strong and will continue going full guns a blaze going forward. But there are a lot of others who will have a lot of challenges will continue to have to work through those and in some of those challenges won't go away over night.
Paul: I think that's fair but the companies who maybe have the financial challenges as Normand was chatting about that still have solid world class projects and credible management will find their way through it. It will be much tougher for the ones that fall below that safety net.
Dean: We talked about game mining companies participating globally and perhaps punching above their weight from what we see other industries, Canadian industries, do on a global scale. I know PwC has a real focus on the mining industry, particularly here in Canada with plans to start our own center of excellence, perhaps you could share some of that with us.
Paul: Sure Dean. Well we've had a long sort of working history globally with this industry because the mines aren't all within close proximity of Toronto. I've worked with our friends in Australia and South Africa for decades, we know the people, know the projects and we have a pretty good understanding of local culture and demands. Recently, with the world getting more complicated, our firm has reorganized itself into these clusters. And because of the role that mining has played in the Canadian firm, Canada has taken on the role as cluster leader for the Americas, all of North and South America, Central America and the Caribbean.
We're going to initially focus on the really large players in that environment and we are looking to better understand the services that we have successfully offered to these global giants in this market and also look for opportunities where perhaps as a cluster involving maybe 40 countries there are some economies of scale in terms of the service offering that we have. We have always been fortunate that people have transferred back and forth from various offices. We have the land ridge, the contacts; we understand the taxation issues that these countries face. I guess as a center of excellence the one area where we could grow is we could bring forward more specific mines like services.
Normand: I want to add that the center of excellence aims at making sure to get the highest degree of collaboration, with professionals in the industries in the Americas to ensure that we present the best professional focusing on the key issues of our clients. So that takes us to a higher level of integration of our territory countries that are focusing on mining in the Americas. I think that everything we have heard from the clients that we've talked to that are working with, as well as PwC professionals, they see that as a way of the future. They see that it is the right thing to do at the stage.
Dean: Well gentleman it's been a real pleasure to have the two of you here today. Thank you very much for your insightful discussion. For more information on the mining industry please visit pwc.com/ca/mining.
Dean: This concludes this episode of Strategy Talks, part of the PricewaterhouseCoopers Managing in a Downturn podcast series. I'm Dean Mullett, thank you for listening.
Helen: And I'm Helen Mallovy Hicks. We hope you'll join us again soon for another episode. To download or to subscribe to this podcast series or to find more information on this topic, please visit our Managing in a Downturn website at pwc.com/ca/managinginadownturn.
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