Miners told to reinvest profits to boost future growth
Mining companies have been urged to reinvest a larger portion of the windfall profits from the iron ore and gold price surge back into their own business.
Mining companies have been urged to reinvest a larger portion of the windfall profits from the iron ore and gold price surge back into their own business to boost future growth.
Mining industry investment will be one of the few bright spots for the economy over coming years, according to last week’s economic update by Treasurer Josh Frydenberg, with the industry forecast to increase investment in new mines and equipment by 9.5 per cent in 2020-21 as investment by other businesses falls by up to 12.5 per cent in the same period.
But at the same time investors, starved for dividends in traditional blue-chip areas such as banks, retail and industrial stocks, will be eyeing the strong prices fuelling profits at iron ore and gold miners with keen interest, with pressure likely to ramp up on mining boards as earnings season unfolds, according to EY mining and metals leader Scott Grimley.
Rio Tinto is the first major cab off the rank, delivering its half-year results on Wednesday. BHP and Fortescue will both deliver annual financial statements in mid-August, alongside the bulk of the major Australian gold miners.
Mr Grimley will lead a discussion on the recovery from the global coronavirus crisis to an audience of more than 200 senior executives from the sector on Monday, with the panel including industry heavyweights Mark Barnaba — deputy chairman of Fortescue and a Reserve Bank board member — and UBS global head of mining Glyn Lawcock.
Amid an uncertain and volatile outlook for markets and commodities, Mr Grimley said the sector should consider reinvesting a greater proportion of recent windfall profits into their own businesses to shore up their medium-term outlook, particularly through greater investment in technological innovation.
“The industry obviously suffered from the hangover of the boom in the way it managed its capital base, in that financial and capital discipline wasn’t as evident as it might have been — it was all about getting product out of the ground and delivered to get the highest price as quickly as possible,” he said.
“And you can still see that they are a bit more cautious than they might be because, I think, of the need to rebuild that trust around financial and capital discipline.”
But Mr Grimley said something of a “pivot” was now required to unlock productivity gains across the industry from automation and digital technologies partly pioneered by mining giants Rio, BHP, Fortescue and others.
He pointed to an EY report to the Minerals Council of Australia in early 2019, suggesting Australia’s miners could deliver productivity improvements of 9 to 23 per cent by adopting autonomous haulage technology, through investment in smarter exploration techniques and end-to-end processes across their businesses.
But an investment of between $9.4bn to $35.2bn across the industry would be required to unlock those potential productivity gains, according to EY, along with another $5bn to $13bn in training and skilling its workforce.
“We foresaw substantial investment opportunities both in digital technology and in the workforce, but that did require some degree of retention of these funds and reinvestment into their business,” Mr Grimley said.
“There’s obviously some aspect of that that goes on … we’re going to need growth, absolutely to get us out of the hole we’re in.”
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