Mining – Executives are trading in their ‘growth for growth’s sake’ mentality and refocusing on capital optimization

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Gilles Bisson Ring of Fire KWG Resources chromite Cliffs Natural Resources

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THUNDER BAY – Mining giant Cliffs Natural Resources recently stated the company is delaying iron ore production at two of their mines. It is a move that Ernst & Young are stating is going to be a more frequent event in the mining sector.

Global mining and metals deal value and volume are down globally, with Canadian numbers falling 43% and 16% year over year in the first nine months of 2012, according to Ernst & Young’s seventh twice-yearly Global Capital Confidence Barometer.

“Our survey results reveal that only 38% of companies, down from 53% in April, are focused on growth in the next 12 months, while 27% are refocusing on business fundamentals, including cost reduction and operational efficiency,” stated Bruce Sprague, Ernst & Young’s Canadian mining and metals leader.

Cost inflation, slowing economic growth, heightened geopolitical risk and volatile prices have sparked this shift in mining and metals companies’ mindsets.

“Executives are trading in their ‘growth for growth’s sake’ mentality and refocusing on capital optimization,” says Sprague. “Nearly a third of our survey respondents cited cost reduction and operational efficiencies as key priorities in the next year.”

But confidence in doing deals is improving, with 28% of respondents expecting to pursue an acquisition in the next 12 months. That’s up from 18% in April.

“While the value and volume of transactions is down, mining and metals companies’ confidence in the current M&A environment is on the rise,” says Sprague. “Expect to see companies move away from diversification and toward synergistic deals that create economies of scale and take advantage of low valuations across the sector.”

Smaller deals and strategic partnerships are on the boardroom agenda as companies manage pressure to generate returns on investment, especially in light of recent cost overruns and integration issues.

“While many companies are refocusing on efficiency and cost control, risk management and capital allocation, new transaction opportunities exist for those with strong balance sheets — opportunities few can afford to miss out on in an era of intense global competition for resources,” says Sprague.