Resources sector update 2020: the year so far
An overview of the mining industry in 2020, its response to the COVID-19 pandemic, and three key scenarios that could play out in the coming months. Despite the obvious challenges, resources professionals will continue to be well-rewarded whichever way the economy turns.
Each year, AltoPartners collates demographics and remuneration of more than 20,000 directors and executives of publicly listed resources companies across Australia, Canada, USA and the United Kingdom. We have waited to release our resources sector update this year. This is partly to see how the tidal wave of central bank stimulus flows through, but also to observe company response and reductions to staff and remuneration.
In February, the trends of the last few years looked set to continue. As discussed in my mid-year update for the AusIMM Bulletin last year, gold and bulk producers powered ahead, explorers had glimmers of success despite weak equity markets, oil and gas markets remained soft, base metals fought against deteriorating global trade and battery metals struggled with oversupply.
When the COVID-19 pandemic arrived in Australia in March, industry was swift and effective in implementing safe working protocols, protecting many local operations from closing on health grounds. Restricted movement of personnel interstate and interoperation is affecting productivity, though anecdotally, this is much less than expected. We will know the full impact as production figures are released in the months ahead.
“Restricted movement of personnel interstate and interoperation is affecting productivity, though anecdotally, this is much less than expected.”
Outside Australia the story has been much worse, and international miners have been hit hard. From Africa to South America, major operations have been suspended to contain the virus. Travel restrictions are keeping many expatriate workers in limbo.
Meanwhile, the economic impact of the pandemic is still rippling outward, and the full effects are yet to be seen. Commodity markets have deteriorated, claiming some marginal operations. The number of distressed assets is rising.
Explorers and developers
While we are yet to see broad job cuts across industry, we are seeing furloughed staff and pay cuts across the explorers and developers. Pay cuts to board and executive ranks of between 20-50 per cent are not uncommon, yet the aggregate effect will not be visible until we run our 2021 report, given our data is retrospective. Against this backdrop, we are seeing some remarkable success among explorers, and the first signs of capital flowing back into the exploration sector.
The majors and profitable producers are forging ahead, and generally, maintaining a surprising surge in remuneration in the past year. Reduced demand has been offset by reduced supply from the closure of marginal operations and suspended operations in countries who have not managed to contain the virus. When travel restrictions lift, we may see an increase in M&A activity. For now, travel restrictions on conducting due diligence and closing deals are delaying completion of many transactions.
The way forward is uncertain, with numerous geopolitical and economic variables. We have outlined three broad economic scenarios and their impact on demand and remuneration for resources professionals. It is quite possible these scenarios will play out in sequence over the longer term.
Scenario 1: Tightrope
Central banks continue quantitative easing without stoking inflation or losing control of asset values and falling into deflation. Reduced demand is balanced by reduced supply, and commodity prices find a floor at current levels. The stock market continues to reward dividend-paying producers in a low yield environment. Exploration success will spur renewed investor interest in the juniors.
In my update last year, I noted that ‘one of the big issues facing the mining industry is a shortage of suitably qualified and experienced mining professionals.’ This still holds true in 2020, with executives, operational leaders and technical specialists in high demand, commanding a premium. Corporate and support executives will also continue to be in high demand. Meanwhile, demand will be in balance for the boardroom, with many willing and experienced directors to draw upon.
Scenario 2: Deflation
Central banks fail to spur economic growth. Weak demand causes widespread deflation. Governments embark on infrastructure spending to stimulate economies. Infrastructure-related commodities benefit, but many commodities remain under pressure, limiting growth of the resources sector.
In this scenario, there will be subdued wage growth, as companies continue the cost cutting cycle started in 2014. However, there are very few graduates in the pipeline for industry careers, and this will ensure that industry specialists continue to get well paid. Disruptive technology will continue to dominate the agenda, accelerating new professional streams that draw in from other sectors.
Scenario 3: Inflation
As economies recover, demand runs ahead of supply. Central banks cheer the return of inflation, but it may well be stagflation as broader wages remain subdued. Commodities enter a new bull cycle, led by gold, as fiat currencies continue their debasement.
The talent shortage will be widespread across the resources sector, much like the boom of 2004-2012. The talent pipeline is well short of industry demand, causing steep wage inflation in resources, and attracting transfer of professionals from other sectors. Industry professionals will be stretched to their limit, recruiting a downline who want to be paid more than they are, while training peers with no industry experience. Ineffective management teams and cost overruns sow the seeds of the next downturn. Investors will leave the sector until the cycle starts again.
Table 1 shows how demand and wage pressure could play out under each scenario.
Key: Projected YoY nominal increases to fixed remuneration.
- Balanced: Less than 2.2% (CPI)
- Moderate: 2.2% to 5%
- High: 5% to 10%
- Very High: 10%+
Resources professionals will continue to be well-rewarded, whichever way the economy turns. Real experience is becoming harder to find, and is not easily substituted. Whether you are introducing a new technology or a colleague from another sector, your team needs deep industry experience for success.
“Resources professionals will continue to be well-rewarded, whichever way the economy turns.”
Universities are not graduating enough resources professionals to meet the demand of industry in any scenario. Industry should be looking to support universities in creating, funding and promoting flexible learning solutions, so that the talent pipeline not only meets the demand of industry, but shapes a better industry.
A significant part of the solution is nurturing the talent we already have in industry. For a new generation, pay is only one consideration. Industry has made great strides in recent years to be more inclusive and equitable, with increased focus on a positive work-life balance, a greater sense of social purpose, and a more collaborative leadership culture. This needs to continue.
An inclusive culture should extend to the giants on whose shoulders we stand. Despite the apparent shortage of resources professionals, many remain underutilised in the later years of their career. The opportunity remains for industry to harness their experience on boards, in advisory roles, and as consultants and mentors. This will go some way to alleviating shortages and remuneration pressure in coming years.
Executive Remuneration 2020
A version of this article first appeared in the AltoPartners Executive Remuneration 2020 report. Download the full report from the AltoPartners website.