Resources sector update 2021: the year so far
In March last year, we were facing the deepest recession in over a decade. In a matter of weeks markets bounced back into the most extraordinary bull market in history, supercharged by record central bank liquidity.
As explored in my article in the AusIMM Bulletin last year, AltoPartners weighed the impact of monetary policy on the mining sector and its impact on remuneration levels. We considered three possible scenarios: inflation, deflation and a ‘tight rope’ between the two. Just over 12 months later, it is fair to say that we are still walking a tight rope. Inflationary pressure seems to be mounting for business and consumers, yet central banks remain convinced of its transitory nature. The lag in data means we will need to wait 6-12 months to get a clearer picture.
General wage growth remains muted. The Wage Price Index in Australia rose just 0.6 per cent in the last quarter and 1.5 per cent over the year. Anecdotally though, some sectors are experiencing acute talent shortages. With borders closed and immigration restricted, poaching and counter-offers are rife, and we should see this come through official statistics over the coming quarters.
Mining has not been immune from talent shortages and acceleration in wages. After the pandemic hit, the brief dip in commodity prices and quarantine restrictions saw many operations limited, suspended and some even put on care and maintenance. Most of these have now restarted, and we are experiencing a synchronized boom across mineral commodities.
While many industry pundits are following the ‘post-GFC playbook’, this boom is very different to that of a decade ago. In a recent ‘Industry Pulse’ survey of mining industry leaders, we noted the following trends:
Majors are restrained
The majors are enjoying the returns from projects built in the last boom. They are much less leveraged than a decade ago, but cautious of the surge in commodity prices. The majors are also using conservative commodity price forecasts for evaluating new greenfield projects and new acquisitions.
Exploration is booming
Minerals exploration is booming; metres drilled and dollars spent in the ground are at near record levels according to the latest data from the Australian Bureau of Statistics. Printed money and wild speculation has driven market capitalisation of some mineral explorers to extraordinary levels, well beyond the sensible price forecasts of any majors they are hoping to deal with. Meanwhile, the green energy thematic has left oil and gas explorers behind; many are now reinventing themselves around emerging applications of hydrogen.
Mid-tiers are hungry
Most mergers and acquisitions activity is coming from mid-tiers, hungry to replenish and grow their resources and reserves with late-stage exploration and development projects. While mid-tiers have a greater risk profile than the majors, they are generally limiting themselves to controllable risks like technology and execution risk, rather than sovereign risk or commodity markets. Large deposits in safe jurisdictions like Australia, Canada and USA are high on everyone’s list, and the premia attached to such projects is forcing companies to look at difficult deposits through new technological lenses.
Private equity is back
Much of the mining private equity world is still licking its wounds from a prolonged downturn, however some funds have emerged with success. New ambitious funds are being deployed, this time with greater scrutiny, oversight and step-in rights to leadership teams.
Consultants are stretched
Over 40 per cent of consulting firms have experienced a sharp increase in workload just in the last six months. Half of these are struggling to keep up with the workload. They have been particularly busy with due diligence, technical reviews and exploration consulting, particularly across copper, base metals and battery metals. Many of the projects under evaluation are progressing to the next stage. Over 85 per cent of consulting firms anticipate increased workload over the coming year.
Acute skill shortages on site
The perennial issue of attracting good people to site has been further exacerbated through border closures and immigrations restrictions. Offshore operations have suffered from expats returning home. These returning expats have taken some pressure off our domestic market, but state borders have impeded fly-in fly-out workers. Sites are chronically short of experienced technical professionals and trades, and they are particularly exposed around statutory ticket holders. Consultants and contractors are covering gaps – some across multiple sites. Remote operating centers and automation are helping somewhat, but not to the extent that our digital evangelists would have had us believe. Wages costs on sites are increasing rapidly.
While we are not back to the heady days of 2011, we are seeing expansion of corporate teams as they add more grunt to their business development, exploration and technical capability. We are not yet at the point of the cycle where growth teams are perversely incentivised to latch on to marginal projects, but that point will inevitably come. At that point, we expect a surge in recruitment of feasibility and project development teams as these projects pass investment stage gates. For now, companies can be fairly selective in the recruitment of corporate teams, and wage pressure is fairly contained.
There are many willing candidates for leadership roles, which has alleviated some of the inflationary pressure on executive remuneration. However, the surplus of willing candidates should not mask the scarcity of suitable leadership. Those with requisite track records and leadership capacity are increasingly weighing multiple offers. This has been particularly apparent in General Manager, Chief Operating Officer and Chief Executive Officer searches where domain expertise is critical, and remuneration is under pressure. That said, bonuses are being paid, shares are increasing, and options are in the money, which has provided an alternative to the steep pay rises we anticipated in our update last year.
Functional roles such as the Chief Financial Officer have been alleviated by talent transfer from other sectors, though experienced industry leaders within these functions still command a premium.
Boards likewise have not been subject to the same remuneration pressure. Firstly, there are many willing participants, though few are chosen. Secondly, the board cohort are less motivated by monetary reward, and more by contribution. Finally, board remuneration is generally limited by shareholder approved fee pools, so is less subject to negotiation.
The underutilised cohort
Meanwhile, there is a cohort of mining professionals in the later stages of their career who remain underutilised. They may be called up for desktop reviews, or occasional coverage, but they have capacity to give much more. Perhaps they are too cantankerous for a three-year board commitment, or their operational knowledge may be out of date. More likely though, they have just been forgotten. AltoPartners would be very happy to reconnect those seeking talent with some of these doyens.
More women needed
Given the industry’s progress, it is disappointing to see the percentage of women on boards go backwards slightly this year; the number of women has stagnated as the number of companies in the dataset have grown.
The business case for women at the top has been well established. Almost every board and executive search we conduct reflects this; we see almost universal demand for women on boards and in leadership. We need more women coming through senior management, board ready.
In this regard, it is encouraging to see more women in functional leadership roles, in legal, corporate affairs, human resources, sustainability and environment. We still need more women in operational and technical leadership. Employers need to provide support and reasonable latitude for women to get board ready and board connected.
The year ahead
In summary, the industry is riding an immense tailwind of stimulus, infrastructure spending and rotation into renewables. Regardless of inflation or deflation, and even with a change of gears from China, the tailwind looks unlikely to subside yet, and mining leaders and professionals will continue to be well-rewarded.
I look forward to working with many of you and helping you secure success in the coming months and years ahead.
A version of this article appears in the AltoPartners Executive Remuneration 2021 report. Download the full report from the AltoPartners website.