‘Volatility is the new normal’ – Teck CEO's plan to create certainty

VANCOUVER (miningweekly.com) – Commodity price volatility is the new normal as the mining industry is cautiously optimistic of the start of a new progressive price cycle.

“The fact that volatility is the new normal is unfortunate, but real, and we have to deal with that to create certainty. We are seeing higher highs and lower lows and the time between these is getting compressed,” diversified Canadian miner Teck Resources CEO Don Lindsay said at a mining conference, in Vancouver, on Monday.

He pointed to geopolitical changes driving extreme volatility, such as the excitement and uncertainty associated with the new regime in the US under President Donald Trump, Brexit, Russian meddling in international affairs, Chinese policy decisions and the Indian currency fiasco – all adding to the continued volatility of commodity prices.

Boards do not know how to deal with that volatility, he explained. “When it takes 15 years to get a project to a sanction decision, how do boards deal with this uncertainty? The sheer volatility makes long-term decisions difficult,” he said.

“We’ve been through a very challenging time – this time last year we had just come out of the single worst week in the history of commodity markets. Then, from the lowest of the lows, we’ve had unprecedented rallies, such as the best month for copper when Trump was elected,” he said.

He described the bottom of the commodity supercycle as the toughest downcycle since 1902.

“While we see cautious optimism from analysts and the investment community, a high degree of uncertainty remains. Unfortunately, explorers are the first to feel pinch on the slowdown and last when recovery comes. It’s coming but is still one to two years out,” he said.

CREATING CERTAINTY
Lindsay suggested a three-pillared strategy to create more certainty for the industry to make itself more resilient in an increasingly volatile world.

The first is cost. According to him, the volatility has forced boards to allocate capital more efficiently, and to focus on productivity to weather the economic storm. Teck started early to cut operational costs at its coal mines and managed to remain cash-flow positive at its six Canadian coal operations during a time when 18 US companies, including the largest, went bankrupt.

He also suggested that costs can be reduced by looking for synergies in partners, to optimise resources between major projects held by different owners. This entails combining balance sheets to reduce risks and project footprints.

The second pillar to creating certainty is access – the mining industry’s ability to access markets abroad, the ability of international capital to access the mining industry and the ability of local industry to responsibly access resources.

“One of the greatest challenges we face is the trend that is pulling the western world back from open borders and trade, and this is detrimental to an industry like ours that relies so much on international markets,” Lindsay stated.

He noted that Asia, and specifically China, remains an overwhelming force. “They are a major source of financing and they consume 40% of the world’s copper and zinc – the Chinese steel industry alone is ten times that of US. We need to be vocal in our support for free trade and free trade agreements as the western world moves back from open borders,” he argued.

Canada has fallen behind Australia in this regard. Australia recognised about 15 years ago that their economic future is inextricably linked to Asia generally, and China in particular, and worked hard to build ties with China that paid significant dividends between 2003 and 2009, when exports increased by a staggering 230%. The comparable number in Canada was 69%, Lindsay noted.

Meanwhile, Australia has completed a free trade deal that has eliminated 95% of tariffs between it and China, while duties in China remain on Canadian coal imports.

“The stronger [the] relationship Canada builds with the mining industry’s top market, the better off we will all be,” he commented.

Locally, industry must also have access to federal and provincial governments to establish certainty of land access to advance new mineral deposits. Working to establish efficient permitting processes to allow projects to progress in a timely manner, as well as competitive tax regimes and the development of responsible carbon tax rules are critical to supporting the domestic industry.

Lindsay’s third pillar is relationships. He noted that, as Canada celebrates 150 years since confederation this year, the country owes its existence in part to mining. “We also know there were mistakes made along the way. For much of 150 years, Indigenous people were left out and ignored. Even as recently as the 1970s land was taken from local communities who had lived there for generations, to build mines. Today it’s unimaginable. We have established dialogue and we, as an industry, have to fill the bucket – do nice things for the communities to get social licence,” he said.

Lindsay said revenue sharing agreements will strengthen ties with Indigenous communities, as shown in British Columbia’s Elk Valley, where all five of Teck’s metallurgical coal mines are part of one of the most comprehensive agreements in place in Canada.

“This starts with the explorers who usually make first contact with communities as ambassadors of the mining community. Just go meet the people first, without a plan, and start the process of gaining social licence from there,” he advised.