covid-19 mining insights - assets.kpmg · mining consumables. access to skilled mining labour...

COVID-19 Mining Insights

April 2020

KPMG.com.au

Building resilience in uncertain times

http://www.kpmg.com.au

2 KPMG COVID-19 Mining Insights

© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

1KPMG COVID-19 Mining Insights

COVID-19 has created unprecedented complexities in the mining sector. This report by our restructuring and mining teams may assist you with the challenges and uncertainy for the Australian mining sector in an environment that is changing daily.

Miners are moving quickly to respond to the COVID-19 crisis by considering:

1 Staff health and safety

2 Safeguarding operations

3 Management of critical supply chain

4 Liquidity management

Key headline insights at this time include:

Commodity price movements have generally been neutral given USD appreciation. Commodity price decreases have been driven by market sentiment not typical physical fundamentals.

China’s domestic commodity supply and demand metrics have remained neutral with both producers and consumers closing operations due to COVID-19 restrictions.

Supply chain issues are arising and will continue for essential mining consumables.

Access to skilled mining labour resources remains extremely tight in the market and domestic and international travel restrictions are impacting labour and site logistics.

Miners are implementing strategies to protect staff from COVID-19 exposure and to limit risk of disruption to operations.

Access to debt and equity will be more challenging albeit there remains a high level of liquidity in the market which will be deployed at opportunistic times.

KPMG COVID-19Mining Insights




Commodity Prices and USD Exchange Rate Volatility

— Commodity prices, in USD, have generally fallen since COVID-19 disruption however the significant USD appreciation has largely counteracted the impact of commodity price declines to Australian operators given majority of mining revenue is denominated in USD (please see graphs further below and short-term movements). The USD is approaching levels last seen since 2001 – 2002.

— During COVID-19 disruption thus far, particularly since mid February 2020 the gold price has had significant volatility albeit, it has historically been a safe haven but has now moved to levels above pre COVID-19.

— Miners that have currency hedging in place will not have received the full benefit of the USD appreciation. Those metal miners that have hedging in place may be in a better position as a result of the USD appreciation and effect on commodity prices – this is likely to be the more vulnerable producers.

China Demand and Global Sanctions

— Demand and supply in China is at similar levels pre COVID-19 however general stock levels have fallen due to import and export restrictions globally. Over time global stimulus effects may drive commodity price increases back to levels pre COVID-19. At present commodity price decreases are mostly due to market perceptions, not based on typical physical market fundamentals.

— With import and export restrictions to China and now into Australia along with reduced activity across China, albeit activity is now improving bottlenecks exist with the transport of product between China and Australia. Shipping costs have reduced. China’s exports were down 17.2% in dollar terms and 4.2% on imports for January to February 2020.

— A number of key commodities produced by Australia include iron ore, thermal and coking coal, lead and zinc of which are also domestically produced by China. The shut downs imposed in China have impacted many producers and consumers resulting in a neutral impact between current domestic supply and demand for these commodities.

— Large miners who are major exporters are weathering the situation and have balance sheets to support the same.

— The US and Europe are major consumers of key commodities and we are yet to see the full effect of demand shifts and impact on producers as the COVID-19 environment continues to evolve.

Initial insights across the mining secor




Operational Supply Chain Disruption

— We expect to see supply chain issues arising and escalating due to import and export restrictions and reduced operational capacity by suppliers as a result of COVID-19 restrictions. Lag times for orders of essential mining consumables such as tyres, reagents and other consumables are emerging and will likely have further impact over the next several months. The Minerals Council of Australia is currently drawing together a list of critical equipment and supplies, including shortages in critical components to help identify other potential suppliers in Australia who may be able to assist, either because they manufacture and/or carry the components or are able to adjust manufacturing to make suitable alternatives.

— Domestic imposed travel restrictions will also create supply chain issues even if products have arrived to Australia and sit at port or warehouses ready for dispatch, however at this time of publishing we have not seen any major impacts. Current government regulations regarding shipping ports remains unclear however we observe that certain shipping ports remain operating to assist in delivering critical mining supplies, however 14 day isolation rules apply at certain ports and pending country of origin.

— We expect to see miners more closely examining counter party risks in respect to new offtake or product sale agreements and third party contractors who have, or are being considered for project works or operational contracts. This is both from a financial perspective and ability to provide adequate personnel to undertake the relevant services.

Human resources and staffing

— Prior to COVID-19 Australia had a skilled mining labour shortage. This position is becoming even tighter due to domestic travel restrictions including intra state restrictions and airline service reductions, albeit the Government has acknowledged that essential travel to site can continue to keep sites operating at this time.

— Added to the above, staff exposed or diagnosed with COVID-19 or staff returning from overseas are unable to work due to quarantine requirements disrupting operations in the absence of alternate staff or contractors being deployed.

— Miners are implementing strategies to reduce and limit staff and contractor exposure to COVID-19 by changing rosters and limiting interaction between swapping FiFo crews and other staff generally. Miners are unable to source any foreign resources at this time due to overseas travel and foreign visitor entry bans to Australia. However, the government is working with miners to ensure they can get workers in and out of regional and remote areas in accordance with health and safety requirements.

Initial insights across the mining sector



Access to debt and equity

— Like most listed entities Australian mining share prices have fallen which may impact existing lending or investment covenants which need to be dealt with, along with equity raisings.

— Current M&A deals will be impacted by the above, and also ability to physically access site as part of typical due diligence. In some cases such deals may be put on hold, delayed or even terminated.

— At the same time, certain companies may be seen as an investment opportunity for funders or investors at current market capitalisation value / share price value. There still exists a high level of liquidity in the finance market, and in particular with regard to private equity we expect at the appropriate time there will be an increase in the appetite for investment.

— Raising equity or debt will be more challenging in the current environment. Equity is more likely to be raised from institutional placement at this time and any debt facilities will likely be more expensive than pre COVID-19 with more stringent due diligence processes.

— Banks are protecting balance sheets and have limited appetite for project debt funding opportunities.

— We also expect to see a hold on new capital expenditure and construction projects in the short term as miners take precaution to preserve cash and facilities amid the current global situation, however we expect that most existing and commenced construction projects will continue.

Initial insights across the mining sector





COVID-19: How KPMG can helpMining Check-list

Stage Comments

1. Identify issues — Stakeholders; consider approach to employees, suppliers, customers, financiers, shareholders, the community and regulators.

— Impacts; consider supply chain, insurance, banking covenants, contractual, legal and PR.

2. Quantify financial impacts and know your options

— Contingency planning; “what if” scenario analysis and cash flow consequences.

— Update forecasts; assess short / long term operational and financial implications. Ensure forecasts can stand up under external scrutiny.

— Short term liquidity, cash flow and eligibility for the Government’s response package; critically assess funds or banking facilities available to absorb the downturn. Understand the implications of breaching banking covenants and options available to address this including your eligibility to access to the Government’s response package.

— Capital expenditure; assess current and forecast capital expenditure needs to determine whether any expenditure can be deferred or needs to be critically continued.

3. Action plan — Site health and safety planning; ensure policies and plans in place that protect employees, suppliers and customers and mitigate disruption to continuing operations.

— Workforce management; understand your options and right-size

— Clear work streams; responsibilities, actions and timeframes. Determine need for external advisers.

4. Stakeholder engagement — Manage key stakeholders; proactive, regular communication and reporting.

— Implement triggers; have pre-determined triggers in place if issues are not progressing.

5. Track and check in — Monitoring; report on performance, key drivers, KPIs and cash flow.

— Updates; establish reliable source for ongoing updates on COVID-19.

6. Focus on ecommerce — Focus on online and data: with store closures likely can leveraging your online business and engaging with customers via digital has never been more important.

7. Safe Harbour and insolvency

— Understand your options: See our COVID-19 portal for further information on the temporary Government relief to insolvent trading rules. While the changes provide some relief to Directors, for many businesses Directors will need to assess the Company’s position to either develop a turnaround plan, or pursue an insolvency administration. Directors need to continue to be mindful of their general director duties and assess if their course of action will lead to a better outcome than an immediate insolvency event.




COVID-19 – Issues and considerationsWhilst the potential impacts of C-19 continue to evolve, we acknowledge that your current focus is rightly devoted to your operations and customers. We encourage you to monitor the situation and maintain close communications with key stakeholders, and we have set out some likely considerations below.

Monday23 March

Sunday22 March

Monday16 March

Wednesday25 March

August

Time

Distress

SuccessI have concerns about my cash flow and operating performance

I want to sell non-core assets

I need to restructure the business model and/or operating model

I want to opportunistically merge or acquire

I need a new strategy

I need to refinance my

loans

Due diligenceValuation assistanceDebt adviceTax advice

I need to manage the business through this severe crisis

Debt adviceDue diligenceCash flow modellingValuation assistanceTax advice

Strategic advicePortfolio analysisSell side assistanceDebt adviceTax positionSafe harbour

advice

I need to make urgent disposals and/or implement shut-downs and site closures

Rapid cash and capital releaseRapid financial assessments including cost reductionCash flow modellingRapid pricing and margin improvement

Capital markets assistanceDue diligence

I needurgentcapital

I need morecapitalASX enters

a bear market

Insolvency laws relaxed

Current suggested end of insolvency

law relaxationCapital markets assistanceDue diligenceTax advice

Strategic advicePortfolio analysisDue diligenceValuation assistanceTax position

Third stimulus package announced

Further state/federal shut-downs

Considerations

Issues




During periods of excess money supply the value of “money” decreases, usually coincident with growth in gold demand/price and interest rate reduction.

Gold Price versus 10 Year US Treasury Yield 2000 – 1Q 2020

Gold price upward trend

QE — Quantitative Easing QT — Quantitative TighteningSource: Comex, US Treasury

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10 Y

ear

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ry In

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st R

ate

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Go

ld P

rice

(U

S$/

oz)

QE1 QE2 QE3GFC QT1

US$/oz 10 Year US Treasury Yield




LME Copper Quarterly Price Trend 2004 – 1Q 2020

US$ copper commodity price fall largely offset by stronger US$

Copper price effect in A$ revenue terms is broadly flat despite the sharp US$ price reduction

Current copper price in A$ is near its “mining boom” peak – a common theme for most commodities

Investment Incentive Price (IIP) aka Long Run Marginal Cost (LRMC) is the forward price expectation above which investment in new capacity earns ~15% IRR

At price cycle low points 25 – 30% of global supply is cash negative triggering a supply response to bring the market back into balance

Copper price flat for Australian producers

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1,000

2,000

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5,000

6,000

7,000

8,000

9,000

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12,000

28% production is cash negative (on 2015 US$ cost curve)

Investment Incentive priceUS$3.20/lb (US$7,050/t)

US$/t A$/t

GFC disruption & recovery

Source: London Metal Exchange, KPMG analysis

1Q 2

004

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Spot

Feb

‘20



9

Key contactsDiverse leaders with deep industry experience and extensive technical knowledge committed to client success.

Our National Mining Leaders

Martin JonesPartner Restructuring ServicesT: +61 8 9278 2003 E: [email protected]

Nick HarridgePartner Transaction ServicesT: +61 3 9288 6067 E: [email protected]

Trevor HartGlobal Leader, Mining Audit & AssuranceT: +61 8 9263 7110 E: [email protected]

Greg EvansPartner Mergers & Acquisitions T: +61 8 9263 7487 E: [email protected]

Key Restructuring Services Contacts

Peter McCluskeySpecial Adviser Restructuring Services, VICT: +61 3 8667 5769 E: [email protected]

Peter GothardPartner Restructuring Services, NSW T: +61 2 9458 1562 E: [email protected]

Ryan EagleGlobal Leader, Mining Restructuring Services, NSW T: +61 2 9458 1559 E: [email protected]

Andrew SmithPartner Restructuring Services, WAT: +61 8 9278 2005 E: [email protected]

Will ColwellPartner Restructuring Services, QLDT: +61 7 3237 5458 E: [email protected]

Tim MichaelPartner Restructuring Services, QLDT: +61 7 3237 5457 E: [email protected]

Our Footprint

Partners50+

Major Clients100+

Locations13

Employees700+



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The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation. April 2020. 488828289ENR

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covid-19 mining insights - assets.kpmg · mining consumables. access to skilled mining labour...

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