Faced with the Covid-19 pandemic, mining executives are being forced to take swift action and make tough decisions as prices fall, economies contract and demand in key consuming industries declines. Three leading mining industry executives told Andrea Hotter about their responses to the 2008-09 global financial crisis, and what advice they might give their peers today.*
They say that hindsight is 20/20, and for the metals and mining industry, this was particularly true of the 2008-09 global financial crisis.
Anglo American chief executive officer Cynthia Carroll, who joined the company at the start of 2007, had spent her inaugural months working to improve the miners safety record and optimize its assets. The board recruited me as a change agent, she recalled. Safety of the companys mining operations was a key area for her attention and one in which the company achieved major improvements under her leadership. Anglo also wanted to add more iron ore to its commodity base, and fundamentally uplift its performance, she added.
The new approach was working. The London-listed diversified miner reported record earnings and operating profits for the first half of 2008 and had an approved project pipeline of $15 billion. By the summer of 2008, commodities prices were at record highs in the midst of a super-cycle boom. China, the engine of growth for the commodities sector, was on track to see another year of double-digit gross domestic product growth.
China looked as though there was no stopping it in terms of growth and development; infrastructure investment was booming, as was demand for commodities across the board iron ore, coal, copper, nickel, even platinum group metals. We thought demand was just going to keep charging ahead there was no end in sight, starting with China, said Carroll.
But then on September 15, 2008, the United States fourth-largest investment bank Lehman Brothers filed for bankruptcy protection. It was, as Carroll noted, a big wake-up call.
Looking back, the warning signs were there. Financial institutions had been marketing mortgage-backed securities and sophisticated derivative products at unprecedented levels, but when the real estate market collapsed in 2007, these securities slumped in value. A credit crisis began unfolding and, in March 2008, Bear Stearns collapsed.
Even then, the crisis initially seemed to be related to toxic mortgage lending in the United States and not the broader global macroeconomic economy.
The crisis was really something that was seen first and foremost in the financial markets. There were various financial instruments that were being discussed, I remember learning the new acronyms very quickly! said Tom Albanese, who headed up mining company Rio Tinto for six years from 2007 to 2013. The financial crisis was led by those financial markets as a leading indicator, and the mining sector was more of a lagging indicator, he added.
There were nonetheless some signs of the impact. For example, Albanese recalled noticing a severe contraction in construction activity in London, where Rio Tinto was headquartered. I remember coming in one Monday morning and from my office I could see about 14 buildings under construction, and that day, every single crane was stopped. You knew that something bad was happening, but you got a full, in your face, sense of what the extent was, he said. It
probably took another month or two before it plugged into the physical [metals] markets.
The contagion quickly spread to other economies around the world, most notably in Europe. By the end of the year, the prices of aluminium, coal and iron ore had more than halved; in the case of copper, a leading economic indicator due to its use in housing and construction, the market had collapsed from above $8,700 per tonne to $2,900 per tonne.
It was the classic Black Swan event that mining executives, like most of the rest of the world, simply did not see coming. It also made it impossible to know when and how the situation might end.
Everyone was second-guessing, Albanese said. You heard the terms green shoots, V-shaped, U-shaped, L-shaped recovery, and then how long would it take would it take two years, five years? Even, would the economy ever recover? Because some people were saying it would never recover.
So, when he was asked for his view of a future recovery on February 14, 2009, also known as Saint Valentines Day, Albanese suggested that the markets would see a LUV-shaped recovery!
I said, I think its going to be an L-shaped recovery in Europe, a U-shaped recovery in the United States and a V-shaped recovery in China. [My answer] was tipped for the Valentines Day spirit but thats actually how it played out, he added.
Without absolute certainty of how the 2008-09 downturn might turn out, mining executives set about scenario-planning for various outcomes.
Nobody knows how a crisis will play out and how long a time it will last. For us it was about trying to develop scenarios, said Svein Richard Brandtzæg, CEO of Norwegian aluminium producer Norsk Hydro for a decade from January 2009. We knew at that time we could extrapolate trends and try to build on history, so it was about looking at how bad could it be and how could we manage that, even in different, really bad scenarios, he added.
Companies and their management teams sprang into action. Some set up specific names for their initiatives, some did not; but the common thread was that measures undertaken across corporations was very similar.
Norsk Hydro commenced a three-part programme called Agenda 2010, centered on navigating the storm, staying focused, and shaping the future. Anglo American created One Anglo, designed to bring the company together and continue to drive the work that Carroll and her team had already been undertaking. Rio Tinto, which had already undertaken a One Rio Tinto programme before the crisis hit, continued its value creation strategy with a focus on strengthening the business during the downturn.
We [at Anglo American] were preparing for all eventualities and we were thinking about multiple scenarios. I knew that we would be in a much better place because of the work that we had done over the first two years, but we couldnt stop, Carroll reflected.
As CEOs set about leading their companies through the global financial crisis, they faced challenges on multiple fronts. Managing their assets was a key test, and in particular deciding whether or not to curtail capacity as commodities prices fell and demand in key consuming industries was crimped.
You have to go through the difficult task of determining how many of your operations should be running in this market: Where do they sit on the cost curve, what is the cost of shutdown, what is the cost of reopening, what are the other considerations that take place in that? Albanese said.
Rio Tinto cut a substantial amount of its aluminium smelting capacity as well as rolled back iron ore shipments and production capacity at various operations around the world.
According to Albanese, curtailment decisions are initially made based on the cost structure of assets and whether they are making money. If the operation is making cash, how can you basically keep the costs down so that it preserves itself in case things get worse? But if the asset is not making cash flow, then you really have to think, what are your options? he said.
It is a view echoed by Carroll, who noted that Anglo American cut or stopped really high-cost production, particularly in platinum and coal. Every production unit, whether it was an ounce, a tonne or a carat, we analyzed. It had to be profitable or become profitable in the very short term, she said.
We created visibility of our cost positions across the group so everybody knew where they were positioned on the cost curve, everybody knew that they had support to get to a better position, and we gave them the tools and support to help them to get there, she added.
But miners and processors considering production cuts cannot ignore safety or care and maintenance, including of associated asset infrastructure, Carroll cautioned.
Some operations are easier to move into care and maintenance than others, with the cost of idling an energy-intensive aluminium smelter being much higher. Typically, decisions to cut aluminium smelting capacity are not taken unless the cuts are slated to last for at least a year.
If an aluminium smelter cut is shorter than that [a year], youd probably think, well, let us keep that capacity running. It is very much about how you believe the crisis will play out... If you think the crisis will take a long time, you take out capacity, Brandtzæg said. But that capacity will be out for a while and it will cost a lot of money to bring it back again. In that respect you try to keep capacity going to see if the crisis will pass and things will improve, he added.
Take or pay power contracts can also be prohibitive to cuts due to the cost associated with idling capacity while still having to pay for the high level of energy that smelters use.
Eventually, however, producers tend to look at their peers and see whether curtailments can be postponed because someone else will make them instead. At some point in time there is a bit of gaming theory whose is the first production to go to support the supply/demand picture in a lower demand environment, Albanese said. But for the most part, it wasnt like you see in retail and other industries, where youre always worried about competitors. First and foremost, youre focusing on what your operations are actually doing and whether they are sustainable in [difficult] kinds of markets or not, Albanese added.
Mining CEOs had to make some difficult decisions quickly in an effort to create the resilience for what might lie ahead. One of those tough decisions was what to do about dividend policies.
Anglo American was faced with the choice of either cutting all its capital expenditure and retaining its dividend or continuing to invest in select projects that would deliver substantial value on the short-to medium-term and suspending its dividend.
After a lot of deliberation, we decided to suspend our dividend, Carroll said. We cut 50% of our capex, and we suspended our final dividend, focusing on cash preservation and safeguarding the balance sheet. I can tell you, this is a terrible thing to have to do it was a tough choice and decision to make, she added.
The move was unpopular with a couple of the companys more vocal shareholders, but Carroll noted that Anglo American was not alone in cutting its dividend and did not undertake rights issues as many of its competitors did.
The company restored the dividend the following year as the balance sheet was strengthened; the projects it had been supporting delivered about $800 million in cash about two years later. Anglo American reported profit of $2.4 billion in 2009 and $6.5 billion in 2010. Investors were very pleased about that performance, Carroll said.
At the same time, miners set about working to improve productivity with a focus on improving efficiency and pushing assets further down the cost curve. These initiatives were aimed at preserving value for shareholders by conserving cash flow and reducing levels of debt.
Brandztæg noted that a central tenet of Norsk Hydros Agenda 2010 programme was to change the companys mindset away from focusing on long-term profitability towards focusing on short-term cash preservation. It was about releasing working capital and cutting costs as much as we could, he added.
Just as some facets within mining and metals get prioritized during a downturn, others get put on the backburner.
Exploration budgets typically fall victim to being slashed during tough times as mining companies seek to preserve cash. It all too often means that some metals are faced with a dearth of projects for years to come as pipelines thin and junior exploration firms typically the source of new future assets for bigger producers are unable to survive.
Unfortunately, its always the case that the first thing to go is always exploration. You stop thinking about what your portfolio looks like 5-10 years from now and think about how you get through the next 90 days, Albanese said.
And while research and development (R&D) is often also a casualty of belt-tightening measures, it can pay to keep this intact. The real no regret I have is that we actually kept automation going in Western Australia, developing our Mine of the Future technology and innovation project. That was a benefit as we went forward, Albanese said.
The project started as one of the worlds biggest private sector trials of robotics, comprising a fleet of mining equipment that loaded and hauled ore automatically. The system eventually revolutionized productivity and the way mining is conducted, creating one integrated mining processing and logistics system controlled by operators almost 1,000 miles away.
In 2008, people were referring to the Mine of the Future as being like Star Wars, and not as a compliment but in a derogatory nature! But it moved very quickly from something that one or two companies were doing to something that will become as uniform for the industry and every company as looking at an iPad or a computer, Albanese added.
It was a similar story at Norsk Hydro, whose R&D activities fell into the shaping the future category of its Agenda 2010 programme. We know from previous serious crises that innovation is sometimes accelerated that is what we have seen during world wars but also during crises, Brandtzæg said.
There can be opportunities in a crisis. Norsk Hydro emphasized R&D during the 2008-09 global financial crisis because it knew it could make additional efforts and deliver even better innovation through R&D, he added.
He cited the energy-efficient aluminium production technology being used at a pilot plant at Karmøy in Norway as a good example of the value of continuing R&D even during tough market conditions. The pilot plant started operations in January 2018 and has exceptionally advanced climate- and energy-efficient aluminium production technology. The facility, located at Hydros existing aluminium plant at Karmøy, will add 75,000 tonnes of aluminium production per year to the existing capacity of around 200,000 tpy. The technology developed by Hydros researchers will substantially reduce energy consumption in aluminium production.
Mergers and acquisitions
The 2008-09 crisis also presented another inevitable opportunity for mining executives: growth in mergers and acquisitions as mining companies re-evaluated their portfolios and sought to divest non-core assets.
Some were on the receiving end of approaches, like Anglo American, which rebuffed a merger offer from industry peer Xstrata plc. The deal did not gain any momentum with Anglo Americans shareholders, something that Carroll attributed to the fact that it was not viewed by the companys board or its stakeholders to be the merger of equals that it was being portrayed as.
It was not a merger of equals. It was June 2009, we had much more valuable assets and a commodity portfolio that stretched across bulks, base and precious metals, Carroll recalled. We pushed back very hard to say, this is not a merger of equals, and we certainly demonstrated that we were in a very strong position, she said. Xstrata eventually dropped the proposed deal four months later, ahead of a former put-up-or-shut-up deadline imposed by the United Kingdoms Takeover Panel.
Other miners made approaches that did result in deals, like Norsk Hydros purchase of the aluminium business of Brazilian miner Vale.
As I said, in such a crisis situation there will always be opportunities! Brandtzæg laughed. Negotiating directly with Roger Agnelli, then Vale CEO, the pair were already finalizing the details by the start of April 2010, signing the deal a few weeks later. It was very much about securing raw materials for our aluminium production, which had been an issue for the company for several decades, he added.
It is sometimes said that real leaders are not born they are made, and very often forged in crisis. The need to be seen, to communicate and to act as a motivator became particularly clear to mining management during the 2008-09 downturn.
In many ways, the CEO has to be a bit of a cheerleader; keep the teams motivated, encouraged, focused on what they need to do as part of the solution. You have the CEO and the executive team, but you also have an organization with tens of thousands of people, who are also wondering what this means for their job, for family members that might have job losses, Albanese said.
From a CEO perspective, first and foremost youve got to get out there, youve got to communicate better, youve got to encourage the organization to stay focused, so you have the ability to react, respond and reposition, he added.
Carroll agreed, noting that CEOs have to keep connected with their entire organization and not just the management. You have to keep engaging, you have to be inclusive, and while maintaining the momentum, drive, focus, encouragement and the pace, she said.
Failure to communicate with stakeholders, internally as well as externally, can be very isolating.
I am observing today a lot of CEOs and business unit heads acting in silos and thats not the thing to do, Carroll noted. CEOs should be having dialogue with a range of participants in the industry as well as those outside, in nearby jurisdictions, to learn what theyre doing and, in some cases, solve problems together.
The 2008-09 downturn was a financial crisis; just over a decade on, the mining industry is facing a devastating health crisis in the Covid-19 pandemic.
While both crises severely impacted the sector, the big difference in 2020 is that, in addition to the crash in demand amid a broader economic downturn, the metals and mining industry is also currently facing a supply shock while miners curtail production and rein in project plans.
Prices began the pandemic nowhere near super-cycle highs, and markets had already been grappling with trade wars, broader economic uncertainty and the prospect of slowing global growth.
The current reduction in supply, which previously may have given metals prices a boost, is now being met with a big hit to demand. How that supply/demand balance evolves is unlikely to be clear until the dust settles, and the coronavirus is fully under control.
The mining industry did not drastically change the way it did business after 2008; we thought about preparing ourselves in a much more diligent way but returning to work today will be very different. We need extreme and additional controls in terms of screening, testing, increased sanitation, social distancing this is a fundamental change that is not going to go away, Carroll said.
The Covid-19 crisis will clearly be alleviated once a vaccine is developed and distributed, but even economic stimuli will not have a huge impact until that happens. The economic recovery period in this case will take years and years, she added.
Near- or re-shoring is, meanwhile, likely, as companies seek to diversify their supply chains, while digitalization is likely to accelerate further, the executives said.
At the same time, the volatility created by crises like Covid-19 is adding a layer of uncertainty to the development of large-scale projects that take a decade or more to progress and are highly capital intensive. This means that mining projects are likely to be developed over time in phases instead of over longer periods with less visibility, said Albanese.
Well hear more and more about phasing operations rather than starting with the biggest thing that can be envisaged; starting smaller and progressing the project. The trend towards phasing projects from a more modest start and then giving yourself time to develop it, not only is it capital friendly, but its actually more resilient in this market, he added.
If a crisis teaches anything, it is that companies should be ready to expect the unexpected. We sometimes feel very surprised when there is a crisis, but when we look back in history there have always been crises, and you never know when they are coming. There will be Black Swan events in the future, but we have learnt through crises that companies need to have a decent financial situation and an inherent flexibility to use when a crisis hits, Brandtzæg said.
Most of all, this is about organization capability to be able to develop organizational competence and capability to handle such a crisis will be crucial for any company.
*This article is based on a series of three separate on-line executive interviews conducted by Fastmarkets special correspondent Andrea Hotter in June 2020. Recordings of the full interviews can be accessed here: https://content. comms.euromoneyplc.com/ CEO.html
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