The mining industry has become a particular area of focus for my firm, Kerrisdale Capital Management. I am Sahm Adrangi, and I am the CIO of Kerrisdale Capital. At Kerrisdale Capital, we publish our opinions after investigative research on companies that do business in areas of our interest, such as mining.
Recently, mining has experienced some increasingly difficult problems that companies will need to overcome to grow. The future of mining is in the hands of the companies attempting to develop solutions to these issues.
In this article, I, Sahm Adrangi, will take a look at some of the hurdles mining companies face that could affect the future of the industry.
Kerrisdale Capital’s take on the value conundrum
Recently there has been an uprise of corporate earnings, cash flow, credit and a drop in debt levels. This often allows extra room to breathe in the budget of mining companies to invest in capital projects and engage in mergers and acquisitions.
Alternatively, the market has become volatile and constantly disrupted with rising demands from stakeholders, a wider talent gap, and diminished access to key inputs including energy and water. It is also worth noting that the Chinese economy has dropped to under 7% rather than its previous 12%.
It is possible that a definitive focus on community value could ward off attractive talent and support. On the other hand, long-term value could be driven on a differentiated business model. However, many have struck strongly to their legacy of strategy, which could be detrimental to their future.
Ethical problems as discussed by Sahm Adrangi
Never before has mining corporations had to directly answer to the general public. The emergence of smartphones and electric vehicles, have people questioning the ethics of how the metals and minerals used for these devices are being obtained. People are becoming increasingly concerned with ethical extraction and environmental protection.
Governments and communities now have the power to shut down or delay projects if mining companies are not adequately meeting the community’s needs.
Corporate social responsibility initiatives were previously approached as more of a compliance exercise, but it is shifting into stakeholder engagement programs. Social license to operate is beginning to turn into a pivotal strategic issue that either differentiates mining corporations or derails them.
Kerrisdale Capital evaluates strategic struggles
World-class ore bodies are often located in politically risky locations, in which government demands take the form of higher royalties, increasing requirements for beneficiation, resource taxes, and reclassification of commodities as strategic.
Additionally, water and energy resources are scarce in some regions. Energy can dominate a mine’s total cash operating costs up to 30% when considering diesel, grid power, compressed natural gas and liquid natural gas.
Also, international capital expenditure on water and wastewater used in the industry is expected to rise by about 23.5%. Fluctuating energy prices and the complications of valuing water prove to be major barriers, especially where the carbon and water footprints created vary between mines and regions.
A probe of complex choices by Sahm Adrangi
Consumer awareness, social licensure, geographic risk, and access to commodities are ongoing hurdles that mining companies must overcome to succeed. Mining corporations need to develop a corporate strategy to jump the hurdles of these ever-expanding range of issues. To succeed in the future, it is likely companies may need to create competitive ventures that are robust enough to generate value in their current scenario.
Sahm Adrangi: Meet the Author
Sahm Adrangi, CIO and Founder of Kerrisdale Capital, received his Bachelor of Arts in Economics from Yale University. As a well-known author, Adrangi has published research and several articles on areas of focus such as biotechnology, communications, and the mining sector. Mr. Adrangi shares his firm’s views on stocks, including overhyped shorts and underfollowed longs that are commonly misinterpreted by the market.