Covid-19 and Commodities: The Mining Industry’s Recovery

The ongoing Covid-19 pandemic has upset the functioning of basically all industries, some for the better but most for the worst. South Africa’s mining industry has, however, for the most part, weathered the storm. Despite global circumstances and local disruptions, mining companies have continued to enjoy the gains in commodity prices, assisted by a weaker Rand, as platinum basket prices increased and investors turned to gold as a safe-haven investment amid concerns about the pandemic and global trade tensions.

Recent research conducted by McKinsey & Company shows that at a trough of the crisis, the price-drop range was 5 to 25 percent across major commodities. Additional data shows that metallurgical coal is down 21% and thermal coal is down 23%. While on the other hand, gold is up 19% and iron ore is up 18%.

Speaking on the topic, Cresco Director Conrad Hefer notes, “The recovery in the mining industry is dependent on sustainable commodity prices similar to what has been seen in the precious metals space. But sustainable commodity prices are dependent on global economic recovery which is not imminent due to the pandemic we find ourselves in. Data has shown that subsectors like precious metals will continue to benefit from this economic uncertainty, but overall, the road to the mining industry’s full recovery is an unsure one.”

Many have noted the substantial increase in some precious metals’ prices (gold prices in particular) due to the impact of Covid-19 on the world economy. Gold’s resilience comes as a result of it being is seen as a ‘safe’ commodity. Accordingly, investment in gold and other precious metal projects has been stimulated across the continent in the wake of economic uncertainty. There seems to be more equity and debt funding available for even junior project developers in the precious metals space.

Nevertheless, the sector, in general, has incurred its fair share of obstacles. Most of these mining operations are in remote areas and the inability to visit these operations has increased the risk with increases in lost production. Furthermore, from an operational risk perspective, most operators have had to put appropriate Covid screening and management protocols in place. Naturally, this came with unavoidable cost implications.

Moreover, mining companies are less likely to rely on consistent and reliable grid power and had considered captive power solutions during 2019. Unfortunately, the development of these renewable energy projects has significantly slowed down during Covid times – with the exception of South Africa, which has seen a substantial increase. This increase has been driven by Eskom’s financial and technical position though, rather than Covid-related concerns. While damaging, these elements did not cripple the powerhouse industry. But full recovery in the mining of certain commodities must still be achieved.

Looking ahead, there is marked uncertainty around industry recovery and the effectiveness of public health responses in controlling the spread and impact of the virus, both locally and internationally. Also, the short-term price trend for each commodity will be different and so, naturally, there is no one-size-fits-all approach to the industry’s recovery.

Navigating the mining industry’s turbulent future can be aided with context-specific financial modelling and diligent risk assessment. For this, industry decision-makers should consult with a hands-on financial advisory partner that understands local complexities, global markets, and ever-changing risk factors.

Cresco is an experienced industry leader, having added value to numerous mining projects on the continent. As new mines are founded and as established ones recover, we are proud to consult on, and provide feasibility studies for, mining projects and the streamlining of their funding, processing, beneficiation, and distribution models. We Enable Growth in Africa by simplifying business continuity and expansion through data-driven financial advisory.