Milk and marijuana: miners diversify in the downturn
With the price of iron ore and other commodities showing few signs of recovery in the short-term, a large number of miners are investing in growth markets outside of their comfort zone. From Gina Rinehart's entrance into China's infant milk market to the surge of Canadian juniors transitioning to medical marijuana, resource companies of various sizes have taken some creative approaches to spreading their risk.
The ongoing downturn in commodity markets has prompted a range of reactions from various sections of the mining industry. On one end of the spectrum, mining giants including BHP Billiton, Rio Tinto and Vale are increasingly looking to divest from non-core assets and focus their attention on a small number of large-scale resource projects that have managed to maintain profitability in a tough economic environment.
But while the majors are predominantly streamlining operations to maximise safe returns, other mining companies - usually smaller outfits without the scope to implement the same kind of restructuring - are looking to new and sometimes surprising markets to reduce their exposure to depressed commodities.
In an August 2015 interview with Australia Business Review, fleet management firm MineCorp's general manager Angus McIntyre laid out some of the challenges involved in diversification based on the company's experience of expanding its services from mining to other markets, including local government, emergency services and military applications.
"The downturn of the mining sector has both forced us and allowed us to start that diversification process, which is a good thing long-term," he said. "But it certainly has been tough and has a big effect on revenue and turnover...The challenge is proving to some of these newer sectors that the product and the offering that we provide still can fit the purpose of their industry. Their mindset is that we're mining and therefore probably too expensive for their requirements. Part of the diversification process has been to make sure we've got fit-for-purpose products for these other industries as well."
Mine service companies expanding to new markets is a good example of diversification in the face of the commodities downturn, but what about miners themselves? Resource companies of various sizes have taken some creative approaches to spreading their risk, from milk to marijuana.
In highly active mining regions like Australia, where cancelled investments and mothballed mines are becoming increasingly common due to slowing Chinese resource demand, a trend has been emerging for small and mid-sized mining companies to make the switch to technology businesses to stay afloat, just as many did during the dot com boom of the late 90s.
Such is the prevalence of the trend in Australia that the Australian Securities and Investment Commission (ASIC) warned Western Australian mining companies in summer 2014 to ensure that shareholders and the wider market are aware of their new business models. ASIC identified 12 mining firms in Western Australia alone that had already made the switch to tech models, with around 30 more expressing an interest in doing the same or with applications pending.
"Where there is this change of business activity there needs to be a good discussion about what the new business model is going to be," said ASIC commissioner John Price.
Gina Rinehart: milking the Chinese market
Many mining companies with the funds to expand have been buying their way into new markets. Gina Rinehart, Australia's richest person and majority owner of Hancock Prospecting, has invested money in increasing her presence in a number of Australian industries, including cattle farming and media. More recently, the mining magnate, whose iron ore projects are particularly vulnerable to declining steel demand in China, has made moves to take advantage of another commodity receiving much healthier demand in the Chinese market - infant milk formula.
In November 2014, Rinehart announced her intention to invest A$500m in Hancock Prospecting subsidiary Hope Dairies to set up Australia's largest dairy operation with the primary aim of serving China's vast and growing formula market. A massive milk poisoning scandal in 2008 has driven demand for Western baby milk products, and with the relaxation of China's one-child policy, that demand is set to almost double within three years.
New Zealand dairies have been the primary beneficiaries of this export market but, with a free trade agreement signed between Australia and China at the tail end of 2014, tariff cuts should see Australia begin to compete more strongly with its neighbour for Chinese business.
Hope Dairies spokesman Jason Morrison said the project, which is expected to start production in 2016, will take advantage of Queensland's reputation for high-quality dairy products while keeping all economic benefits local. "We have this premium product, we have an avenue to get it there, we're going to do the complete value-adding in Australia," he said. "It's processing, it's canning, it's exporting, right down to the marketing of it, so it's a real integrated programme and strategy."
Other mining companies have been making the same switch to producing Australian food products for the ever-growing throng of middle-class Asian consumers. Canada-based iron ore developer Century Iron Mines entered the Australian agriculture sector in July 2015, kick-starting a new venture to export eggs to Asian markets including China, Macau and Hong Kong, in a bid to generate revenue while the company holds out for an iron ore price rally.
"Due to the downturn in commodity prices, Australia's moving its focus from mining to dining," Century Iron Mines CEO Sandy Chim told Reuters in August. "We see a good opportunity to start a small but meaningful food distribution business that can capitalise on our network in China."
Going to pot
In Australia and Canada, which host large numbers of junior miners and exploration companies that are struggling to deal with rock-bottom demand for new sources of metal, mining companies are increasingly turning to marijuana, a market that would likely have proven too controversial just a decade ago. Today, the increasing recognition of the plant's therapeutic value has created new, potentially lucrative 'cannabusiness' opportunities, and with trailblazers like the US state of Colorado providing successful case studies for more wholesale legalisation, the sector looks well-placed for growth.
A May 2014 story in the Financial Post noted that over a dozen junior mining companies in Canada had announced a pivot into medical marijuana, with more jumping on the bandwagon since then. Furthermore, many smaller outfits are abandoning mining entirely rather than simply diversifying their activities. Gold explorer Affinor Resources became Affinor Growers last year after a takeover and restructuring that saw it transform from a mineral explorer into an agriculture and medical marijuana company.
"[Affinor Resources' executives] were clearly looking for something to do with this shell that they'd been keeping on the market, because the mining thing just kind of went bust," Affinor Growers director Nick Brusatore told the Financial Post last year.
In an August interview with Reuters, John Fowler of Canadian former gold and copper explorer Supreme Pharmaceuticals, which is now seeking a licence to grow medical marijuana at its new greenhouse facility in Ontario, said: "With the downturn that the mining industry has suffered, I think the smart and innovative entrepreneurs in the sector are looking for other asset types that can rebuild businesses and restore lost value for shareholders." .
Similar moves into agriculture, cosmetics and technology by mining companies in Canada, Australia, South America and elsewhere provide abundant examples of the many diversification methods employed by the industry to adapt during the bust years of the commodity cycle. While the growing numbers of junior and mid-sized companies abandoning the resource sector entirely has raised some concerns that there won't be enough exploration capacity if and when the market picks up again, immediate survival tends to trump long-term strategy for companies in the red.