Is the glass half empty? Or half full?
Today, the global mining industry is generally doing well: commodity prices have been strong and, balance sheets are healthy. Although there has been turbulence recently in demand for some commodities, over the next decade the industry is likely to benefit from rising demand, driven by the growing global middle class and the requirements of the energy transition.
But there are warning signs, too. The industry is lagging in innovation and failing to attract the workforce it needs. Many existing assets are declining, with deteriorating ore quality at mature sites; new ones are more challenging to develop. And costs for just about everything are high and rising.
Given these trends, and the unpredictability of commodity and market cycles, what can management teams do to generate attractive returns for their shareholders?
A McKinsey analysis of the performance of more than 200 metals and mining companies from 2001-23 found that, while commodity price changes are a critical factor in generating total shareholder returns (TSR), up to 50% of excess TSR growth—that is, after controlling for market pricing—came from company actions.
McKinsey ranked company performance by quartiles for growth, cost efficiency, and capital productivity, then analyzed excess TSR. The results were clear: outperformers consistently delivered above-median cost and capital productivity, and their core operations were strong. But to reach the top quartile of excess TSR, companies also needed top-quartile growth.
To generate this growth, M&A was critical; the biggest movers executed almost twice the M&A volume compared to those that remained near the bottom. By pursuing a mix of M&A and organic investment, then, fast-growing players with solid but not necessarily top quartile fundamentals consistently outperform their peers.
Stating the solution is, of course, much easier than achieving it. McKinsey has estimated the industry needs $5.4 trillion in capital investment by 2035 to scale up supply to meet demand—about 10 percent more than in the previous decade. But accelerating growth in mining may be difficult; there is less capital available and recent projects have delivered lower returns per dollar than in the past.
All this is happening in a world of change, particularly in regard to energy and the efforts to reduce greenhouse gas emissions. Moreover, lower-carbon technologies require different inputs. The UN estimates that to get near net-zero, the use of energy transition minerals such as lithium and cobalt will need to increase six-fold by 2040. While net-zero is far from inevitable—at the moment, the world is running far short—any acceleration toward renewable technologies will increase the relative importance of these minerals.
So, it’s a complicated time for mining, with both economic and social pressures building. To improve its chances to create value, the industry will need to continue to evolve and modernize. Here are two approaches to explore.
Scale impact from digital technologies, including generative artificial intelligence (gen AI).
Technology could boost mining productivity—but most digital investments don’t achieve what they are meant to. To get results, it’s important not to get distracted by the allure of shiny tech things, but to identify specific areas where digital technology can make a real difference, such as mine planning, process controls, maintenance, and capital productivity.
Connected, digitized value chains can give teams access to much richer data that AI can assess in new ways. For example, gen AI can analyze the terabytes of proprietary electromagnetic and seismic measurements related to resource extraction to inform decision-making. AI can also help run remote operations more safely and efficiently, by revealing cause-and-effect relationships and identifying problem areas more quickly. Maintenance technicians can use AI to process work orders, procedures, inventories, and parts databases to monitor machinery at work in the field. Capital project teams can leverage gen AI for generative scheduling purposes and rapidly assess the impact of unpredicted issues. That allows them to make informed decisions on paths to take weeks if not months faster.
Essentially, gen AI applies intelligence to data, with human judgment informing how, when, and why. Its uses in mining are broad, deep, and only beginning to be explored. Those who get it right could gain significant competitive advantage and above-average returns. Most companies in the industry have explored different AI use cases. Very few, however, have been able to scale its adoption to a level that truly transforms productivity and competitiveness. Scaling the impact from AI needs to be a priority for our industry.
Examine the culture. Some companies in the survey have bucked the industry’s prevailing low-productivity, low-growth trends. These outliers stood out in terms of operational performance. This didn’t just happen: they were systematic in establishing a culture of purpose, performance, and excellence. Among other things, they defined routines that promote continuous improvement; invested in skill development and capability building; fostered an environment of trust and accountability; and encouraged people to ask questions. The best cultures look not only at past performance, but also real time conditions, often using AI models. By doing so, they can address existing performance gaps and raise the bar for future performance.
For two decades, McKinsey has done research on organizational health. The consistent result: healthier organizations perform better, and this advantage increases over time. In fact, organizational health is the single strongest predictor of value creation.
For mining, as for every other industry, getting the right people on board is essential to create value. In a 2022 survey of industry leaders, more than 70 percent said talent shortages are holding them back from delivering on production targets and strategic objectives. Fixing this problem is not the exclusive task of the personnel department; the effort has to start from the top and be seen as a priority for everyone. In short, it has to become part of the culture.
Addressing the labor shortage challenge will require , organizations to modernize and adapt their culture to a newer generation of talent.
Change is not just coming to global mining: It is already here—and likely to accelerate. In order to play its essential role in the global economy, the mining industry has to go beyond business as usual. Those that adapt will fill up that half-empty glass.
Patrick Lahaie is a senior partner in McKinsey & Company’s Montreal office. Michel Van Hoey is a senior partner in Luxembourg. They are the global co-leaders of McKinsey & Company’s Metals and Mining Practice.
This article originally appeared in Global Mining Review