Business risks in mining and metals 2014-2015

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Productivity tops mining risks

Productivity tops mining risks

The need to address the decade long decline in productivity due to the sector’s quest for growth during the supercycle has pushed productivity to the top of our risk ranking.

EY – top 10 mining risks over 7 years

Boards and CEOs are now realizing that regaining lost productivity and gaining new ground is critical for long-term profitability and achieving an adequate return on capital employed, and requires a whole-of-business response. This broad transformational approach is essential and is yet to be applied effectively by any one sector participant. This huge step change is why this risk is top of the ranking.

Although the top risks have shifted around in the ranking, there has not been a substantial shift in priorities. The risks themselves have evolved greatly over the year with the prolonged commodity price dips which have thrown up many issues for the miners.

Moving up into the top 10 this year is access to water and energy, which is becoming an increasing issue as demand rises, costs increase and availability diminishes.

Capital allocation and access – diverging and unique challenges

The capital allocation dilemmas have fallen from last year’s top spot, reflecting progress made during the year in addressing this challenge.

Steady progress has been made by the majors on capital management and optimization following a spate of asset write-downs in 2013. Capital discipline is expected to continue, but the question now facing companies is what form the next phase of investment will take, and when stakeholders will begin pushing for this.

However, at the other end of the sector, little has changed in the past 12 months for many juniors and explorers and they remain cash-starved and focused on survival.

Social license to operate – engaging powerful communities

This risk has climbed to third position because the influence of a community to stop or slow projects is powerful and can end a project, no matter how exemplary a company’s track record is with social engagement.

The frequency and number of projects being delayed or stopped due to community and environmental activists continues to rise. Organizations cannot assume that acceptance by the community and its stakeholders will always be maintained. They should be integrating the activities required to obtain and maintain a social licence into the broader strategic plan of a more sustainable business.

Resource nationalism – both retreating and advancing

Maintaining its spot in the top five risks, there remain waves of resource nationalism by countries keen to gain a greater share of shrinking returns from the sector.

On one hand, some countries have changed mining tax policies to become more attractive to mining investment in a lower investment environment. At the same time, other countries have introduced mandated beneficiation, invoked use-it-or-lose-it and increased state ownership.

Emotive arguments promoting resource nationalism can only be overcome with meticulous and transparent revelation of the facts.

Capital projects – a conservative approach

This risk has moved into the top five due to the long trail of mega projects commenced during the boom that still need to be fully delivered. With a view to the next cyclical upswing, mining and metals companies are beginning to plan the next wave of projects.

While the public capital markets still do not have an appetite for investment in new supply, companies are beginning to quietly prepare for the inevitable investment as reserves need replacing and the cycle changes.

Mining companies do not want to make the same mistakes they made during the supercycle and boards will be demanding much more robust capital project management to avoid the failures of the past. In addition, with softening commodity prices, many companies are looking to extract more for less through increased productivity.

New entrant – Access to water and energy

Accessing affordable water and energy has become increasingly difficult, especially in South America and Africa. Burgeoning energy costs and competing water demands in many mining regions around the world are starting to have a bigger impact on costs and the ability to operate.

With global demand for energy expected to increase 36% by 2025, and with falling ore grades, this risk is compounding year by year, with the sector facing higher energy prices and volatility. Similarly, water scarcity is an issue demanding a strategic and practical response.

The top 10 risks

Risk radar for mining and metals

Top 10 business risks

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Under the radar risks