Moving from the back seat to the driver's seat
Mining and metals companies are grappling with unprecedented global supply restructuring in the wake of the super-cycle. Those that best manage the ever-evolving business risks will be best positioned to survive and thrive in the next cyclical upswing.
Future growth, productivity and capital access are the top business risks for miners.
The switch to growth is looming and assets are now still relatively cheap and ripe for opportunistic acquisition. Given the long lead time to develop new supply, decisions to invest for future growth have to be made now or long-term returns will be lowered.
It is the paradox that long-term reinvestment and growth is essential for the sustainability of the sector and yet public capital markets are still demanding the opposite. This has pushed “switch to growth” to the top of the rankings.
While most miners have commenced actions to regain the productivity lost during the “production at any cost” boom years, the need for sustainable and enduring productivity improvements remains vital for survival and prosperity. Even though some work has been done on productivity, there is still sizeable scope for improvement which is why this risk comes in at number two.
Productivity will remain the number one operational focus of CEOs throughout 2015-2016.
Evolving risks: resource nationalism and social license to operate
“Resource nationalism” and “social license to operate” (SLTO) round out the top five risks. While many countries are now actively seeking to attract mining and metals investment, mandated beneficiation and tax transparency measures around the world mean resource nationalism continues to be an ever-changing risk to businesses.
Similarly, while social license to operate can be considered a routine part of doing business for mining and metals companies, the nature of the threat continues to increase and evolve. Projects continue to be delayed or shelved completely because of conflicting community interests, with governments increasingly backing these communities.
Undiminished: price and currency volatility, capital projects
Price and currency volatility remains at number six. It has not diminished in the past 12 months, and continues to wreak havoc with many mining and metals businesses. It has been the large currency fluctuations and the focus on either price or currency volatility, instead of both, that has kept this risk high up on the agenda.
Capital projects also held its spot in the top10 business risks for mining and metals organizations. Despite significantly less capital being allocated to projects, development continues because of the long lead times for projects approved during the super-cycle. EY research shows that, apart from fierce competition for capital within mining and metals companies, massive budget overruns continue to plague the completion of these complex multibillion dollar projects. With the productivity of invested capital being a key issue for CEOs, there is an imperative to address the cost blowouts and overruns.
Increasing threats: access to energy, cybersecurity, innovation
While falling oil prices have brought some relief to mining and metals companies, the energy-intensive nature of the sector makes access to energy a key long-term issue. Securing sustainable, cost-effective and reliable energy supply from project conception will become even more imperative as companies expand operations to remote areas with underdeveloped energy infrastructure and reducing emissions and energy footprint becomes an imperative in developed countries. The increasing affluence of the population in these countries also means there is increasing competition for energy between the mining and metals companies and this community.
“Cybersecurity” and “innovation” both move into the top 10 for the first time this year.
Cyber-hacking in the mining and metals sector has become more widespread and sophisticated – in our Global Information Security Survey 2014, 65% of mining andmetals companies said that they had experienced an increase in cyber threats over the past 12 months, and this is likely understated as many incidences go unreported. The integration of IT and operations technology (OT) could make organizations more vulnerable to cyber-hacking but applying the greater levels of security and control around IT to OT will eventually enhance the integrated technology environment.
Being a victim of any form of cyber-attack can cost a company millions of dollars in lost production, threaten worker a threat to worker safety or cause massive reputational damage, by leaking of confidential or stakeholder sensitive information.
The focus on regaining lost productivity has also brought the lack of innovation in the sector to the fore, pushing it onto the risk rankings this year. Innovation will be vital to protecting and sustaining margins in the long term, and will be the key to maximizing revenues in the future.