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Effective mining and metals capital project execution - The consequences of risk - EY - Global

Effective mining and metals capital project execution

The consequences of risk

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"In mining and metals, the consequences of project execution risk are real, immediate and severe — there is a substantial corporate strategic benefit for investing in effective risk management and mitigation." Loretta Hudson, Advisory, EY

The mining and metals industry wouldn’t exist if not for risk-takers. What separates success from failure is having a clear definition of what constitutes ‘acceptable risk’ for a project, then avoiding or mitigating that risk.

Failing to address risk can lead to consequences that span the spectrum from mere inconvenience to grave danger. The following examples illustrate some of the potential consequences of project execution risk:

Failure to deliver against agreed plans — Realized delivery risks will typically impact one or more of a project's cost, schedule, scope and quality parameters. Where impacts represent a material variation from approved plans, a critical review of the project's alignment to Business Case assumptions and rationale may be required. Late-stage Business Case modifications have the potential to undermine the project's investment case and severely impair stakeholder buy-in and confidence.

Loss of competitive advantage — For many mining and metals companies, the ability to efficiently and predictably operationalize assets and infrastructure forms a key source of competitive advantage. As commodity prices, commercial terms and the competitive landscape constantly change, the window for timely project delivery is finite. When risks result in project delays, cost overruns or quality defects, many companies will feel a direct impact on corporate performance and competitive advantage.

Damage to reputation — Leading mining and metals companies recognize the essential disjointed role of corporate reputation in securing and maintaining a social licence to operate. The risk of health, safety, environment and community incidents is ever present, demanding high levels of delivery discipline and management vigilance. Where policy, process or control break-downs do occur, and an incident results, mining and metals companies must respond immediately to prevent long-lasting reputational damage.

Claims and disputes — The scale, complexity, risk and uncertainty of capital projects increases the potential for claims and disputes with delivery partners. The vendor selection and commercial negotiation process should ensure all parties have a common understanding of scope, dependencies, commercial terms and protocols for potential dispute scenarios. Where contractual agreements, performance targets, quality acceptance criteria and dispute resolution procedures remain ambiguous, project teams risk financial claims and disputes with embedded vendors.

Regulatory non-compliance — Mining and metals companies must operate within a complex framework of regulatory and statutory obligations. Compliance teams should actively maintain visibility of the scope of these obligations and communicate corresponding requirements to functional and delivery personnel.

When regulatory engagement is required, companies should maintain a single-point liaison team and coordinate engagement activities across their organization. Where compliance obligations and regulator expectations are not met, companies risk fines, forfeitures, business restrictions and reputational damage.

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