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Costs, consolidation and capital top risk list for miners
SYDNEY, MOSCOW, 24 August 2009 ─ Costs, consolidation and capital head the top 10 list of risks facing players in the mining and metals sector, compiled annually by Ernst & Young.
Ernst & Young Global Mining & Metals Leader, Mike Elliott, says the drop in metal prices and the capital drought caused by the global financial crisis have put pressure on mining and metals businesses.
“In 2008, capacity constraint issues such as skilled labor shortages and infrastructure bottlenecks dominated the top 10 list of strategic business risks, but this year it is all about funding and cash flow,” says Elliott.
“Boom-time ‘production at any cost’ attitudes have left an unsustainable level of costs for mining and metals companies, and with the fall in commodity prices, cost containment is now the biggest strategic challenge for the sector.”
Industry consolidation kept its number two rank on the top 10 list, by way of greater vertical integration, with Asian mining and metals companies at the forefront of cash-rich investors looking to make strategic acquisitions.
In the wake of the global financial crisis, access to capital is a new but major strategic business risk for the sector, jumping in at number three.
“Funding of new projects and refinancing of maturing arrangements can be challenging and is of particular concern in a sector that relies on a constant stream of risk capital,” says Elliott.
"Raising capital is particularly challenging for the Russian mining sector where such large projects as Udokan require billions of dollars in investment while the funding for such projects is no longer easy to obtain," says Evgeni Khrustalev, Partner and Head of the Mining & Metals Group in the CIS.
Ernst & Young’s Strategic Business Risk Report 2009 ranks the sector’s top 10 strategic business risks as follows (with 2008 ranking in brackets).
- Cost containment (6)
- Industry consolidation (2)
- Access to capital (new)
- Maintaining a social license to operate (4)
- Climate change concerns (5)
- Skills shortage (1)
- Infrastructure access (3)
- Access to secure energy (9)
- Resource nationalism (8)
- Pipeline shrinkage (10)
Elliott says supply-side capacity related risks are likely to re-emerge to again dominate the top strategic business risks in the sector.
“Skilled labor shortages, infrastructure bottlenecks, lack of investment in exploration and secure energy supplies are major issues for increasing supply and the underlying causes have not been addressed,” he says.
“Demand is not going to be a big issue going forward. What will be more significant is the ability of miners to capitalize on any upswing in demand given the supply capacity issues and given that the sector has shut down mines and scaled back production.”
Elliott says record debt-to-equity levels in the sector will only compound supply issues.
“Historically, the debt-to-equity level has been about 30% but by the end of last year that had gone up to 58%,” he says.
“The debt load combined with post-financial crisis reticence of lenders, means that businesses won’t be able to borrow as much to fund expansion.”
Holding their place in the top 10 strategic business risks are climate change and maintaining a social license to operate.
“These issues are only going to become more significant for the sector as community support for future mining and metals projects becomes even more critical.”
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