Volatility re-sets risk agenda in mining & metals sector
Capital allocation, skills shortages, resource nationalism surge in risk rankings
Sydney, 29 June 2010 — Capital allocation has rocketed to the top of the risk list for mining and metals companies around the world, according to Ernst & Young’s annual Business Risks facing mining & metals report 2010, released today.
Skills shortages jumped to second spot on the risk rankings, up from six in 2009; cost management came in at number three; and resource nationalism surged to number four from ninth last year.
However Ernst & Young Global Mining & Metals Leader, Mike Elliott, says it is capital allocation that is creating the most complex global challenges for businesses in the sector.
“Volatility across commodity prices, cash flow, risk appetites and availability of capital are driving massive capital allocation challenges for mining and metals businesses,” says Elliott.
“Capital allocation was not such an issue 12 months ago – it has gone from below the radar to
become the biggest current strategic business risk for the sector.”
“The uncertain economic environment and massive changes to expected rates of return, level of gearing, taxes, and the cost of debt and equity, is challenging existing capital allocation benchmarks.”
“Businesses are having to re-assess investment allocations more frequently.”
The 2010 top strategic business risks in the mining and metals sector are:
- Capital allocation (17 in 2009)
- Skills shortage (6)
- Cost management (1)
- Resource nationalism (9)
- Maintaining a social license to operate (4)
- Infrastructure access (7)
- Access to secure energy (8)
- Access to capital (3)
- Price and currency volatility (11)
- Climate change concerns (5)
Elliott says while the 2009 risk list was dominated by costs, consolidation and capital, in 2010 it is supply-side capacity issues that are re-emerging following the quick recovery in the sector.
“Skilled labour shortages and insufficient infrastructure are again key issues across the sector and may delay future project development and production,” he says.
Elliott says resource nationalism is the other significant “mover” on the risk rankings.
“Resource nationalism is rapidly becoming a greater strategic business risk for mining and metals companies globally as governments around the world seek to replenish their depleted treasuries in the wake of the financial crisis.”
“The proposed resource super profits tax in Australia is the highest profile example but it is part of a broader and concerning global trend for mining and metals companies. Quebec in Canada, as well as India and China have all increased royalty rates in recent months.”
“Many mineral-rich countries are seeking to extract greater economic rent for the right of a mining company to exploit resources.”
Elliott says while the mining and metals sector is by nature a “risky business”, the sheer speed of change and level of volatility in the past few years has elevated the need for comprehensive risk management to new levels.
“Done well, working through scenarios and impact analysis can deliver opportunities to preserve shareholder value, tight processes and controls and even enhance shareholder value.”
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