Volatility underpins top risks for global mining and metals sector

Thursday, 8 September 2016

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  • Capital considerations dominate top three business risks
  • “Switch to growth” falls from first to sixth in ranking

Cash is king once again in the global mining and metals sector, as ongoing volatility pushes cash optimisation, capital access and productivity to the top of the EY Top 10 business risks in mining and metals, 2016-2017 report.

Cash optimisation replaces “switch to growth” — which fell to sixth position — at the top of the risk ranking this year amid prolonged sector volatility. Meanwhile, capital access and productivity risks held their positions in the top three year-over-year.

Scott Grimley, EY Oceania Mining & Metals Leader, says: “Mining and metals companies are prioritising cash generation and preservation in the wake of moderate global growth, dampened demand for commodities and a lower-for-longer price outlook this year. Maintaining strong balance sheets and long-term profitability requires companies work proactively to address sector risks. Those that do will be in the best position to switch to growth when commodity prices finally begin their upswing.”

Capital access moves to second in risks ranking

Capital raised in the sector globally was down by 5% quarter-over-quarter in Q2 2016 and 28% year-over-year to US$60b in Q2 2016.

“Traditional forms of debt and equity aren’t readily available in today’s mining and metals market. In the short term, access to traditional sources of capital will remain difficult meaning that alternative sources of finance and ways of raising capital will be crucial to business growth going forward, such as streaming deals and private capital,” says Grimley.

In 2015, there were 11 major streaming deals worth US$4.2b, up from US$2.2b two years earlier. In 2016, two streaming deals worth US$940m and US$500m have been announced.

Grimley says: “Miners are telling us that capital is not scarce, but it is different. There are a large number of private funds and investors looking to invest in quality projects, but invariably they will approach deals differently to traditional capital providers. Navigating this will require new strategies to manage different risks and priorities.”

Productivity remains top operational challenge

Productivity declined significantly during the sector boom as companies adopted a “volume at any cost” mindset. This approach resulted in a singular focus on the mine and created an integration gap between the mine and production plant, maintenance and supply chain.

Grimley says: “Miners put complexity back into the business during the boom cycle and now face a substantial integration gap to solve. Productivity is undoubtedly the greatest operational challenge in the sector but it’s also one of the biggest opportunities, though unlocking these opportunities requires miners to seek more diverse input, leveraging a management team with more diverse skills and learning from other sectors.”

“Companies have made progress to improve labour productivity, but have hardly scratched the surface on asset productivity. The focus needs to be on building a productive, cost-effective end-to-end value chain. Adopting a process model and digital approach will be key enablers to addressing the productivity risk.”

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Notes to Editors

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