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Business risks facing mining and metals

Top 10 business risks 

1. Cash optimization 

Limited pricing and demand visibility as a result of ongoing market volatility is challenging mining and metals companies as they plan for the future. Cash is king once again as companies seek to maintain balance sheet liquidity and implement plans to maximize operational cash flow for long-term profitability.

Mining and metals companies can effectively manage liquidity by making sustainable cost reductions that do not erode value, increase focus on working capital and improve capital effectiveness.

2. Capital access 

Capital raising continues to be an issue in the sector. In 2015, capital raised was down by about 10% YOY. There was a sharp decline in loan finance to the sector and most loans were used for refinancing existing facilities rather than going into new projects.

As the risk of default has increased, banks are only extending trade and long-term financing at an increased cost to those mining and metals companies with sufficient security to back the debt. With limited access to capital, companies are looking at alternative sources of finance and portfolio realignment options.

3. Productivity 

Productivity remains in the top three risks as many miners are still struggling to make further improvements, particularly in asset productivity. The focus on “volume at any cost” during the mining boom generated a focus on production at any cost. Often this meant that mines had to be larger. Scaling up these structures made them more complex to run and resulted in silos and diminished connectivity within operations. It created an integration gap within businesses and dealing with it requires an end-to-end approach for long-term improvements in productivity.

The key to achieving long-term sustainable productivity improvement is to focus on the assets as a business system, the relentless pursuit of loss and supporting people in the organization who play a critical role in productivity transformation.

4. Social license to operate 

Mine accidents, mining-related diseases, community protests and neglecting mine rehabilitation obligations are all having a significant impact on the sector’s image. To maintain a strong social license to operate (SLTO), it is important to integrate sustainability into long-term planning and link key performance indicators with productivity outcomes as well as remuneration structures.

Successful companies have highlighted the value of operating in tandem with communities and have shown that it is possible to engage through mutual value creation.

5. Transparency 

Resource nationalism has generally retreated over the past 12 months as investment attraction initiatives have gained pace and governments seek to improve future revenue streams. However, transparency initiatives continue to gain momentum as governments seek to improve governance in their countries.

Improving transparency can help mining and metals companies show their social contribution — providing local communities with greater access to information and, in turn, helping to refute claims of not paying. The reporting of government payments is and will remain a significant challenge for many, but an increased transparency can only help to enhance investor confidence and generate trust with stakeholders.

6. Switch to growth 

Mining and metals companies need to break free of the pro-cyclical, short-term behavior that currently prevails. Even though commodity prices may be lower for longer, preparing for future growth remains essential if companies are to stay ahead of the competition.

A clear understanding of growth options available — whether to build or buy — is essential. This requires an ongoing awareness of the market and the competition. It may also involve a process of downsizing existing portfolios to realize capital and free up scarce resources to support future growth opportunities. Switching to growth at the right time to take advantage of a buyer’s market will boost long-term shareholder value.

7. Access to energy 

As energy consumption can be anywhere from 15% to 40% of the operating budget of a mine, cost is naturally an important consideration when choosing an appropriate source of energy. However, this is only one aspect of a far larger strategic decision.

It is no longer a matter of scarcity, but rather the ability to identify, prioritize and implement the best option to ensure long-term tangible and intangible benefits.

8. Joint ventures 

Companies enter into joint venture (JV) arrangements for a variety of reasons. When JVs are managed well, they have the potential to deliver substantial value to stakeholders, significantly enhancing the value of company portfolios, and access to reserves and capabilities. However, when these relationships go wrong, they can be extremely disruptive, particularly to project schedules and key decision points.

The risk is especially large for non-operating JV partners but mitigation strategies can be put in place to protect their investments, including non-operator audits or embedding non-operator management to provide increased visibility.

9. Cybersecurity 

Mining and metals companies have begun to tighten their IT security, but many admit that there are still known vulnerabilities in their cyber defenses and that they are not moving fast enough to mitigate these. The convergence of IT and operational technology (OT) platforms, protocols and techniques, has created the biggest threat to mining and metals, with OT security being largely under-invested.

Understanding the risk exposure across both IT and OT and investing in the appropriate security is vital to remain ahead of the curve and prevent financial, reputational and intellectual property risk.

10. Innovation

Despite the commodity downturn and the resulting decrease in investment, innovation is still a key risk. This is because innovation is a key enabler of productivity improvement that will provide long-term competitive advantage when the market improves. To prepare for future growth, we believe that now is the time for collaboration on innovation with other sector participants, other sectors, service companies and academic institutions.

To be successful, companies need to align their innovation program to their strategy, have a clear change management program, have the right structure, processes and systems in place, and most importantly, not to just focus on technology.

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Top risks for commodities