Progress on digital implementation is new top risk for mining and metals sector
London, 17 October 2017
- Digital effectiveness at number 1 position in top 10 business risks ranking
- Escalating cyber threat rises to third place amid increased rogue activity
- Shifting focus to long-term strategies that provide competitive shareholder returns now critical
Digital effectiveness has emerged as the number one risk for the mining and metals industry, according to the EY Top 10 business risks facing mining and metals, 2017-2018 report, as companies strive to improve productivity by introducing new technologies. With the sector increasingly investing in digital, cyber risk has risen from ninth to third position in the ranking as the convergence of information technology and operational technology has made companies more vulnerable to rogue activity.
While the majority of sector companies have started their digital journey,1 poor implementation of technology and a gap between progress and the scale of the opportunity leaves companies at risk of falling behind leading adopters. Meanwhile, despite the unprecedented rise in cyberattacks year-on-year, the report indicates that the sector is yet to catch-up in cybersecurity awareness.
Paul Mitchell, EY Global Mining & Metals Advisory Leader, says:
“The opportunity through digital is huge. But digital goes beyond just adopting new technologies: it is a critical enabler to address the sector’s most urgent operational challenge – improving productivity across the value chain. And as the sector increasingly moves toward digital transformation, the attack surface is also becoming larger and it is critical that mining and metals companies accelerate their cybersecurity program.”
New risks emerge as the sector switches to growth
Cash optimization fell from first to sixth position in this year’s ranking, in the wake of higher margins and improved cash generation. The need to drive competitive shareholder returns, however, calls for companies to manage the competing demands of short-term capital allocation with longer-term investment in growth, according to the report.
While 2017 has seen companies reduce leverage and return cash to shareholders through dividends and share buyback programs, this is a short-term response to the underperformance of recent years, as return on capital employed has consistently fallen below the weighted average cost of capital. Now that balance sheets have been restored and excess cash returned, the sector will begin to look for investment opportunities that drive long-term return on capital. For those companies that fail to do so, the report points to increasing pressure from activist shareholders – even at the risk of takeover.
Mitchell says: “While cash returns have helped regain shareholder confidence, this is not a long-term strategy. Mining and metals companies need to differentiate themselves through their capital decisions, and increasingly this will mean investing in growth as well as returning capital to the balance sheet and to shareholders.”
Regulatory risk surges while new technologies disrupt the sector
Regulatory risk is a new entrant to the top 10, as governments demand a greater return from their natural resources in light of improving commodity prices and profits, while transparency initiatives continue to gain momentum.
Mitchell says: “A change in the regulatory framework can cause significant uncertainty to companies and possibly impact foreign investment. It is therefore critical that they keep abreast of proposed regulatory changes and maintain open and transparent communications to all levels of government and their regulatory agencies.”
New world commodities feature as another new business risk at fourth position, due to increasing disruption in other sectors. The rise of electric vehicles and battery storage solutions, for example, demand that companies evaluate which markets to enter and where to invest.
Mitchell says: “This year’s business risks report clearly reflects the positive uptick in the market – volatility has eased-off in a number of commodities, and balance sheets are in a better position. It is now all about how companies stay ahead of the competition – gaining competitive advantage and being at the lower end of the cost curve is key. Managing the risks will assist mining and metals companies in achieving this.”
1 EY “Preparing for tomorrow’s digital mine today” webcast poll, February 2017
Notes to Editors
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How EY’s Global Mining & Metals Network can help your business
The sector is returning to growth but mining and metals companies face a transformed competitive and operating landscape. The need to improve shareholder returns will drive bold strategies to accelerate productivity, improve margins and better allocate capital to achieve long-term growth. Digital innovation will be a key enabler but the industry must overcome a poor track record of technology implementations. If mining and metals companies are to survive and thrive in a new energy world, they must embrace digital to optimize productivity from market to mine.
EY takes a whole-of-value-chain approach to enable each client to seize the potential of digital to fast-track productivity, balance portfolios and set a clear road map for their new energy future.
For more information, please visit ey.com/miningmetals.
About the report
EY’s Top 10 business risks facing mining and metals, 2017-2018 report is based on EY discussions with leading global mining and metals companies, and analysis of the operating environment for companies in the sector. It is EY’s 10th annual report analyzing and ranking the top strategic business risks for companies in the sector. Underlying business risks for mining and metals companies do not vary significantly from year to year, but the acuteness of the issues and its priority can change. While the report does not provide an exhaustive list of the risks facing companies in the sector, it does provide a snapshot of the most significant challenges today. Mining and metals companies that best understand the risk scenarios and potential impacts on their business are better positioned to manage these risks and seize strategic opportunities.