10 minute read 29 Aug 2018
Ore conveyor belt aerial

10 business risks facing mining and metals

Authors

Miguel Zweig

EY Global Mining & Metals Leader

Mining and metals leader with over 30 years of experience in the sector.

Paul Mitchell

EY Global Mining & Metals Advisory Leader

Experienced mining and metals leader. Contributing insightful points of view to the market around productivity and digital.

Andrew van Dinter

EY Global Mining and Metals Tax Leader

Trusted tax advisor focused on the mining and metals industry. Corporate strategist with experience across the globe. Team leader passionate about developing a business understanding.

10 minute read 29 Aug 2018
Related topics Mining and metals Digital Risk

With the uptick in the mining and metals market, companies must manage the risks to stay ahead of the competition. 

Digital transformation, ongoing innovation and a focus on new world commodities are bringing a different kind of volatility to the mining and metals sector. Companies will have to be increasingly flexible and agile in their business models to remain competitive.

Below are the top ten business risks facing mining and metals.

1.       Digital effectiveness

Key thought: The focus should be on using digital to solve the most urgent business problem: improving productivity and margin across the value chain.

While the concept of digital mining is not new, there is a disconnect between the potential from digital transformation and the poor track record of successful implementation. Digital transformation goes beyond adopting technology though — it needs to be solving a business issue and is key to resolving the sector’s productivity challenge. Companies need to be pragmatic when targeting digital enhancements. New tools can be OK, but investing in integration and expanding usage of current applications can also generate a lot of value.

While much of the sector’s focus on digital has been on driving the productivity agenda, wider themes may fundamentally change how the sector works. Companies risk being left behind by their competition if they are not at the forefront of this. We believe that new business models will need to be developed, and so agility is key.

2.       Competitive shareholder returns

Key thought: Balancing short-term shareholder returns with long-term value can be difficult but important.

Competitive shareholder returns have exponentially increased in relevance over the last six months. With cash being generated at significant levels again, the amount of shareholder activism in the sector is increasing on the back of the fear that returns won’t be sustained.

Companies need to differentiate themselves – by investing capital properly and getting a good return compared to the rest of the market. Ultimately, they need to be a market leader to attract capital.

3.       Cyber risk

Key thought: Could cyber risk diminish the productivity gains and digital advancement aspirations for a mining organization?

Cyber risk is an ever-growing issue — an outcome of increased digital transformation and convergence of IT/OT, as well as continued rogue activity in the sector. With the increasing investment in digital and reliance on control systems for efficient operations, the attack surface is only getting larger.

Having a clear digital road map that incorporates cyber risk is fundamental because it is not a matter of “if” but “when.” It is critical that mining companies accelerate their cyber programs to meet, and head-off, these risks.

4.       New world commodities

Key thought: Future demand dynamics in the mining and metals sector are being disrupted by rapidly changing technology and an increasingly renewable-focused energy mix.

Disruption in other sectors, particularly with an increased focus on sustainability, will have a major impact on future demand for commodities. For example, the end of petroleum cars will impact a significant part of platinum demand: almost half of global platinum production is used in catalytic converters to remove diesel pollution. Other commodities, such as cobalt, lithium and nickel, will benefit from the increased demand for battery storage.

Companies will need to adopt a level of flexibility in their business models to be agile to change and regularly review their portfolios, considering all future growth assets.

5. Regulatory risk

Key thought: Regulatory risk has increased for the sector as governments demand a greater return from, and oversight of, their natural resources.

An increased focus from tax authorities has led to a new form of resource nationalism. In developing countries, particularly, a raft of new laws aimed at greater local participation has brought uncertainty and risk to the sector. Licensing requirements have also increased as a result of environmental accidents.

To mitigate this risk, it is important to keep abreast of proposed regulatory changes and maintain open and transparent communications with all levels of government and their regulatory agencies.

6. Cash optimization

Key thought: This risk now turns to allocation of capital and managing the competing demands of shareholders vs. growth projects.

A recovery in commodity prices and successful cost-cutting initiatives have resulted in higher margins and improved cash generation, with mining and metals companies signaling intentions to return cash to shareholders. Further, a return to growth will likely drive increased production, which will in turn require investment into working capital and capital investments.

Industry participants should prioritize their cash commitment and continuously improve their cost structures to cushion themselves from adverse price movements and anticipated extra expenditure.

Industry participants should prioritize their cash commitment and continuously improve their cost structures to cushion themselves from adverse price movements and anticipated extra expenditure.

7. Social license to operate (SLTO)

Key thought: SLTO is a privilege that needs to be earned through strong collaboration with the local community and a range of stakeholders.

Managing the needs and expectations of communities, governments, employees and other stakeholders who provide companies with their SLTO can be a delicate balancing act of agendas and issues. Environmental accidents, employee strikes and worker fatalities suffered by some companies can result in collateral damage for the whole industry.

There needs to be a shift from a reactive and compensation model of social investment to one that is far more strategic and collaborative.

8. Resource replacement

Key thought: Resource depletion is a concern — we’ve stopped spending on exploration. This is equivalent to technology companies not spending on innovation.

Resource replacement needs to be addressed now to future-proof your organization. With leverage across the sector significantly reduced and cash flow improved, shareholders expect higher returns than the sub-5% on average over the last five years. Until these returns are met, investing for growth will remain a marginal activity, rather than the central strategy it was during the first decade of this millennium.

To overcome this risk, in addition to increasing exploration spending, companies have adopted a number of strategies, including forming strategic partnerships, entering into joint ventures and acquiring existing projects or mines.

9. Access to and optimization of energy

Key thought: Cost and security of energy supply are important factors in the choice of energy sources.

Mining and minerals-processing operations require a large quantity of electricity. Remote area mining operations have unique challenges in developing, maintaining and operating stand-alone power systems. To minimize fuel-price volatility and ensure supply, companies are opting for a mix of energy sources — fossil fuels, hydroelectricity and renewable energy.

The decision on energy sources has reputational and social implications for organizations that are facing increased scrutiny on the extent of their emissions and water usage. Energy efficiency opportunities can be identified through improved metering and data analytics that can now be provided at significantly lower cost than has been the case in the past.

10. Managing joint ventures (JVs)

Key thought: JVs are often seen as a way to mitigate risk but, if managed incorrectly, can become a significant risk.

When JVs are managed well, they have the potential to deliver substantial value to stakeholders. However, when these relationships go wrong, they can be extremely disruptive, particularly to project schedules and key decision points. Non-operators are particularly vulnerable to operating risks as they have very limited say in the day-to-day operations at mine sites.

Non-operating JV partners need to consider what mitigation strategies should be put in place to protect their investments. Regular challenges by active investors will remove complacency and demand a greater consideration of all stakeholder interests when making operational decisions.

Summary

If mining and metals companies are to survive and thrive in a new energy world, they must carefully navigate these risks. 

About this article

Authors

Miguel Zweig

EY Global Mining & Metals Leader

Mining and metals leader with over 30 years of experience in the sector.

Paul Mitchell

EY Global Mining & Metals Advisory Leader

Experienced mining and metals leader. Contributing insightful points of view to the market around productivity and digital.

Andrew van Dinter

EY Global Mining and Metals Tax Leader

Trusted tax advisor focused on the mining and metals industry. Corporate strategist with experience across the globe. Team leader passionate about developing a business understanding.

Related topics Mining and metals Digital Risk