From Mining.com author Dawn Lovett
Ernst & Young’s global mining & metal division recently published a report stating the top business risks to mining in the coming year. These risks are very important for investors to consider, as higher valued stocks tend to have more risks involved. The case study was originally published by Madison Avenue Research and can be found here.
1. Resource nationalism – The mining and metals sector rebounded quickly from the economic downturn, and thus became a key player in restoring national treasury conditions. Since then, many producer nations have made plans to tax mining more heavily due to concerns over two-speed economies. This past year, many governments have changed their fiscal policies to add taxes and royalties and have also looked to increase local participation in mining. This trend is likely to continue in 2012.
2. Skills shortage – Since the mining and metals sector has fared better than other sectors, many staff temporarily working in mining and metals may leave the industry in the coming years as their own sectors see improvement. There is also a large demographic of workers near retirement age who have left the sector, along with others who have been made redundant during the economic slump. Indeed, there are skills shortages in Australia, Canada, South Africa, and South America, which has caused many projects to become cancelled or deferred due to insufficient staff.
3. Infrastructure access – A sustained lack of available infrastructure has hindered production from getting to the markets where the demand exists. Bottlenecks in rail networks occur in Australia, China, and Russia. Although there has been some innovation in financing infrastructure, such as take-or-pay contracts, not enough is being done to meet the expected growth in demand from developing economies.
4. Maintaining a social licence to operate – Several issues can affect a company’s social licence to operate. Environmental issues such as the impact on bio-diversity, water pollution, soil contamination and waste management are often a concern for local communities. A company’s reputation can become a concern if they fail to ensure that safety accidents do not occur. Land disputes can also arise between a mining/metal company and a local community.
5. Capital project execution – Since the global economy has begun to recover, a number of new mining projects have been announced at around the same time, calling on the same resources to be developed. These projects consume a large part of company spending and can cause dramatic losses in project value if not managed properly. Tight management, execution, and risk assessments are critical.
6. Price and currency volatility – Many companies do not operate in their functional currently, which causes them to be vulnerable to foreign exchange prices. Commodity price volatility has changed due to
exchange-traded funds (ETFs), which act beyond the factors of supply and demand. In periods of risk aversion, gold prices can still rise in response to strong ETFs. When prices fall, investors may sell ETFs, which will cause prices to fall further.
7. Capital allocation –It is important for mining and metal companies to continually assess risks, accepted rates of return, and their impact on capital allocation decisions. A major project can be delayed or divested if the assumed level of risk and rate of return are incorrect. Shareholders may even demand that surplus cash be returned to them if they feel there hasn’t been an adequate return on investment for the risks involved.
8. Cost management – Due to scarcity of key inputs, labor, capital equipment, and energy, operating costs are on the rise. In addition, the prices of oil and steel as well as transportation costs are all expected to increase in the next few years.
9. Interruptions to supply – The series of natural and environmental disasters that have taken place in the last year have raised concerns of a major catastrophe to global supply. It is important that companies understand and prepare for such an occurrence, since the consequences can affect everything from infrastructure, prices, supply, and investment decisions.
10. Fraud and corruption – A number of mining and metal companies have ventured into regions with unstable political environments, such as West Africa, South America, and Asian countries like Papua New Guinea and Mongolia. Such expansion has brought sovereign risks affecting tenure security and changes in tax and royalty regimes. New fraud and corruption regulations emphasize the need for increased focus on these areas.