MINING FINANCE / INVESTMENT
Resource Nationalism still the number one risk say miners
Although Ernst & Young's business risk radar for mining and metals highlights many problem areas for mining projects, good business risk management could mitigate several of these issues simultaneously.
Posted: Monday , 09 Jul 2012
RENO (MINEWEB) -
In their report, Business risks facing mining and metals 2012-2013, E&Y's Global Mining and Metals Group outlines the top 10 business risks for mining and metals including (ranked in descending order) resource nationalism; skills shortage; infrastructure access; cost inflation; capital project execution; social license to operate; price and currency volatility; capital management and access; sharing the benefits; and fraud and corruption.
Obviously, mining and metals companies that are addressing a specific risk may also help correct risks in other potential risks areas. For instance, averting resource nationalism may also involve strategies to obtain a social license to operate in mining communities, reducing the potential for fraud and corruption at the mine site level, as well as sharing benefits of mining operations through employment or health, education, improved water management, or other community programs.
E&Y notes government have gone beyond taxation in getting more out of the mining sector with a wave of requirements such as mandated beneficiation, export levies and limits on foreign ownership.
As these risks grow, "Mining and metals companies looking to preserve value are actively negotiating value trade-offs with less politically sensitive policies than resource nationalism," the report observes.
--Importing/increasing of royalties or mining taxes-Many mining and metals jurisdictions have announced increases in taxes and royalties. However, Peru's new mining tax and royalty regime, as well as Chile's before them, bases levies on net mining income with certain adjustments, e.g. interest expense is not allowed as a deduction.
--Mandated beneficiation/export levies-"Many governments are now seeking to have minerals beneficiated in-country prior to export," says E&Y. "In theory this will capture more of the value-chain as the products will achieve higher prices." However, governments are imposing steep new export levies on unrefined ores to force mining companies into domestic beneficiation. This may mean mining producers have to cope with the high cost of establishing refineries and smelters in other less developed nations. Low cost power and infrastructure for these smelters and refineries are often in short supply, as is skilled labor to operate these facilities.
--Retaining state or national ownership of resources-"Changes in ownership laws can have a significant impact on the rewards miners expect to receive for the risk they have taken. When a partial divestment is done part way through a mine life, the mining company has paid for 100% of the investment, including the upfront exploration, development, commissioning and early operating risk, but will be giving up a percentage of the future investment return."
"There is an increased need for project economics and modeling before any investment is undertaken to factor in the probability of changes in the policy, e.g., how will forecast returns be affected if there is a 40% chance the mining and metals company has to sell 49% of its shareholding at a loss?"
Steps mining and metals companies can take to respond to these risks include investment in transparent relationships with host governments to foster a greater understanding of the project to the host country; align with the host government's long-term economic and political incentives and become an invaluable part of the infrastructure; align with multi-lateral agencies, such as the World Bank, to achieve "a prominent victim status" in the face of resources nationalism; encourage direct government participation, E&Y advises.
FRAUD AND CORRUPTION
In the report, E&Y observed "the extent of fraud and corruption and the associated effects on both private and public citizens of countries have led governments to implement far reaching regulatory changes."
In response to new regulations and enforcement, companies are changing the way they do business in other countries.
Compliance monitoring is becoming crucial as many companies are seeking assurance of their compliance. Mining and metals companies are substantially increasing due diligence initiates around third parties as part of their corruption analysis, which includes specific anti-corruption provisions in contracts.
Companies have been forced to become active in encouraging internal whistle blowing, E&Y noted.
SOCIAL LICENSE TO OPERATE
In their report, E&Y's climate change and sustainability service group observed, "Companies are now viewing their interactions with stakeholders, especially communities, as partnerships and this approach of strong engagement can be vital to success."
For instance, Teck Resources ensures it has no pre-existing plans before it enters a new region and before talking to local stakeholders. "The company now only develops plans for a project after it has met with the community and develops these in conjunction with this community."
Steps mining companies can take to response to social license to operate risks can include embedding mitigation strategies in all critical business processes to ensure an integrated approach is adopted; integrate sustainability key performance indicators with productivity outcomes in mine safety, reduced water consumption and reducing mine waste,
Other steps include improving the speed with which to act on potential license issues; encourage trusting and supportive relationships with all stakeholder to reduce security risks in troubled locations; and integrate sustainability objectives into all long-time project planning.
SHARING THE BENEFITS
Stakeholders feel entitled to a portion of the value created by mining and metal companies and balancing these various and competing expectations is challenging, says the report. Governments are pressuring mining companies to take a greater role in supporting the community through social and logistical infrastructure, community developments, and local hiring and procurement practices.
Steps mining companies can take to respond include obtaining trade-offs that limit the impact of mine valuation; sharing benefits in the short term, locking in the stakeholders for the long term; and increasing the transparency in reporting about who benefits from a mine or a facility.
The risks associated with skills shortages include: impact to production output; delay, downsizing or cancellation of projects, global mobility necessitated; increasing labor costs.
Steps mining and metals companies can take to respond to this risk include: sourcing skills from aligned sectors and a broader demographic; account for demographic and diversity factors when making an investment decision; initiate programs that encourage semi-skilled and retired workers to re-enter the work force; create employee packages focused on career development opportunities; develop strategic alliance with institutions and communities; and substitute capital for labor through innovation," says the report.
Infrastructure blockages remain prevalent in rail and port infrastructure supply chains and are increasingly impacting mine supporting infrastructure and power and utilities networks due to remove mine development locations.
Meanwhile, E&Y sees a real dividing line in the approaches of individual organizations in their ability to address the cost, risk and scale of development of the required transport, utilities and supporting infrastructure for mining projects, as smaller mining companies struggle to fund a single large sole-use infrastructure development.
Steps mining companies can take to respond to these risks include looking to other stakeholders to co-develop a solution with shared benefits; and investigate partnerships with other potential stakeholders in expanded infrastructure to innovative financial arrangements.
CAPITAL PROJECT EXECUTION
The report observes that there is a massive pipeline of projects in 2012-2015, compounded by high delivery cost inflation and heightened microeconomic uncertainty. This uncertainty has put downward pressure on the prices of mined commodities since the second half of last year.
Mining companies are adapting to these risks by prioritizing the investment pipeline to align with a changing appetite for cost and cash exposure; enhancing project controls to drive delivery against plan in a standardized and consistent matter; and increasing the focus on the integrity of data around estimated projects costs and benefits to improve management's level of decision-making confidence.
To read the E&Y report, Business risks facing mining and metals 2012-2013, go to http://www.ey.com/GL/en/Industries/Mining---Metals/Business-risks-facing-mining-and-metals-2012---2013