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MINING RISKS
 
Resource nationalism now a bigger risk than a year ago – E&Y
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8th July 2012
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JOHANNESBURG (miningweekly.com) – An ‘expanded footprint’ has ensured that resource nationalism retained its position as the number-one global risk for mining and metals companies around the world, as ranked by advisory firm Ernst & Young (E&Y).

Commenting on the ‘Business risks facing mining and metals 2012/13’ report, E&Y global mining and metals leader Mike Elliott said resource nationalism was now a bigger challenge than a year ago, at a time when the myriad risks facing the sector have become increasingly complex and critical.

“This is because resource nationalism has now expanded its footprint, not only in terms of the number of geographies that are being added to the list of those undertaking resource nationalism, but also in terms of its scope being changed. It is not just about taxes and royalties, but now includes a wave of requirements introduced around mandated beneficiation, such as bans on the export of unprocessed raw materials, as well as export levies and limits on foreign ownership,” Elliott said.

He added that projects around the world had been deferred and delayed, and in some cases investment withdrawn altogether, owing to the degraded risk/reward equation.

“The uncertainty and destruction of value caused by sudden changes in policy by the governments of resource-rich nations cannot be understated.

“Miners must continue to engage with governments to foster a greater understanding of the value a project brings to the host government, country and community, and be better able to negotiate appropriate trade-offs that preserve the value to miners, governments and other stakeholders,” Elliott urged.

Meanwhile, the global skills shortage and infrastructure access retained second and third spots, respectively, in the risk rankings this year, while rapidly escalating costs have pushed cost inflation up from the number eight spot to the fourth position.

Elliott said the need to expand existing production or develop stranded deposits was keeping infrastructure access in the top three sector risks.

The report stated that global mining capital expenditure was expected to grow 14% in 2012. This was being driven by a range of mining development projects in developed economies like Australia and the emerging markets of China, and Africa.

However, infrastructure blockages remained prevalent in rail and port infrastructure supply chains and were increasingly impacting mine-supporting infrastructure and power and utilities networks, owing to the remote development locations.

The current uncertainty over global financial markets added additional risk to the process of pit-to-port mine development. A downward trend in resource prices would force an immediate reassessment of marginally economic deposits.

The need for rapid development, while the price environment remained benign was therefore a key concern for all mining and metals organisations.

“With governments less able to fund supply chain infrastructure as it has in the past, a new paradigm has formed whereby the private sector needs to play this role. This necessitates changes to the procurement processes and risk allocation between government, users, developers and funders,” the report read.

Further, Elliott said the acute skills shortage seen in Australia and Canada had spread to more places during the past year, with projects in countries such as Indonesia, Mongolia, Brazil, Chile, Peru and Mozambique also plagued by this challenge.

“Strong commodity prices and confidence in the long-term sector fundamentals have created a record level of new developments and mine expansions.

“This level of investment is driving demand for skilled workers around the world and drawing on the same global pool of talent to build and operate these projects,” he added.

Meanwhile, a new risk, ‘sharing the benefits’, made its debut at number nine this year, replacing ‘interruptions to supply’, while ‘social licence to operate’, ‘capital project execution’, ‘price and currency volatility’, ‘capital allocation’ and ‘fraud and corruption’ rounding out the top ten.

Elliott told Mining Weekly Online that while there was not a large reshuffle in the relativities of the risks, their absolute impact had increased and at a time of softening of returns, as some commodity prices have eased in the last six months.

“Almost all the top risks are more complex and more critical for miners now than they were 12 months ago; the imperative for miners to manage these risks and understand the changing risk/reward equations has arguably never been higher.”

He added that greater activism by stakeholders to increase their participation and share in the benefits of the value created by mining and metals companies were bringing a number of the other risks into much stronger focus.

“Mining and metals companies are forced to balance the expectations and needs of their many stakeholders. When they fail to meet expectations or fully understand needs, it can result in strikes, supply disruptions, shareholder activism, community unrest and governments using their power through resource nationalism,” Elliott said.

He added that many stakeholders wanting an increased share of the mining and metals profits were not taking on additional risk for this increased return.

“Balancing competing demands and getting this risk transfer is the challenge for the sector.”

He suggested trade-offs as a solution. “The workforce could maybe give up higher wages, while employers could agree to flexible working conditions, for instance. The productivity improvements this could bring would be positive in terms of project value.”

Looking ahead, Elliott said more developed countries such as Canada and Australia would pose higher risks to mining in metals going forward.

“There is probably more risk in these countries in terms of margin outcomes because there are a large number of high-cost operations that are more sensitive to the volatile price movement,” he noted.

Meanwhile, potential short-term margins would really attract investment, particularly in politically unrest countries such as the Democratic Republic of Congo.

Elliott added that new business risks that might appear in the ‘Business risks facing mining and metals 2013/14’ could include energy issues.
 

Edited by: Mariaan Webb

 

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