A look at resource nationalism, skills shortage and infrastructure risks
Resource nationalism remains the number one risk for mining and metals companies as governments around the world continue to impose new taxes, royalties and levies on extracting their resources. Since the global financial crisis, the sector has become a target for world economies to replenish their national treasuries.
A global mining skills shortage and infrastructure access also retained their respective second and third spots on Ernst & Young’s annual Business risks facing mining and metals report this year. Both these risks are much more acute and widespread this time around, and when comparing the top 10 risks year over year, one thing is clear: these three issues aren’t going away anytime soon.
While the demand outlook for commodities remains strong, the price peaks appear to have passed. Now there’s a much greater imperative for mining and metals companies to remain nimble and sure-footed in how they manage these growing risks in order to balance the risk–reward equation demanded by boards and shareholders. The first step is developing a better understanding of these risks — and how to mitigate them — inside and out.
Resource nationalism
During 2011 and for the first six months of 2012, a number of countries announced or enacted increases in taxes or royalties, including the Democratic Republic of Congo, Ghana, Mongolia, Peru, Poland and the US. We also began to see a significant increase in the number of countries introducing beneficiation strategies that stipulate minerals must be beneficiated in the country prior to export. But with these changes comes a new risk profile that threatens to deter mining and metals companies.
Companies considering doing business in South Africa, Zimbabwe, Indonesia, Brazil, Vietnam and other countries where these strategies exist will have to contend with a variety of challenges including, the high cost of establishing refineries and smelters if none already exist, the need for both low-cost power and infrastructure for beneficiation plants — both of which are often in short supply — as well as skill shortages and relatively high taxes.
The other resource nationalism trend we’re seeing is governments seeking greater or exclusive ownership of their minerals. While this isn’t necessarily a new phenomenon, the level of change taking place is enough to sound the alarm. These changes in ownership laws can have a significant impact on the rewards miners expect to receive for the risk they’ve taken. Now, while weighing the risk–reward ratio when modelling the economics of future projects, companies are taking into account potential policy changes. With recent changes throwing many companies a curve ball, having a sense of the longterm outlook in any given country is especially critical.
Changes to the mining laws or tax regimes in areas where companies have existing projects are fast becoming concerns as well. Many companies are reevaluating their current operations against new taxes or the prospect of new levies to determine whether it is worth their while to divest their interest or sell down to maximize its investment return.
Each of these trends have hard consequences for Canadian mining companies looking to do business abroad — or with projects already up and running in foreign jurisdictions. These trends are particularly influencing where mining and metals companies invest their capital.
While governments seek to secure a higher return on their natural endowment, it’s up to mining and metals companies to encourage these countries to take a broader view of the return from mining, including direct mining jobs and indirect jobs through infrastructure development and suppliers, and the associated income and payroll tax revenue from these jobs. Mining and metals companies are also contributing to community development in emerging economies by building hospitals and schools.
Expressing these mutual benefits is an important part of building transparent relationships with local governments. Other steps mining and metals companies can take to respond to the increased risk of resource nationalism include the following:
- Negotiating tax incentives and offsets
- Aligning with the host governments long-term economic and political incentives
- Partnering with state-owned enterprises that have strong government-to- government relationships
- Encouraging direct government participation
Skills shortage
Behind resource nationalism, a growing industry-wide skills shortage is the second most important risk facing mining and metals companies this year. Identifying, attracting and retaining critical operational and constructions skills are top priorities for many companies.
Strong commodity prices and confidence in the long-term sector fundamentals have created a record level of new developments and mine expansions, with 136 new projects planned or announced in 2012. 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. In Canada, the Mining Industry Human Resources Council’s 2010 National Employer Survey reported that 40% of the Canadian mining workforce will be eligible for retirement by 2014, taking with them an average of 21 years mining experience each, and driving the need for skilled workers from 60,000 to 90,000 by 2017. Without skilled labour, companies also face potential project delays, downsizing or cancellation. In fact, according to the 2011 Canadian Mining Industry Employment and Hiring Forecasts, 32% of Canadian mines were either suspended or shelved during 2009–11.
And, with the competition for talent heating up, labour comes with a much steeper price tag. To keep these costs down, companies must review and rebalance their remuneration arrangements to be both competitive for the individual and affordable and sustainable for their organization. Part of this is about understanding that, for most employees, career opportunity and additional benefits are just as important as compensation. Retaining employees today calls for companies to engage with them on multiple levels and communicate the full range of benefits of employment with their company. These benefits can range from offering flexible work arrangements to tailoring their employee experience offerings to different labour segments. Companies searching for skilled labour can also:
- Turn to non-traditional and underrepresented labour pools, including women and indigenous groups
- Source workers from other sectors with similar or complementary skills
- Initiate programs that encourage semi-skilled and retired workers to re-enter the workforce
What’s more, companies should consider developing strategic alliances with educational institutions and communities to build up the labour force or create programs to fill skills gaps.
Infrastructure access
A lack of sufficient infrastructure is standing in the way of companies developing resources this year. Mining and metals companies operate in hard-to-reach places all over the world. And this remoteness naturally brings challenges associated with cost, transportation, utilities and all other supporting infrastructure.
On top of that, we’re seeing majors with strong balance sheets come under increasing pressure from shareholders to restrict capital spending, while, on the other hand, juniors still struggle to access financing. And with governments stepping back from funding infrastructure, companies have to get a lot more creative in order to get their projects off the ground.
Collaborating with similar-sized competitors or larger off-take customers through joint ventures and partnerships is one option companies can pursue. Another is to look towards private and sovereign wealth for funding. We’re also s
eeing investors step forward from automotive companies and high-tech companies looking to secure long-term strategic sources of rare earths.
What next?
Over the last year, we’ve seen the same top risks plague the industry. But we’ve also seen companies step up to the plate and take proactive steps against mitigating these risks. Understanding the risks you face, whether they be resource nationalism, skills shortage or infrastructure access, is an important part in setting your company up for success.
Seizing opportunities is possible only when you’ve done your due diligence and conducted regular risk assessments, planned for all risk scenarios, evaluated your company’s ability to manage risks, implemented monitoring and control processes and kept an open mind about where risks can come from.
Risks exist around every corner in the mining and metals industry, but so do opportunities.
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