Risk is an inherent part of doing business in the global mining and metals industry. But in an industry that’s ever-evolving it’s hard to predict what’s coming around the corner. Understanding your company’s risk profile and risk appetite are the first steps to turning risks into results. Ernst & Young’s annual Business risks facing mining and metals report offers a snapshot of the top-10 risks facing the industry this year.
Governments around the world continue to impose new taxes, royalties and levies on extracting their resources. These increases have hard consequences for companies looking to do business abroad — or with ongoing projects in foreign jurisdictions. Investing in transparent relationships with host governments and focusing on generating direct and sustainable benefits for host communities are two steps companies can take to respond to this risk.
New projects and aging demographics are putting pressure on mining and metals companies to attract and retain talent. Mitigating the effects of today’s war for talent begins by accessing non-traditional and underrepresented labour pools and resourcing from other sectors with similar skills and experience.
Establishing whether or not the necessary transportation, utilities and supporting infrastructure is in place is crucial, especially with governments no longer acting as the vehicle through which new infrastructure projects are funded. Responding to this risk requires companies to improve mine planning and to look for stakeholders to co-develop a solution with shared benefits.
Cost inflation — driven by labour, energy, supplier constraints and taxes — is a risk that keeps growing and continues to threaten profit margins and projects themselves. Industry consolidation, automation technology, owner-operated mines and investment in energy assets are some steps to lessen the impact of rising costs.
Capital project execution
High delivery cost inflation and heightened macroeconomic uncertainty, not to mention the significant pipeline of new projects underway, has been putting pressure on prices over the last year. Prioritizing the investment pipeline and enhancing project controls will be critical to success.
Maintaining a social license to operate
Maintaining a social license is more than a compliance exercise, it’s a business imperative. A strong reputation can provide a competitive advantage through better access to capital and improved government relations. Companies incorporating risks to their license into their enterprise risk management framework stand to gain the most.
Price and currency volatility
With equity prices becoming increasingly sensitive to macroeconomic news and commodity prices not fully improving share prices, companies are facing differing asset valuation expectations that are putting transactions on hold around the world. Addressing this volatility includes pursuing hedging strategies and diversifying portfolios.
Capital management and access
Cost inflation and a volatile investment backdrop are challenging the returns on major organic growth programs. This, coupled with undervaluation by the markets amidst increasing pressure for greater return of capital to shareholders, is driving companies to revisit capital allocation strategies. Building options and flexibility into capital agendas through opportunistic refinancing and strategic divestments and reallocation of capital are two ways companies are responding.
Sharing the benefits
This risk joins our list this year as the sector faces increased pressure from stakeholders — including government, workers, local communities and suppliers — looking for greater share in perceived profits. Assessing claims in the context of mine valuation, obtaining trade-offs that limit the impact on valuation and increasing transparency in reporting who benefits from a mine or facility are each steps to mitigate this risk.
Fraud and corruption
Increased political risk in a number of key mining and metals investment destinations, as well as increased regulation and enforcement activities pose ongoing challenges to reputation, social license to operate and the bottom line. Responding to this risk requires compliance monitoring and third party liability.
Being caught unprepared when it comes to risk can mean far-reaching implications on cost, future supply and share price. Mitigating these challenges and seizing opportunities requires extensive due diligence, including conducting regular risk assessments, planning for all scenarios and implementing monitoring and control processes. But above all, success in the year ahead means keeping an open mind about where risks can come from.