MANAGING RISK: Resource nationalism No.1 on list of mining risks

Ernst & Young of Vancouver has published its annual report "Business risks facing mining and metals 2011-12." It will come as no surprise that resource nationalism is the biggest risk facing miner. But it is not the only one. The survey...

Ernst & Young of Vancouver has published its annual report "Business risks facing mining and metals 2011-12." It will come as no surprise that resource nationalism is the biggest risk facing miner. But it is not the only one. The survey also lists supply capacity issues such as skills shortage, capital allocation and infrastructure access.

"This year we're seeing resource nationalism take the form of greater controls on foreign investment, mandated beneficiation, use-it-or-lose-it demands and authorized government participation," says Tom Whelan, leader of E&Y's national mining and metals practice. "What originally began as a way for mineral-rich countries to repair and replace lost revenue from the downturn has become a way for governments to manage the effects of a two-speed economy."

According to E&Y, over the past 12 to 18 months, approximately 25 countries have increased or announced intentions to increase their government's share of mineral production through taxes or royalties. For example: South Africa has a new royalty regime; Ghana is going to double royalties; and Australia will introduce its new resource rent tax. And there are others. Zimbabwe is seeking to indigenize its resource sector. Per intends to replace its current royalty system with payments based on profits.

2011 Top Strategic Business Risks in the mining and metals sector

            2011    Description                            2010 rank

            1          Resource nationalism             4

            2          Skills shortage                         2

            3          Infrastructure access              6

            4          Social licence to operate        5

            5          Capital project execution        (new)

            6          Price and currency volatility   9

            7          Capital allocation                     1

            8          Cost management                  3

            9          Interruptions to supply            (new)

            10        Fraud and corruption              (new)

Whelen particularly warned about the problem of capital project execution. New projects, expansion and restarts are rising the demand for materials and labour, not to mention costs. To avoid the costs of project delays and overruns, he suggests taking a holistic approach.

"Addressing this year's risks head on will not only deliver superior returns, it will attract new investment," said Whelan. "By working through scenarios and impact analysis, companies can discover opportunities to preserve and enhance shareholder value and tighten processes and controls."

"Business risks facing mining and metals 2011-12" may be read in its entirety or the executive summary downloaded at www.EY.com/ca.

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