When looking to grow or invest in emerging markets, mining companies must weigh the balance of the risks and rewards associated with expanding abroad. Companies should accurately and effectively consider concerns such as political risks, environmental policies, financial strategies, mergers and acquisitions (M&A) opportunities as well as tax legislations in the regions where they plan to invest in.
Risk management has been increasing in importance in recent years. Boards are explicitly asking for Enterprise Risk Management (ERM) capabilities, shareholders are expecting it and analysts are drawing ratings conclusions, in part, based upon the organization’s ERM capabilities. To help identify and manage current and emerging risks, mining companies should engage in active internal discussions, as well as look externally to anticipate the risk factors that may affect their performance.
Best practices for risk management
There isn’t a specific formula to increase the chances of success when dealing with projects, investments or mergers and acquisitions abroad. However, by reviewing and making use of the recommendations highlighted in PwC’s report: Getting on the right side of the delta" A deal-maker’s guide to growth economies, mining companies will be on the right side of the delta factor.
Creating a team of experts
It’s important for mining companies to assemble the right multidisciplinary team. The team should comprise of geologists, technicians, engineers, as well as finance, strategy, law, forensics, and integration specialists when thinking about expanding into emerging markets. The team should also have on-the-ground nationals and people who will actually manage the business post-completion of a development, expansion or M&A. Identifying and designating people into key roles takes time, but is worth the investment.
While there are common themes across growth economies, each market is different. There is always a case for prioritizing markets. By doing so, it allows a company to focus scare resources on fewer markets to increase the chances of building scale positions that can support future growth. For mining companies, some of their most effective M&A strategies are ‘platform strategies’, or making a large initial acquisition to enter a net market and then quickly securing smaller acquisitions. This particular strategy requires greater focus on fewer markets.
Visiting the region of interest
Emerging markets are different. Being on the ground is the best way to reduce risks in a number of areas, including:
- Giving stakeholders context to address their concerns;
- Improving the quality of diligence to increase the transparency of financial information and reduce risks from non-compliant business practices;
- Engaging with multiple levels of governments to increase the chances of obtaining approvals for developments and to understand potential future changes in the government’s position; and
- Understanding market potential to help with valuations.
Researching your partners
When looking to participate in a joint venture or align with another company for a project or M&A, mining companies need to conduct potential partners extensively. It’s best to avoid 50/50 joint ventures and always discuss exit plans and alternative solutions with partners early on.
By taking into account these strategies and incorporating them into business models, mining companies will be better positioned to make their growth market deals and developments "work".
Mining risk forums
One of the ways mining companies can kick-start their risk management routine is through industry forums. Starting October 2012, PwC will be facilitating Governance, Risk, and Compliance (GRC) round-tables to allow mining industry risk leaders to engage in discussions and learn about emerging and leading practices to best manage risk within the sector.
The forums will assemble a wide range of risk leaders, such as chief risk officers, audit executives, and chief financial officers, who will all participate in discussions, learn from one another and provide feedback on topics such as aligning enterprise risk management with strategic planning, defining roles between enterprise management and internal audit, and managing capital project risks.
Interactive polling sessions will take place to allow participants to anonymously compare GRC capabilities within the sector. This will allow members to understand where their risk management capabilities reside versus their peers. The best way to establish leading practices and set models is through learning from others in the same industry and forums like these allow for the necessary conversations to be had while experts in the room can offer strategic solutions and feedback.
For more information about the mining risk forums, please visit PwC’s mining site at: www.pwc.com/ca/mining.
LinkedIn: Join the PwC Mining Community www.pwc.com/ca/mining-linkedin
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