With an extended period of lower and volatile commodity prices globally, the mining and metals sector is currently going through a "super correction" to the super-cycle, resulting in unparalleled impacts on earnings, balance sheets, and investor perceptions for the sector. Understandably, mining and metals companies are more focused on their margin, cash flow, and capital returns than anything else right now. Though steps to recovery were set into motion in the past few years with mine closures and major capex reductions, it would be premature to say that the majority of mining and metals companies are free to take the risks that they would have during the “production at any cost” boom years. From the Ernst & Young paper, the “Business risks facing mining and metals 2015-2016”, we highlight the first five of the Top 10 Business Risks Facing Mining and Metals.
1. Switch to Growth
In the mining and metals sector, most companies are in a short-term mindset, focused on consolidation and capital returns in a low-growth environment. According to Ernst & Young the time to invest in future growth is now, though most companies are finding it hard to make that switch. Whether building or buying, preparation and execution are critical to prepare for the future upswing.
2. Productivity Improvement
Productivity improvement is always vital to survival for any industry and while there have been steps in the right direction, there’s still room for significant changes in the mining and metals industry. Innovation and productivity go hand in hand and to the early adopters, productivity has proven time and again to give a competitive edge. It’s important to keep in mind that productivity needs to remain a priority - even when commodity prices improve.
3. Access to Capital
With the cyclical downturn, fundraising options for the mining and metals industry have been slim at best. Market conditions have brought about the rise of alternative sources of financing for the mid-tier and junior companies in the industry, but those sources generally bring with them their own set of complexity, costs and risks. At this point, Ernst & Young believe it is critical to maintain a long-term strategic focus of project fundraising (rather than concentrating on short-term funding), which can be achieved through preparation, knowledge, risk mitigation, and market awareness.
4. Resource Nationalism
The fight against corruption in the mining and metals industry is going strong and, along with the sentiment that companies are still not paying their “fair share” to host nations, has resulted in new transparency laws requiring companies to start reporting taxes and other government payments. Organizations should be taking advantage of these reports to truly show the value they are adding back into the host nations.
5. Social License to Operate
To maintain SLTO there are a complex array of relationships that must be negotiated. Recently this risk has increased under the burden of tougher global economic conditions. With the huge investments put into operations at stake, continued engagement, collaboration, and communication with all of these stake holders is imperative.
If you would like to check out the remaining top five business risks (Price and Currency Volatility, Capital Projects Execution Risk, Access to Energy, Cybersecurity, and Innovation [new]) and the rest of the Ernst & Young paper that also goes into the top ten below-the-radar risks, you can find the link here.