Productivity is now the top business risk facing mining and metals companies globally, ranking number one in EY’s annual Business risks facing mining and metals 2014-2015 report.
Paul Mitchell, EY’s Global Mining and Metals Advisory Leader says, “The decade-long decline in productivity, as the sector chased growth during the commodity boom, will require complete business transformations to fully recover.”
Productivity ranked at two on last year’s risk list and was ranked at number four in 2012.
“An indication of the scale of the issue is evident in Australian Bureau of Statistics multi factor productivity measure which includes common factors such as labour, capital and materials. This shows that mining productivity in Australia has declined by about 50% since 2001. Despite massive investment in new equipment and automation, capital productivity in Australia has declined by 45% since 2000 (versus 22% in all industries).” 1
Mitchell says, “The supercycle lasted for so long it had the impact of altering the DNA of mining companies to adapt the processes, performance measures and culture solely toward growth. Making productivity gains isn’t as simple as further cost reduction efforts. This transformation was a conscious choice over a decade and the counter-transformation will need to be radical if it is going to work in a couple of years” he says.
The 2014 top 10 strategic business risks in the global mining and metals sector:
- Productivity (2 in 2013)
- Capital dilemmas – allocation and access (1)
- Social license to operate (4)
- Resource nationalism (3)
- Capital projects (7)
- Price and currency volatility (6)
- Infrastructure access (9)
- Sharing the benefits (8)
- Balancing talent needs (5)
- Access to water and energy (new)
Capital allocation and access remains a key issue
The capital allocation dilemmas have fallen from last year’s top spot, reflecting progress made during the year in addressing this challenge. Steady progress has been made by the major industry players on capital management and optimisation following a spate of asset write-downs in 2013. However, at the other end of the sector, little has changed in the past 12 months for many juniors and explorers and they remain cash-starved and focused on survival.
Social license to operate is an imperative
Helen Adair, Executive Director in EY’s Climate Change and Sustainability Services team says: “Social license to operate has consistently been near the top of the risk rankings and this year is no different. The number and size of projects being delayed or stopped due to community and environmental activists continues to rise.”
“Organisations cannot assume that acceptance from the community and its stakeholders will always be maintained. Organisations should be integrating the activities required to obtain and maintain a social license into the broader strategic plan of a more sustainable business.”
Resource nationalism retreats and advances
Despite declining commodity prices, there remain waves of resource nationalism by countries keen to gain a greater return from the mining and metals sector. On the one hand, some countries, such as Kazakhstan and Vietnam, have changed mining tax policies to become more attractive to mining investment in a lower investment environment. However at the same time, other countries such as Indonesia, South Africa and Zimbabwe have introduced mandated beneficiation and increased state ownership.
Scott Grimley, EY’s Oceania’s Mining & Metals Leader says, “Mining and metals companies need to continue to educate governments on the impact of resource nationalism on investment decisions, whether that is taxes or in-country processing requirements and the like. They must continue to demonstrate the benefits of mining to the community and that raising the cost of doing business may jeopardise those benefits.”
Capital projects
While the public capital markets still do not have an appetite for investment in new supply, mining and metals companies are beginning to quietly prepare for the inevitable investment as reserves need replacing and the cycle changes.
Paul Murphy, EY’s Asia-Pacific Mining & Metals Transactions Leader says: “Mining companies have learnt from the rush to production and the stress placed on supply capacity of capital projects within the industry during the super-cycle and boards will be demanding much more robust capital project management to avoid the failures of the past. As supply shortages for many commodities start to come through and investments get the green light, the lessons learned from the boom will be high on CEO and Board agendas.”
Access to water and energy
Accessing water and energy is an essential part of operations for mining and metals companies and this was viewed as an “under the radar” business risk in 2013.
Burgeoning energy costs and competing water demands in many mining regions around the world, particularly Chile, Peru, South Africa and Mongolia are starting to have a bigger impact on costs and the ability to operate, pushing this risk up into the top 10 for the first time.
Mining companies spent US$11.9b on water infrastructure globally in 2013 alone, an enormous 250% increase from US$3.4b in 2009. Similarly, global energy prices have leapt 260% since 2000.
Michele Villa, Partner in EY’s Climate Change and Sustainability Services team says: “With global demand for energy expected to increase 36% by 2025, and with falling ore grades, risk related to access to water and energy is compounding year by year with the sector facing higher energy prices and volatility. Managing costs sustainably is a priority and we expect to see increasing reliance on renewable energy in the sector as the cost declines, especially in remote areas.
“Similarly water scarcity is an issue demanding a strategic and practical response. Companies that treat water risks as a strategic challenge will be far better positioned in the future.”
Click on the following list to view the full report: Business Risks facing Mining & Metals, 2014 – 2015
| 1Australian Bureau of Statistics |
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