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Productivity tops mining business risk – EY report

“The decade-long decline in productivity…will require complete business transformations to reverse,” says EY’s Mike Elliot.

Productivity is now the top business risk facing mining and metals company, says EY’s annual Business risks facing mining and metals 2014-2015 report made public Monday.

“Boards and CEOs are now realizing that regaining lost productivity and gaining new ground is critical for long-term profitability and requires a whole-of-business response,” said EY Global mining and Metals Leader Mike Elliot. “It’s transformational and takes a lateral and broad-thinking management to pull it off successfully.

Capital allocation and access to capital, which topped the EY risk list a year ago, remains a critical issue at number two, while social license to operate moved up from four to number three. Access to water and energy is a new entry in the top rankings at 10th.

See: Managing dwindling energy, water resources a top priority for mining

The 2014 top 10 strategic business risks in the global mining and metal sector are: 1) productivity, 2) capital allocation and access, 3) social license to operate, 4) resource nationalism, 5) capital projects, 6) price and currency volatility, 7) infrastructure access, 8) sharing the benefits, 9) balancing talent needs, and 10) access to water and energy.

In their report, EY mining and metals experts suggest productivity should be boosted to regain lost ground over the super cycle; to continue to innovate to recover lost competitive advantage; and to counteract rising real wages.

Meanwhile, EY observed that major mining companies have showed tremendous commitment to capital discipline over the past 12 months, positing them well for future growth. However, access to capital remain a critical challenge for junior miners as “they remain cash-starved and focused on survival.”

“For many early-stage companies, the only available scenario is to halt exploration, lay off staff, close premises and maintain only skeletal operations—a form of corporate induced coma,” said the report.

“The new world of resource nationalism is a balancing act between promoting investment and maximizing in-country benefits,” EY noted. “The most drastic example of recent resource nationalism activity has been mandated beneficiation and state ownership.”

“Mining and metals companies need to continue to educate governments on the impact of resource nationalism on investment decisions, whether that is taxes, use-it-or-lose-it or in country processing requirements,” EY suggested. “Companies need to continue to demonstrate effectively the benefits of mining and metals to the broader community and enhance the understanding that raising the cost of doing business may scare away investment and jeopardize those benefits for the government and the community.”

The report also observed that mining companies “are now experiencing a time of extreme volatility created as the market tries to return to equilibrium following years of price stimulus which encouraged new supply. …Working in volatility is the new normal and companies need to adapt.”

“Living with volatility for long periods of time requires mining and metals companies to build in coping mechanisms that guard against the negatives of volatility, while taking advantages of the opportunities that only present themselves during this time, such as flexibility in varying levels of production,” EY advised.

Meanwhile, some stakeholder demands have been rebalanced as it has become clear that mining companies are coping with reduced profits. “As commodity prices recover, mining and metals companies need to work to build credibility and trust with all stakeholders now to manage how these increased benefits are best shares,” EY suggested. “Transparency initiatives will be part of this and are being enacted in the EU, US and elsewhere.”

Other under the radar business risks identified in the report are 11) cyber-attacks and information security; 12) threats of commodities substitution; 13) project pipeline shrinkage; 14) fraud and corruption; 15) competing demands for land use; 16) climate change concerns; and 17) leveraging new technologies

 

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