Mining and metals companies contend with supply constraints, volatility
(Vancouver, 13 September 2011) Resource nationalism tops the mining and metals risks list while supply capacity issues like skills shortage, capital allocation and infrastructure access continue to dominate the business agenda, according to Ernst & Young’s annual report Business risks facing mining and metals 2011–2012 .
“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 Ernst & Young’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.”
In the past 12–18 months, approximately 25 countries have increased or announced intentions to increase their government take through taxes or royalties. South Africa’s new royalty regime, Ghana’s plans to double royalties and the Australian government’s proposed minerals resource rent tax are just a few examples of upcoming legislation that could impact investor decisions.
“In addition to supply capacity constraints putting commodity prices and cost profiles at risk, mining companies will have to contend with a variety of new up-and-coming threats on their radar this year,” says Whelan.
The 2011 top strategic business risks in the mining and metals sector:
Resource nationalism (4 in 2010)
Skills shortage (2)
Infrastructure access (6)
Social license to operate (5)
Capital project execution (new)
Price and currency volatility (9)
Capital allocation (1)
Cost management (3)
Interruptions to supply (new)
Fraud and corruption (new)
Capital project execution is just one risk making its debut this year as new mining projects, expansions and restarts create new competition for resources and escalate costs.
“Without properly managing this risk, companies could suffer the costs of project delays and overruns,” says Whelan. “But by taking a holistic approach to capital project execution and measuring project progress to make informed decisions, from concept to operations, companies can get the most value out of their project.”
At the same time, mining companies entering frontier markets on their quest for growth should prepare to encounter fraud and corruption risks, particularly threats to security of tenure, and changes in mining, tax and royalty regimes.
“Addressing this year’s risks head on will not only deliver superior returns, it will attract new investment,” says Whelan. “By working through scenarios and impact analysis, companies can discover opportunities to preserve and enhance shareholder value and tighten processes and controls.”
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