HOW THE MINING SECTOR INCORPORATES WILDCARDS INTO ITS STRATEGIC PLANNING

DEBORAH LAUREN SPICER

Research report presented in partial fulfilment of the requirements for the degree of Master of Philosophy at the University of Stellenbosch

Supervisor: PROFESSOR A. ROUX

Degree of confidentiality: A

March 2012

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Declaration
By submitting this research report electronically, I, Deborah Lauren Spicer, declare that the entirety of the work contained therein is my own, original work, that I am the owner of the copyright thereof (unless to the extent explicitly otherwise stated) and that I have not previously in its entirety or in part submitted it for obtaining any qualification.

D.L. SPICER

JANUARY 2012

Copyright 2010 Stellenbosch University All rights reserved

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Acknowledgements
Financial support for the MPhil in Futures Studies, that has culminated in the production of this report, was provided by Venmyn Rand (Pty) Ltd. The report was also enriched by a discussion with Claude Baissac of Eunomix.

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Dedication
To Martin and Amy Muller, for their love and support.

Abstract
There have been a number of events in the last 10 years that have had a significant influence on much of the world and appear to have been a surprise for many. These low probability and high impact events are typically described as wildcard events in the strategy and futures studies literature. This research report examines how mining companies incorporate wildcards into their strategic planning by examining the risk reports of Exxaro, AngloGold Ashanti, Gold Fields and Northam. Since mining companies typically remain silent about risks that have a low probability of occurring, even if they have a high impact when they do, this research report examines what mining companies say about risks that they do not deem to be wildcards, i.e. their most important risks that they believe will have an influence on their business, rather than what they say about wildcards. It is in the interstices between what is said about risks that are widely regarded as important that this research report explores what is being said about wildcard risks.

Key words: Futures studies Risk reporting Risk assessments Wildcards Gold Fields AngloGold Ashanti Exxaro Northam

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Table of contents
Declaration Acknowledgements Dedication Abstract Table of contents List of figures List of acronyms and abbreviations CHAPTER 1 ORIENTATION 1.1 1.3 1.4 1.4.1. 1.4.2. 1.5 1.6 INTRODUCTION AND PROBLEM STATEMENT RESEARCH OBJECTIVES IMPORTANCE / BENEFITS OF THE STUDY Wildcards as important in strategic planning Wildcards and shareholders and stakeholders METHODOLOGY CHAPTER OUTLINE ii iii iv v vi ix x 1 1 2 3 3 5 6 7 10 10 10

CHAPTER 2 LITERATURE AND BACKGROUND REVIEW 2.1 2.2 2.3 2.4 2.5. 2.6. 2.7. 2.8 INTRODUCTION WHAT ARE WILDCARDS?

ARE THERE DIFFERENT LEVELS OF PROBABILITY OF A WILDCARD OCCURRING? 12 CAN WILDCARDS BE NATURAL EVENTS? ARE WILDCARDS AND OTHER RISKS CAUSED BY HUMANS? CAN RISK, IN GENERAL, OR WILDCARDS, IN SPECIFIC, BE QUANTIFIED? ARE WILDCARDS CASE OR CLASS DEPENDENT? CONCLUSION 14 16 19 22 23 25 25 26 27

CHAPTER 3 REVIEW OF MINING SECTOR RISK ASSESSMENT REPORTS 3.1 3.2 3.3 INTRODUCTION RESOURCE NATIONALISM SKILLS SHORTAGE

vii 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 INFRASTRUCTURE ACCESS MAINTAINING A SOCIAL LICENCE TO OPERATE CAPITAL PROJECT EXECUTION PRICE AND CURRENCY VOLATILITY CAPITAL ALLOCATION COST MANAGEMENT INTERRUPTIONS TO SUPPLY FRAUD AND CORRUPTION CONCLUSION 29 29 31 33 33 34 36 36 37

CHAPTER 4 ANALYSIS OF ISSUES RELATED TO RISK REPORTING AND WILDCARD RISK REPORTING 39 4.1 4.2 4.3 4.4 4.5 4.6 4.5.1. 4.5.2. 4.5.3. 4.5.4. 4.7 INTRODUCTION WEB FORMAT RISK REPORTING VS. RISK ASSESSMENT NATURE OF RISKS DISCLOSED CONFIDENCE IN HANDLING RISKS RANKINGS OF RISK Commodity, country or mining method specific risks Interlinked risks Risk as identifiable and assessable The importance of history CONCLUSION 39 39 42 46 47 48 48 49 50 51 52 54 54 54 55

CHAPTER 5 WILDCARDS AND LOWER PROBABILITY EVENTS 5.1 5.2 5.3 5.4 5.5 INTRODUCTION NEW COMMUNICATION VEHICLES FOR COMMUNITY ACTIVISM NEW TECHNOLOGY

RISKS NOT MENTIONED BY E&Y, BUT MENTIONED BY THE SAMPLED COMPANIES 56 CONCLUSION 60 61 61

CHAPTER 5 SUMMARY, CONCLUSION AND RECOMMENDATIONS 5.1 INTRODUCTION

viii 5.2 5.3 SUMMARY OF MAIN FINDINGS RECOMMENDATIONS 61 62 62 62 63 63 64 64 64 65 65 66

5.3.1 Greater attention to wildcards 5.3.2 The removal of information asymmetries 5.3.3 Greater coordination of risk management 5.3.4 An improved understanding of group think 5.3.5 Exploring new presentation methods for risk assessments 5.4 FURTHER RESEARCH

5.4.1 Fundamental questions of this research report 5.4.2 Limitations of this research report 5.4.3 Exploration of wildcards and their incorporation into strategic planning REFERENCES

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List of figures
Figure 1.1: Styles in this template Figure 2.1: Typical characterization of risks 4 11

Figure 2.2: Exxaros risk bulls eye, showing the most important risks as occurring close to the centre of the bulls eye 12 Figure 2.3: Gold Fields risks based on severity and probability of occurring 20

List of acronyms and abbreviations

ANC BP BSC EWRM E&Y JSE MPhil NASDAQ African National Congress British Petroleum balanced score card enterprise wide risk management Ernst & Young Johannesburg Stock Exchange Master of Philosophy National Association of Securities Dealers Automated Quotation

CHAPTER 1 ORIENTATION
1.1 INTRODUCTION AND PROBLEM STATEMENT

There have been a number of events in the last 10 years, which have had a considerable impact on much of the world and appear to have been a surprise for many. These include: 1) The dot com crisis, which resulted in significant falls in information technology and communication stocks on the National Association of Securities Dealers Automated Quotation (NASDAQ) after March 2000 and led to a re-evaluation of the value of this sector of the economy (Petersen et al 2009:1). 2) The terrorist attacks on the World Trade Centre and the Pentagon, which caused many in the West and East to reconsider their identities as well as how safe they felt in the world (Petersen et al 2009:1 ; Steinmuller undated:193 ; Hiltunen 2006:61). 3) The 2008/2009 economic recession and the sub-prime lending crisis, which led to job losses on a large scale, negative gross domestic product growth in many parts of the world and a lack of consumption expenditure (Petersen et al 2009:1). 4) British Petroleums (BPs) accident in the Gulf of Mexico, which was an environmental disaster on such a scale that it had an influence, not only on the share price of BP, but on how the world views multinationals and sustainable development. 5) Floods in Queensland, Australia, which resulted in the shutting down of 75% of the countrys coal mines, affecting global coal supplies and making some mining companies revaluate how prepared they were to cope with the potentially devastating effects of climate change (Harjani 2011:cnbc.com). 6) The 2011 tsunami in Japan, which may result in component shortages as a result of electricity supply shortfalls as well as a reconsideration of nuclear programmes globally, since it is widely regarded as the largest nuclear disaster since Chernobyl.

These low probability and high impact events are typically described as wildcard events in the Strategy and Futures Studies Literature (Petersen et al 2009:1-2).

While they have captured the popular imagination, it is difficult to determine whether these form part of company risk assessments in the mining sector. This may be because they are often not

2 disclosed in the framework of risk reporting that does not pay much attention to them, instead preferring to focus on those risks that are of higher importance and have a higher probability of occurring, while also maintaining information asymmetries between the reader and management of the firm. 1.3 RESEARCH OBJECTIVES

The research report plans to understand how mining firms incorporate wildcards into their strategic planning.

There are several related issues and assumptions that underlie this topic. They are as follows (Baissac: 2011): We can know what risks (including wildcard risks) will influence the mining sector. We want to know what risks (including wildcard risks) influence the mining sector. We want to do something about the risks (including wildcard risks) that influence the mining sector. We can report about the risks (including wildcard risks) that influence the mining sector. We want to report about the risks (including wildcard risks) that influence the mining sector.

There are fundamental problems with all of these assumptions, and it is not at all clear whether all or even some of them are true.

Since the general public, which is often not privy to the internal risk assessments that are carried out within a firm, generally has access to publicly available reports on risk assessment, the research report will seek to understand the last two assumptions outlined above, that relate specifically to risk reporting, in the hope of understanding whether companies include wildcard risks in their strategic planning.

These wildcards have had a significant influence on the world in the last ten years and at least some theorists (including Hiltunen 2006:69) suggest that planning for events with a high impact and a low-probability, or a higher probability given the continuance of current trends, is possible (as further discussed in Section 2.2). This relates to the first assumption outlined previously, i.e. whether we can know what risks (including wildcard risks) will influence the mining sector, and is essential if one wants to ensure that the reporting of wildcard risks is carried out. However, it is not sufficient that this be possible and this report does not intend to conclusively show whether it is

3 possible. A whole variety of additional assumptions need to be true for risk reports to contain and address issues related to wildcards and how they are likely to affect any sector of the economy and, for the purposes of this report, the mining sector in particular. Hence, this research report focuses on describing what wildcard risks, if any, are contained in risk reports rather than risk assessments. 1.4 IMPORTANCE / BENEFITS OF THE STUDY

There are two issues related to the relevance of this topic. The first relates to the importance of considering wildcards in strategic planning. The second relates to being able to convince shareholders and other key stakeholders that these wildcards are being addressed. Both are important and Sections 1.4.1 and 1.4.2 discuss each of these issues of relevance.

1.4.1. Wildcards as important in strategic planning There seems to be a sense that wildcards are an idea whose time has arrived and that there is value in examining wildcard possibilities to help companies anticipate what could occur in the future.

It was envisaged at the outset of this research report that the mining sector would be incorporating these wildcard events into its planning for a number of reasons, including that it (like many other sectors) is integrally connected to the worlds economy, which means that when one of the wildcard events occurs it inevitably has a ripple effect on the mining industry, which is invariably influenced by the event. This has been observed at numerous times over the last decade. It was also visibly seen in early 2011 in the aftermath of the Japanese tsunami, which resulted in a drop in the price of uranium, as there was a global anti-nuclear sentiment which was associated with it (Ker 2011: smh.com.au). There was also a reduction in the purchases of diamonds, as Japanese consumers, which typically buy larger stones, shied away from significant purchases (Rough and Polished 2011: rough-polished.com). While the often quoted expression is that When the US sneezes the rest of the world catches a cold, recent events have shown that events in any number of countries can dramatically influence the global economy, as the world economy becomes increasingly integrated.

The mining industry, like many others, has also had its ideas of the inevitability of the status quo shattered by recent wildcard events. This can be observed in price predictions in the diamond sector, for instance. Consider Figure 1.1, overleaf.

Figure 1.1: Rough and Polished Diamond Price Forecasts in November 2010 and January 2011 Source: Telfer et al (2011)

Figure 1.1 shows the divergent views of respected diamond research firm WWW in November 2010 and January 2011, with the November forecast showing a slowly decreasing diamond price while the January forecast shows a slowly increasing diamond price. It is complete about-turns in beliefs about the future and a willingness to consider alternatives, as illustrated by Figure 1.1, that has come to characterize the mining industry at present. It is this kind of open frame of mind and an increased openness to the consideration of a variety of factors that may come to influence the mining sector that suggested the appropriateness of a study into how wildcards are being incorporated into mining-sector planning strategies at this time.

However, many of the writers in this field are of the view that wildcards should be considered because they improve strategic thinking. Kleiner (1999, quoted in Wright 2003:10), for instance, notes that scenario planning (and the consideration of wildcards) allows planners to consider the unthinkable, ungodly and unpredictable for the purpose of gaining an improved understanding of individual and group assumptions about the future. Schwartz (1996, quoted in Wright 2003:12), meanwhile argues that planners should deliberately seek disconfirming advice in the search, not for the right or wrong answer, but the search to make scenarios more consistent, plausible and useful. There thus may be value in exploring different alternative events so as to improve strategic thinking.

1.4.2. Wildcards and shareholders and stakeholders Shareholders and stakeholders interested in a particular company are keen to see that the resources which have been entrusted to the company are being taken care of, especially due to the recent spate of corporate governance scandals, including Enron.

While shareholders are often described as being particularly interested in maximising returns, stakeholders are often described as interested in a wider range of interests (Fremond 2000:1; Smith 2003:1). The dichotomy between the groups interests has been shown to be a false one by various researchers, including Fremond and Smith. Both groups are acknowledged by them as concerned with the long-term health and prosperity of a given firm (Fremond 2000:2) a goal which is unlikely to be achieved unless the company anticipates and mitigates the risks that it is likely to encounter.

Shareholders and stakeholders also tend to agree on the corporate governance principles of transparency and responsibility, among various other principles (Fremond 2000:2). These principles involve the full disclosure of financial and non financial information and ensuring that the corporation fulfils its proper role in society (Fremond 2000:2), respectively. They also suggest that any factor that is likely to influence the firm or society in relation to the firm needs to be disclosed, and presumably this would include risks that could potentially destroy the value of the firm or risks that could potentially result in the company not fulfilling its proper role in society.

While the author of this report is not aware of shareholders or stakeholders who are very concerned with wildcards being disclosed, the potential magnitude of the effect of a wildcard on a company or society at large, makes this group of risks of potentially great importance for company stakeholders, including shareholders.

It is possibly with this in mind, that the King III report makes several recommendations on the boards responsibility for risk governance, managements responsibility for risk management and risk assessment, response, monitoring, assurance and disclosure (PwC 2011a). It also argues that the board should disclose how it has satisfied itself that risk assessments, responses and interventions are effective as well as any undue, unexpected or unusual risks and any material losses (PwC 2011a), a comment which suggests to the research report author that it is important for the boards of companies to consider wildcard risks as part of their general corporate governance obligations.

1.5

METHODOLOGY

Mining companies typically report on high impact high probability risks in their risk reporting, which makes it quite difficult to examine wildcards, or high impact low probability events, since which are ordinarily not disclosed or discussed.

This research report examines the literature on wildcards that is available and also the literature around risk assessment reporting. This information is generally related to defining what a wildcard is and to understanding risk reporting and did not specifically do so in the context of the mining sector.

To find out more about how the mining sector views wildcards, it was important to view mining company documentation on wildcards. However, this was challenging because mining companies typically remain silent about risks that have a low probability of occurring, even if they have a high impact when they do. As a result, this research report had to take the unusual measure of examining what mining companies say about risks that they do not deem to be wildcards, i.e. their most important risks that they believe will have an influence on their business, rather than what they say about wildcards. It is in the interstices between what is said about risks that are widely regarded as important that this research report hopes to examine what is being said about wildcard risks.

The research report examines the web-based information that Gold Fields, Northam, Exxaro and AngloGold Ashanti make available regarding their most pressing risks. These companies were randomly chosen but represent companies that mine a range of commodities, since while Gold Fields and AngloGold Ashanti both mine gold, Northam is a platinum mining company and Exxaro is a coal mining company.

While they have an identifiably South African presence and their main contributing assets to earnings in South Africa, they also represent companies with operations and interests in a range of countries, with Gold Fields with operations in Australia, Ghana, Peru and South Africa; AngloGold Ashanti with operations in South Africa, Namibia, Tanzania, Ghana, Mali, Guinea, Australia, the US, Brazil and Argentina; Exxaro with operations in South Africa, Namibia, Australia and China; and Northam with operations only in South Africa.

7 The companies also differ in their size, represented by market capitalization, as well as the exchanges on which they are listed, with Gold Fields represented on the Johannesburg Stock Exchange (JSE), New York Stock Exchange, NASDAQ, Euronext and the Swiss Exchange; AngloGold Ashanti on the JSE, London Stock Exchange, Paris Stock Exchange and Ghana Stock Exchange; and Exxaro and Northam on the JSE.

The web-based write-ups on risk that are identified as being of primary concern to the mining company involved were assessed against Ernst and Youngs (E&Ys) Business risks facing mining and metals 2011-2012 to determine how well they agree with the risks that E&Y has identified as important. Any discrepancies between what was E&Y described as the most important risks facing the mining sector and what was reported by the various sampled mining companies were examined to determine whether these discrepancies described or hinted at an important feature of risks, in general, or wildcards, in particular. Discrepancies were also further investigated to check whether they were an indication that risk reporting frameworks were in some way disallowing a truthful full disclosure of risks, including wildcard risks.

1.6

CHAPTER OUTLINE

The preceding discussion was intended to give the reader a framework for the discussion that follows, and had outlined the issue that this report hopes to address, the objectives that it intends to fulfil, the two issues that make this topic relevant and the methodology that will be applied in the course of this research report.

Chapter 2, which follows, is intended to give an overview of the debates about what constitutes a wildcard. This is by no means a simple issue and theorists have diametrically opposing views about the definition of a wildcard, from those that believe that one can anticipate wildcards, those that believe that one can, in some cases, anticipate wildcards and those that believe that wildcards constitute events that cannot be foreseen or planned for at all. The largely theoretical outline of what constitutes a wildcard also delves into debates on whether wildcards can be natural events or caused by people and the associated question of whether they are case or class dependent. The discussion of what constitutes a wildcard is an important framework for the discussion in Chapter 3.

Chapter 3 reviews what four mining companies say about what could be potentially seen as the ten most important risks facing the mining sector, as defined by E&Y.This discussion thus describes

8 what are traditionally seen to be events which are not wildcards. It is hoped that in more clearly understanding what mining companies believe to be the key risks involved in their businesses that one gets an insight into what is not disclosed and also gets an insight into the nature of reporting and the nature of reporting about wildcards. Chapter 3 discusses such risks as resource nationalism; skills shortages; infrastructure access; maintaining a social licence to operate; capital project execution; price and currency volatility; capital allocation; cost management; interruption to supply and fraud and corruption.

Chapter 4 represents a deepening of the discussion in Chapter 3, which had largely been a textual analysis of risk reports by four mining companies. Chapter 4 is intended to be an analysis of risk reporting and wildcard risk reporting, and investigates limitations of the reporting medium, the power relations involved in reporting and the structure of the world of commerce and its influence on risk reporting. It starts by assessing how the web format of risk reports affects risk reporting. The next subheading discusses the difference between risk reporting and risk assessments and suggests that the power relations between readers and writers of reports may result in writers not being completely candid about risks or even being deliberately misleading. The chapter goes on to discuss the nature of the risks disclosed by writers of reports, and specifically investigates whether the jurisdictions, and the legislative environments that influence them, play any role in how reports are written. The last section of the chapter further problematises the method that was employed to undertake the textual analysis carried out in Chapter 3, and discusses such issues as whether an overarching ranking of risks within a sector is even possible; whether risks can ever be seen as items that stand alone, can be ranked in a specific order and can ever be seen as unconnected; whether one auditing firms assessment of risk can be seen as an authoritative statement on risk in the mining sector; and whether psycho-historical influences on risk reporters are likely to colour and influence their assessments of risk.

Chapter 5 is a return to some extent to a textual analysis of the risk reports of Gold Fields, Exxaro, AngloGold Ashanti and Northam. It highlights areas that have been ranked by E&Y in its list of the top11 to 20 risks that influence the mining sector and how the sampled companies rank these risks. It draws attention to several issues that the mining companies do not mention at all.

Chapter 5 goes on to mention risks that the mining companies mention but that E&Y does not. These risks appear intuitively important to the mining sector and the research report queries whether these risks, which are not acknowledged by one of the top auditing firms, are lower probability events or potential wildcards. It further suggests that these risks are not of the same nature as some of the wildcard risks that have been outlined by some theorists.

Chapter 6 concludes with a summary of important points raised and provides several recommendations. Future research topics that could further tackle the issue of wildcards are also highlighted.

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CHAPTER 2 LITERATURE AND BACKGROUND REVIEW

2.1 INTRODUCTION

The literature and background review that is presented in this section hopes to outline some of the debates and discussions that surround how wildcards are defined in the strategy, risk assessment and futures studies literature. Since the topic of the study relates to how mining firms incorporate wildcards into their strategic planning, an understanding of what is understood by the term wildcard is an essential starting point for the study. The definition of the term is also not a simple one, with different theorists offering diametrically opposed viewpoints of what constitutes a wildcard. A starting definition of a wildcard as a low probability, high impact event is offered. However, for some theorists the probability of a wildcard occurring and the likelihood of its being anticipated is a central point of contention. Others discuss whether wildcards can be natural events or caused by people and are interested in the associated question of whether they are class or case dependent. Still other theorists are very concerned about whether wildcards as risks can be quantified an important feature of many risk assessments that are being carried out in industry. 2.2 WHAT ARE WILDCARDS?

Wildcard events in the strategy and futures studies literature are typically described as low probability and high impact events. They are thus believed to have: Little likelihood of occurring and sometimes the plausibility of their occurring is doubted, in its extreme form. A large influence on actors, institutions and countries when they do occur.

This would suggest that they should lie at point H in a graph showing all events and trends and how they are characterized according to their likelihood of occurring and their impact should they occur (Figure 2.1). They would also be often ignored by planners and risk managers, who would prefer to concentrate on events which have a high probability of occurring and would have a high impact if they occurred, seen at point A on Figure 2.1.

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HIGH PROBABILITY

H
HIGH IMPACT

Figure 2.1: Typical characterization of risks

Planners might attempt to highlight those events that have a high probability of occurring and have a high impact when they occur, since these would be seen to be the events that would have the largest influence on the actors, institutions and countries, etc., that are being studied. The risk reports surveyed, especially that of Exxaro, seem to endorse the model of categorising risk as having a high probability and a high impact. Exxaro even outlined how each risk could be described in terms of each of these categories, and drew a bulls eye to indicate that those risks that scored high on probability and impact would be the target for assessment (Figure 2.2). This language of focusing in on some risks is further endorsed by E&Y, which uses the terms off the radar and on the radar screen to indicate which risks deserve particular attention. For those interested in wildcards these metaphors may be alarming since they suggest that wildcards, which may not be the highest probability events, may not be examined in any great depth.

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Figure 2.2: Exxaros risk bulls eye, showing the most important risks as occurring close to the centre of the bulls eye Source: Exxaro (2011a)

The other sampled companies, however, tended to be less specific about how risk fell into each category, instead noting that these were their most important risks or the risks that affected them.

However, for risk managers the danger is in only addressing those issues that are believed to be most likely to occur in the mistaken belief that other events outside the traditional Bell curve distribution are of low or lower importance. The chance of these events occurring is low, but their impact will be great if they do occur.

2.3

ARE THERE DIFFERENT LEVELS OF PROBABILITY OF A WILDCARD OCCURRING?

Because of their influence on the world and global business, planners and studiers of the future are paying more attention to these events and trying to understand them. And some are suggesting that the risks that have been labelled wildcards may have been misnamed or that expansions and alternatives to the definition of a wildcard, as a high-impact, low-probability event, need to be considered when deciding whether to study a risk.

Markley (2011), for instance, suggests that wildcards should be divided up into several categories, with a Type I wildcard being one which is assumed by almost everyone as having a low probability

13 of occurring but having a significant impact if it does this would suggest that this type of wildcard lies in at H in Figure 2.1.

This would be in contrast with a Type II wildcard, which has a high probability of occurring if trends that suggest it continue and a significant impact if it does occur. The occurrence of these Type II wildcard events is not yet a commonly held belief, and thus these events have low credibility. On this definition, it is uncertain whether the event should be placed at H or at A, but probably the best interpretation is to show it at position H with an arrow leading to A, as in Figure 2.1.

Others appear to suggest that Type II wildcards are not wildcards at all but gradual changes. This, for instance, appears to be what Hiltunen (2006) suggests. She appears to prefer to call the Type II wildcards, that are outlined by Markley (2011), gradual changes rather than true wildcards (Type I, in Markleys description), which convey more of a sense of abrupt discontinuity than the gradual discontinuity of events that are foreshadowed by trends, and which therefore have a longer response time and become visible to a sizeable group of the population before they occur.

Hiltunen (2006), however, while she argues for a distinction between those wildcards that are seen as more abrupt and other events that are more gradual, does not argue that wildcards have no advanced warnings associated with them. She suggests that, while wildcards have a short time in which they can be responded to, there are still weak signals that suggest that the change will occur. Hiltunen (2006) argues that weak signals allow people to anticipate gradual changes, and they also allow people to anticipate wildcards, although these are more difficult to anticipate than gradual changes.

The companies sampled, and especially AngloGold Ashanti, appear to be very interested in assessing risks from a historical perspective and this suggests that they are aware of the dynamic nature of risks. It also suggests that they are aware that a risks probability of occurring can vary, increasing or decreasing over time. Thus, for instance, AngloGold Ashanti notes: Environmental laws and regulations are continually changing and are generally becoming more restrictive. In particular, the use of sodium cyanide in metallurgical processing is under increasing environmental scrutiny and prohibited in certain jurisdictions. Changes to AngloGold Ashantis environmental compliance obligations or operating practices could adversely affect the companys rate of production and revenue. With statements like these, the company indicates that the nature of some risks vary over time so it is important to continually monitor them.

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But this is again contrary to other discussions of wildcards, since there are some, such as Barber (quoted in Hiltunen, 2006), who argue that there are no advanced warnings for wildcard events, which are characterized by sudden and wide-reaching impacts. On this definition, a wildcard could not be predicted and the arrow shown in red in Figure 2.1 could not even be anticipated. Barber would presumably want to make a radical distinction between events that are foreshadowed by weak signals that could be interpreted by society and those that cannot be predicted. She would presumably not want to make the distinction between Type I and Type II wildcards, and would want those events that have been characterised as Type II wildcards characterised as something else. 2.4 CAN WILDCARDS BE NATURAL EVENTS?

What then are we to make of the fact that many of the sampled firms outlined risks as well as the risks outlined by E&Y have a strong human element.

The list of wildcard events that is outlined by Petersen (2009:14-16) includes several natural wildcards, including the earths axis shifting, an asteroid or comet hitting the earth and the ice cap breaking up. Many of these have occurred in geological time and it is not inconceivable that they could happen again.

Taleb (2007) also calls our attention to the fact that our knowledge of the natural world, which has been built up in the course of human learning, may also be shown to be incorrect. Thus, where Europeans believed that all swans were white before visiting Australia, they found out that black swans were common in this country. The potential falsifiability of all claims about the natural world suggests that our knowledge of a class of objects can be grounded on false assumptions. As a result, people might be surprised by an event which does not fit in with what had been understood about the class to which it belongs, in the same way as the discovery of black swans led Europeans to redefine the characteristics of that class of birds.

This incomplete understanding of nature also appears to have occurred in the March 2011 Japanese tsunami. Japanese engineers had anticipated that a tsunami could occur but designed their seawalls to be up to 40 feet high, never envisaging that a tsunami of greater than this height could hit the coast of Japan. This miscalculation, along with miscalculations about where tsunamis were most likely to hit the coast, is likely to have resulted in significant numbers of deaths (Onishi 2011).

15 The tsunami example and swan example, as well as the many natural examples of wildcards provided by Petersen, suggest that the natural world can be a source of wildcards.

Hoppe (1997:53) describes the term class probability and believes that this term is appropriate to describe natural events. He notes that people can know a significant amount about whole classes of events, such as the long-run frequency distributions of tornadoes, although they might not know about specific events within this class, such as who will be hit by a tornado and how much damage it will cause. No one knows who will be hit by a tornado, although if they are, as they infrequently are, the losses are likely to be large, says Hoppe. For this reason, it is possible for people to pool their risk of tornadoes and pay an insurance premium, calculated based on the long-run frequency of tornadoes, to be insured against this risk (Hoppe 1997:54). He argues that people can know everything about classes of events, such as natural events, and their probability distributions.

Others agree that the body of knowledge about natural events is accumulative and we can know an increasing amount about these events as the body of knowledge is increasingly added to (Baissac, 2011). However, from the Japanese tsunami example and from Talebs example of the black swan, it is noteworthy that sometimes our knowledge of natural events is not as complete as we would like and this sometimes leads to wildcards. Also, from the events listed by Petersen, who lists natural events which are not everyday events but have occurred in historical time, it is clear that one can be lulled into only considering those natural events that occur with higher probability and ignore events that have lower probability.

Several of the sampled companies mention that climate change may influence the sustainability of operations, but do not expand on which risks they are specifically considering under the heading of climate change. AngloGold Ashanti mentions risks such as floods, droughts and inclement weather and notes that these conditions may be exacerbated by climate change.

It is possible that companies feel that they are adequately protected from natural disasters, since they are typically included in force majeure clauses. They are thus not expected by clients to deliver on their commodity contracts as a result of these disasters, can be exempted from deviating from their mining plans if there is a natural disaster, and have a ready excuse for shareholders if they fail to perform. Part of the reason for this is that traditionally natural disasters appear to have been seen as something that is beyond the control of a firm, which have typical force majeure clauses in many of their government and supply contracts, which exempt them from having to perform as they intended to if they encountered a significant natural disaster, including

16 earthquakes, floods, fire, plague, Acts of God (as defined in the contract or in applicable law) and other natural disasters (Worldbank undated:3).

However, how natural events, and particularly extreme natural events, influence a mining concern has come under the spotlight as a result of the scope and intensity of natural disasters, in the form of heavy rains and floods, which affected Australia in 2010 and 2011 (Creamer Media 2011). These have led to many believing that there is a need to reassess, revise or renegotiate force majeure provisions since they were found to be inadequate in many cases since they did not, in scope and detail, tackle the liabilities of all roleplayers involved (Creamer Media 2011). Some have even suggested that companies need to expend more effort in understanding weather events, since there are likely to be more intense droughts, cyclones, floods and fires and as least some of these will be foreseeable. These commentators have argued that commodity companies should be using the services of weather services to limit losses of revenue and disruptions to operations (Fogarty 2011). This suggests that companies need to consider natural risks in a deeper fashion and that these should not be relegated to a lower status of interest, since it should be a top of mind consideration, as one commentator described it (Creamer Media 2011). 2.5. ARE WILDCARDS AND OTHER RISKS CAUSED BY HUMANS?

The World Bank (undated: 3) seems to endorse the view that there is a distinction between natural vs. human-linked surprise and unforeseen events, which it includes in its list of force majeure events. This is because the bank separates natural events, including earthquakes, floods and plague, from political and special events, including terrorism, strikes and nuclear contamination.

The majority of wildcard events that are listed by Petersen (2009:14-16) are also events that involve humans. These include human cloning being perfected, an altruism outbreak, and nuclear terrorists attack peoples ability to act in a way that is different in some way to the way that they have behaved in the past, among many other wildcards.

In a mining context, many of the sampled companies risks that are outlined in this research report relate to human agency in some way, including resource nationalism (Section 3.2); skills shortage (Section 3.3); infrastructure access difficulties (Section 3.4); maintaining a social licence to operate (Section 3.5); capital project execution (Section 3.6); price and currency volatility (Section 3.7); capital allocation at a time of depleting resources (Section 3.8); cost management (Section 3.9); and fraud and corruption due to greater political risk (Section 3.11). Even interruptions to supply due to natural and environmental disasters could be linked to human agency if one believes that people are partly responsible for the greenhouse gases and climate change (Section 3.10).

17

Does this suggest that the majority of risks, including the wildcard risks, facing the mining sector are connected with human agency? This research report suggests that it does.

This is particularly true if one accepts a learning model of events and actions, as put forward by Ludwig Lachman. His model proposes that people continue to learn from their previous actions so it is impossible to predict their future actions, and this results in a radical uncertainty with respect to events in which people play a role. This may make it difficult for companies in the commodities sector to correctly understand how the price of commodities will behave, for instance, since speculators in commodities are very adept at working out new ways of benefiting from price rises and falls (as more fully described in Section 3.7).

Even if one accepts a less uncertainty prone model of knowledge and action, such as the historical model of knowledge and action, one is bound to believe that there is a significant amount of uncertainty attached to human behaviour. As put forward by Ludwig von Mises, this model suggests that knowledge is provided by history, and, if conditions remain unchanged, we can expect that the future effects will be similar to the past effects. However, since it is uncertain whether conditions remain unchanged, there is still a moderate uncertainty about how the future will evolve, although there is some certainty about peoples personality characteristics and a history of their choices, the theory describes.

An example of a risk that might fit into this historical paradigm is that of resource nationalism (as discussed in Section 3.2), since there is historical evidence to suggest that, where commodity prices are high, countries tend to want more of the natural resource pie, while, when commodity prices are low, countries tend to want to create a more favourable investment climate to attract companies to invest in their countries. This cyclical nature of resource nationalism appears to be proven but, because mining takes place in many jurisdictions, it is clear that not all jurisdictions behave in the same way towards resource nationalism. This may be for a variety of reasons including a particular countrys dependence on the mineral sector, particularly powerful lobby groups advocating against resource nationalism, underfunded governments that find it difficult to implement legislative changes timeously since it would require a significant amount of research, and pro-investment members of various governments, etc. All these variables may make one governments decision to follow a resource nationalism agenda different to another governments decision to not follow a resource nationalism agenda.

18 There are also those that suggest that human action is more predicable than action as outlined by the learning or the historical models. These are those that subscribe to: The general equilibrium model, which states that events in which human beings play a part are insurable and can be described with long-run frequency distributions in the same way as earthquakes and tornadoes can be described. The rational expectation model, which assumes that people have perfect knowledge and decide what actions they and others will take based on their knowledge of the actions that are available for them to take. These models suggest that events in which human agency is important are fairly predictable. This seems to me difficult to believe because human-related events are the events that most of the commentators and companies believe are more risk prone.

This research report suggests that the general equilibrium and rational expectation models may be applicable in some cases and acknowledges that these models seem to hold true in times of stability. However, in times of uncertainty and turbulence, a learning model of action or a historical model of action (which allows for uncertainty because it allows for changes in the conditions that may change) appear to be more appropriate. Since the present economic crisis has turned many assumptions on their heads, it appears that models which suggest greater certainty may not be the most appropriate at present.

Further evidence for the idea that risks in the mining sector are often associated with human agency comes from Benning (2000:147), who outlines risks typical of the mining sector, including orebody risk, technology risk, operational risk, market risk, infrastructure risk, political risk, construction risk, and environmental risk. Of these risks only orebody risk (which is associated with the geology of the body to be mined) and environmental risk are potentially not directly associated with people. And even these risks are to some extent, since the interpretation of the orebody depends on the abilities of the person who has been tasked with its modelling while, as argued earlier, much environmental risk involves some human agency. This seems to me to suggest that human agency is an important contributor to even the more common risks that are described in the mining industry.

Hoppe (1997:71) argues that, where individual learning takes place in a context of human history, we know some but not all of the factors that determine an outcome. In this situation, we can refer to case probability rather than class probability, where one would know nothing about individual events. Hoppe (1997:71) suggests that one might be better off with these case probability events

19 rather than class probability events, since at least one knows something about individual events rather than groups of events. This research report suggests that this is an appropriate conclusion, although it is aware that the learning model of action may also hold in some cases, and it may not always be possible to know how people will behave as they are continually changing and adapting their behaviour. This is further complicated in an environment where there are numerous roleplayers, as is the case with resource nationalism, which involves governments, mining companies, communities and workers, etc. 2.6. CAN RISK, IN GENERAL, OR WILDCARDS, IN SPECIFIC, BE QUANTIFIED?

For those who think of events in terms of probabilities of occurring as well as the long-run frequency distributions of classes of events, there is the belief that one can quantify the risk of some events occurring. These are likely to be people who think of uncertainty and risk in terms of a Gaussian Bell curve, where the likelihood of something of low probability occurring is located on the edges of the bell curve rather than the mount in the middle. Taleb (2007:36) notes that it is easy to predict what you observe by extending what you observe for these events. He also notes that this type of phenomenon may have mild randomness and is characterised by continuity with history.

Since they are in some sense able to be described, these events could be high-probability events, Type II wildcards, or gradual changes (as discussed in Section 2.3).

In the risk assessment domain the quantification of risk appears to be extremely important. This can be seen in the sampled companies reports in the frequent presentation of risks on graphs with calculations and rankings of risks. Such is the case with the Gold Fields heat map, where the relative severity of risks and the probability of risks is graphically illustrated and tallied (Figure 2.3), and the bulls eye scoring of Exxaro (Figure 2.2), which helps to give risks a score of one to 100 in order to assess their importance.

Part of the emphasis on the quantification of risk may stem from the fact that, in order to prevent unverified and non-credible reporting, many countries have introduced mechanisms to ensure that reporting is accurate, including the liability and the auditing of risk reporting (Dobler 2008 :186). This also seems to be enshrined in South Africa, where the King III Report argues for accurate disclosure of risks (PwC: 2011a). While it may be a leap to assume that the term accurate implies some sort of mathematical calculation of risk, this research report suggests that the quantification of risk is a possible outcome of the need to carry out an assessment on whether the risks contained in a report can be factually supported. This is supported by the fact that practitioners in

20 risk assessment also confirm that statistical methods of calculating risk, in addition to historical methods, among others, are among the traditional arsenal employed by risk assessment professionals when carrying out risk assessments (Baissac: 2011).

Figure 2.3: Gold Fields risks based on severity and probability of occurring Source: Gold Fields (2011b)

The mathematics of actuaries does seem to play a role in informing risk assessors of risks. Some note that insurance premiums make risks concrete and an increase in an insurance premium suggests that the risk of a particular event is increasing. Thus, the threat of many events related to global warming has increased as is evidenced by the fact that the cost of certain types of insurance has gone up; the cost of global warming is monetised in the higher prices of certain types of insurance, some believe. This suggests that mathematics may be an important means of alerting risk assessors to the fact that there may be a gradual or even significant change in the way that a particular risk should be perceived.

However, there are some that caution against the use of mathematics in risk assessments, arguing that mathematical language is often used to justify assumptions and hide the subjectivity of those that formulated the risk statements. This perhaps suggests that, where mathematical calculations are carried out after risk assumptions are made and merely to justify those assumptions, those risk assumptions should not be regarded as value free. In addition, Stroh (78-79) cautions against

21 creating a hyperreality in document and trying to convey that organisations are representable; the author of this research report suggests that by quantifying risks and representing final calculations of certain risks as the most important risks that are likely to influence a firm, risk reports often set up their conclusions as unchallengeable and representing the truth about risks that they face (although it should be noted that, even through a narrative on risk, the firms are suggesting that they can reflect the truth about the risks that they face).

Some would argue that wildcards, as a phenomenon, would have to fall in a Mandelbrotian curve since wildcard events are likely to be so rare that they would not fall on a Gaussian curve. When people speak of events in these terms, they tend to speak about long tails, fat tails and extreme outliers. Taleb (2007:36) refers to events that fit in a Mandelbrotian curve as grey swans, and acknowledges that they are hard to predict from past events and that history cannot be relied on to confirm them.

Some of those theorists that argue that a wildcard is something that cannot be foreseen at all, however, would argue against the quantification of this type of event at all. This seems to be the case with Taleb (2007:36) who argues that some occurrences cannot be anticipated in advance through experience and that their occurrence is wild or superwild. As a result, these events do not fit into the even distribution of the Bell curve and cannot be described in repeatable patterns on any scale as one would expect from events that are Mandelbrotian. Called black swans by Taleb (2007:36), they are impossible to predict from past events and history cannot be relied upon to confirm them. This would suggest that the quantification of these risks would be difficult.

However, since the risk assessment environment demands auditability, it is likely that wildcard events that are highly uncertain, or are Type I wildcards, will not be noted in risk reports. Dobler (2008:186) confirms that people prefer not to disclose information in which there is an uncertainty in the risk information. They also prefer to report risks where there is a risk management system in place. While a risk management system does not demand a quantification of risk information, risk management systems often eventually do use some mathematics to try and capture the large amount of risk information that is available and that needs to be processed in some way.

The fact that our world is increasingly complex makes quantifying the effects of a wildcard also difficult. Our modern environment connects different institutions, countries and sectors in increasingly dense networks. This results in a complex environment, where an understanding of all the elements in a system does not result in an understanding of the system, states Stroh (2005:86). Isolating and describing elements of the system, trying to establish how they are

22 causally related, and trying to establish what magnitude of cause will have what magnitude of effect make trying to quantify a risk difficult.

Taleb (2007:226) argues that, while interconnections appear to make systems seem robust and make them appear to be immune to wildcard events, they cannot be so. Instead, interconnections make pieces of the network as well as the whole network vulnerable to the effect of a black swan or high-impact, low-probability event on important interconnected nodes. Thus, the US experienced large-scale blackouts as a result of an important electricity node failing in 2003, while much of the world experienced a recession as a result of problems within the interconnected financial sector in late 2008 and 2009. Mathematical calculations of the likelihood of the latter event occurring were not widespread and the few commentators who did suggest a recession would occur had their views widely publicised after the recession took hold.

2.7.

ARE WILDCARDS CASE OR CLASS DEPENDENT?

For different theorists, it may be possible to have knowledge of a class of wildcards, such as tornadoes, and still contend that, because one does not know when an individual event will take place, a specific tornado could be a wildcard. These theorists would presumably be content with the class of Tornadoes being modelled on a Gaussian curve and would still insist that the specifics of an individual tornado are unknown even if one knows their typical frequency and the physical parameters that they conform to, including that they will fall on the Fujita (F) scale, which classifies tornadoes according to whether they can cause moderate to incredible damage depending on their speed, and which has modelled that only 0.1% of tornadoes lie in the highest classification on the F scale (National Geographic, 2011; Tornado Facts, 2011).

Thus, for Petersen (2009:14-16), the likelihood of the ice-cap melting is still a wildcard, even though it sits comfortably within what has happened historically in the geological record, with cool and hot periods in evidence over the last 2bn years (Scotese 2002).

Other theorists such as Taleb (2007:36) argue that the event characterised by wild or superwild randomness could only be known in its individual case. He notes that wild or superwild events do not belong to groups where the typical event is one that is situated in the centre of a Gaussian curve. Instead, he argues that wild and superwild events skew groups in which they are situated. Such would be the case with a best-selling author, such as JK Rowling, whose book sales would be considerably higher than other authors sales, he notes.

23

In some cases, wildcard theorists tend to be very specific about what event they are describing even giving them a timeframe and a geographic location. Thus, Petersen (2009:14-16), for

instance, describes one possible wildcards as Hackers Blackmail the Federal Reserve.

Taleb (2007:141) appears to be critical of the specificity of this approach. He argues that people can overestimate the unusual or some specific unusual event. Thus, where a sensational event is at the forefront of someones mind, due to exposure in the press, for instance, people tend to overestimate the importance of such an event occurring. This, Taleb calls the error of specificity.

The sampled companies tend to focus on generic risks facing their businesses rather than specific issues. This seems to be because the risks that they outline are the business risks that apply across the various operations, where there are a lot of operations. Most of the companies tend to outline individual operational risks separately and these are typically not disclosed to the general investing public.

As an example, Gold Fields notes that the top 10 corporate, regional and operational mitigation actions and strategies identified during the EWRM [Enterprise Wide Risk Management] process are aligned with operational business plans and integrated into the Individual Balanced Scorecards (BSC) of all employees from C-Band through to ExCo. However, it is possible that in the distillation of corporate, regional and operational risks into only 10 risks, some of the risks that are important may be lost. It is also possible that some of the regional and operational risk assessments may have additional depth and suggest some wildcards that may be obscured by the insistence that the company primarily target 10 risks even while being useful in focusing the attention of staff on these risks and remunerating them for concern about them.

However, not being specific enough with risk definition may have its dangers. The force majeure descriptions tend to be very generic in legal contracts as do the general categories of risk that risk assessors use to understand a business, industry or country, etc. These generic risks may be too general to be taken cognisance of.

2.8

CONCLUSION

Wildcards are typically described as high-impact low-probability events. However, there is disagreement as to whether wildcards can be anticipated at all, with some suggesting that they are

24 accompanied by weak signals, some suggesting that some wildcards can be anticipated, and some suggesting that they cannot be anticipated at all.

There is also disagreement about whether there is more uncertainty associated with natural or human-linked phenomena, with some suggesting that human-linked phenomena are more prone to having a high degree of uncertainty, others suggesting that specific natural phenomena involve a large amount of uncertainty, and still others suggesting that the classification of natural phenomena may have not been correct, leading to inaccurate information about specific natural phenomena and potential surprises for those who believe they understand those phenomena.

Another issue of contention is that some believe that classes of events can be known and therefore modelled mathematically, while others believe that wildcard events cannot be modelled and are unknowable.

25

CHAPTER 3 REVIEW OF MINING SECTOR RISK ASSESSMENT REPORTS

3.1 INTRODUCTION

Ernst & Young (E&Y) (2011) updates its list of top 10 risks for the mining and metals sectors each year. It lists the most important risks for the mining and metals sectors as: Resource nationalism. Skills shortage. Infrastructure access. Maintaining a social licence to operate. Capital project execution. Price and currency volatility. Capital allocation. Cost management. Interruptions to supply. Fraud and corruption.

These risks are those risks that are likely to be broadly understood as having the likelihood of having the most influence on the mining sector and are likely to be those risks that have a high probability and a high likelihood of occurring. They are thus those risks that are likely to be being considered and they are unlikely to be wildcards, since these are typically describes as low probability, high impact events (as described in Chapter 2 of this report).

This chapter examines the risks that several mining companies list as the most important risks that they are considering for their companies and examines whether they are considering wildcard events in their risk assessments of their companies. What follows is a discussion of: The risks that E&Y has identified as important. Whether a sample of South African mining companies agree with the assessment that these are the most important risks and report on these risks. Whether they deviate at all from the risks identified as important by one of the top auditing firms.

26 Whether mining companies discussions of their most important risks can give investors any insight on whether they are taking wildcard events into account in their risk assessments. 3.2 RESOURCE NATIONALISM

Resource nationalism is mentioned by E&Y as the biggest risk for the mining sector in 2011 and 2012. This is because the mining sector has become of interest to various countries which are hoping to get a greater share of mining profits from the booming sector that promises to boost treasuries, which have in many cases been hard hit by the global financial crisis. E&Y notes that resource nationalism could result in additional taxes or royalties or increased participation in mining ventures by governments.

It appears that E&Y regards resource nationalism as highly likely to occur and to have tremendous effects if it does occur. Northam, Exxaro and AngloGold Ashanti specifically refer to this issue, but Gold Fields does not. Northam mentions this first of the risks that it outlines and mainly describes the fiscal and regulatory dimensions of nationalism, such as beneficiation provisions, royalties, health levies and other taxes and licences. Exxaro, meanwhile, only describes an extreme form of resource nationalism, which is resource nationalisation, or the taking over of resources by the government; this it ranks as the 19th most important of the 20 risks that Exxaro outlines. Still others do not mention resource nationalism at all. Exxaro specifically says that this is a high impact, but low probability event, while Northams positioning of this as its first-mentioned risk suggests that the company believes that resource nationalism is a high impact and high probability risk.

What is interesting is that some companies regard resource nationalism as the most important risk, others regard it as a less important (but still noteworthy) risk, while others regard it as a risk scarcely worth mentioning. This is interesting since one would expect that the number one risk, as identified by E&Y, would at least be being considered by companies in this sector. Since it is not being uniformly considered, it is certain that companies define this risk in terms of different probabilities of occurring and having different levels of impact should it occur. Thus, in terms of Figure 2.1 of the MPhil research report, some may view this risk as a high probability, high impact event, others view it as a low probability, low impact event and still others view it as a low probability, high impact event (and potentially, therefore, as a wildcard).

As described in Chapter 2 of the MPhil research report, those that are involved in wildcard research sometimes refer to weak signals that herald the onset of a wildcard that should be incorporated into planning. The writer of this research report would suggest that the announcement by E&Y of resource nationalism as the most important risk that is likely to affect the mining sector

27 in 2012 is rather a strong signal, as is the fact that a search on resource nationalism, in inverted commas, on Google on the 7th of December 2011 produced 330,000 results suggests that this risk has a long history of discussion.

In its extreme form, resource nationalism can be understood as resource nationalisation, which has been the subject of heated discussions in the press, as the South African African National Congress (ANC) Youth League had been promoting the idea that the countrys mineral resources should be nationalised. Since this has been a highly publicised debate, this research report suggest that this should be viewed as a strong signal that this should be something that should be considered, especially since a search for the nationalisation of mines, in inverted commas, presented 543,000 results on Google on the 7th of December 2011.

While the threat of nationalisation of mines appears to have diminished with the five year suspension of ANC Youth League President Julius Malema, it seems peculiar that those issues that appear to be the most important in terms of the risks that relate to the mining sector have not received the attention that they deserve. This, to me suggests that it is even more likely that those events that are regarded as having a lower probability of occurring, including many wildcards, will be ignored if even the widely regarded most important risks influencing the mining sector are ignored. Some potential reasons for this issue being disregarded are further discussed in the Section 4.3. 3.3 SKILLS SHORTAGE

E&Y (2011:2) identifies skills shortages as the second most important risk for the mining sector in 2010 and 2011 and indicates that it may become an even more important risk in 2012. It notes that the mining sector is using staff from other sectors in which an upturn has yet to occur and that near retirement workers have also left the sector. It argues that industrial disputes, strikes and walkouts will become more common in the tighter labour market as workers seek higher wages.

Others, such as PwC and Deloitte, meanwhile, argue that labour costs are likely to rise due to competitive poaching and the need to rehire ex-employees who have turned contractor as a result of recessionary downsizing and income disparities between joint venture partner firms and operations will also increase labour turnover.

One would expect that this topic that has received attention from the leading auditing firms, and shows 1,450,000 results in a Google search on the 7th of December 2011 for the combination of

28 terms skills, shortage, mining, industry (not in inverted commas) thereby indicating that it is something of wide concern would be mentioned by most of the mining companies sampled. This would be another of the risks in which there would be strong signals to support the consideration of this risk in a companys risk assessments.

Not surprisingly then, most of the mining companies surveyed list labour issues as among the risks that they consider worth mentioning.

The fact that so many companies of the sample regard this as a significant risk, suggests that this is a high probability event that is being planned for, if identified risks translate into operational level actions. However, E&Y (2011:2) notes that projects are being cancelled or deferred due to the inability to staff up construction and operations. This may suggest that potentially some of the impacts of the skills shortage are not being anticipated or planned for, and that these related risks might be wildcards.

Another risk that is related to shortages of skills is identified by AngloGold Ashanti, which notes that a skills-poor environment presents difficulties in retaining staff and presents a challenge in its being able to achieve its employment equity targets since staff are poached by others. Thus the risk of not being able to achieve employment equity targets, and the response by a government intent on ensuring that its goals of ensuring that black people are able to participate in the mining sector, may actually be a wildcard for many companies. Thus the acknowledged risk of skills shortages may hide a wildcard risk, i.e. the loss of mining rights as a result of not being able to meet employment equity targets, remaining unidentified by many firms, with the exception of AngloGold Ashanti, since it is associated with a risk that has been identified.

Interestingly again is the fact that different mining firms rank skills shortages differently among their risks. Gold Fields lists it 5th of the 10 risks that it identifies as important, Northam lists it next to last among the short list of risks that it identifies and Exxaro lists it 10th of the 20 risks that it identifies. AngloGold Ashanti, meanwhile, is interesting in that it tackles skills shortages under various headings. It notes that labour disruption and increased labour costs might influence its results; that the employment of contractors might expose the company to project delays and suspensions or increased mining costs; and that the company competes with other firms for key human resources.

Section 4.3 further discusses some of the political aspects involved in the reporting of skills shortages as a risk.

29 3.4 INFRASTRUCTURE ACCESS

E&Y mentions infrastructure access became more of a risk in 2010. The company mentions power, water, shipping, ports and rail as types of infrastructure that mining and metals companies require to get their commodities or downstream products to the market. However, since E&Y has a separate risk category dedicated to access to secure and cost-effective energy, it is understood that the third most important risk that relates to the mining sector, i.e. infrastructure access, speaks mainly about access to transportation. This is reinforced by the fact that it notes that a lack of sufficient rail networks is the biggest obstacle in getting commodities to market.

E&Y notes that some projects have been cancelled as a result of a lack of infrastructure provision. Others (Spicer: 2011) have also noted that infrastructure provision is becoming important because mining investments are taking place in more remote locations in which there has been inadequate expenditure on infrastructure and in which there are pressing social needs that suggest that infrastructure provision may not necessarily be the most important items on governments expenditure lists.

Exxaro is the one company that mentions rail infrastructure explicitly among its risks, and lists it as the most important risk for its current operations and growth aspirations. It is clear that, as a producer of coal, which is a bulk commodity, this infrastructure is vital for it and understandable that gold companies Gold Fields and AngloGold Ashanti and platinum producer Northam are not as concerned with the availability of bulk transportation means. Sections 4.5.4 and 4.5.1 further elaborates on how companies may perceive risk differently for a variety of reasons. 3.5 MAINTAINING A SOCIAL LICENCE TO OPERATE

E&Y outlines that maintaining a social licence to operate has moved from being the 5th most important risk for the mining and metals industry in 2010 to being the 4th most important one in the 2011-2012 list of risks. E&Y notes that it is important that companies ensure that their: Environmental performance does not become a concern for local communities and regulators. Reputation is not damaged by safety incidents. That land disputes between themselves and local communities are avoided.

The author of this report has taken social licence to operate to refer to specifically whether the company is endorsed by the local community within its immediate environment although a social licence to operate clearly extends to the broader society, which needs to reflect on whether a

30 company is taking care of a countrys collective environmental resources and whether its safety and health performance reflects care for workers who may not reside within the immediate vicinity of the mine.

Gold Fields and AngloGold Ashanti use specific language related to social licences in their risk assessment write-ups. Gold Fields specifically mentions the risk of losing its social licence to operate and lists it as the last of the ten risks that it identifies. AngloGold Ashanti, meanwhile, notes and then expands on the statement that Mining companies are increasingly required to consider and ensure the sustainable development of, and provide benefits to, the communities in which they operate, which is the 11th heading that it discusses when referring to its risks. Through these write-ups (which list this risk as quite low among the risks examined, both of these companies appear to be relegating social licence to operate, and the likelihood that they will lose the endorsement of the communities in which they operate, to having a lower probability of occurring and having a lower impact if it occurs than many other risks, and this appears to be contrary to the much more important status given to this risk by E&Y.

However, because of the many aspects that influence whether a company has a social licence to operate, including environmental, safety and land issues, several of the issues are discussed in a variety of the sections of the risk information provided on the websites of the sample companies. This makes it difficult to determine whether the ranking of social licence to operate by the sampled companies is actually as low as it first appears. Gold Fields, for instance, discusses safety related stoppages first among the risks that it discusses. While this has a financial implication, it is clearly also important because the broader community, including the regulatory authorities and the unions, is involved, and its censure in effect may mean that the mine will close.

AngloGold Ashanti, similarly, addresses health, safety and environmental issues under a number of headings, and this may suggest that the risk of not obtaining a social licence to operate, including the threat of multiple health, safety, land and environmental affecting its social licence to operate, among various other issues, is being considered as an important risk which is described in its fullness.

The other sampled mining companies also address many of the health, safety and environmental issues that would be important for the local community as well as the broader national communities in which they operate. Again, because these issues are discussed under numerous headings and at different points in the risk assessment information it is difficult to determine how important maintaining a social licence to operate is. Exxaro, for instance, mentions:

31 The inability to maintain a licence to operate due to non-compliance with all applicable legal and regulatory frameworks (its 3rd most important risk). Insufficient supply of clean water for sustainable operations and communities (its 9th mentioned risk). Risks associated with the closure of current operations (its 11th listed risk).

These all have health, safety, environment and land implications and can be seen to be of concern to the local and broader community.

However, the fact that some of the sampled mining companies do not use the common terms that relate to ensuring that their operations are endorsed by or not frowned on by the local community may suggest that these companies analyses of the risk environment may have omitted some important issues. Indeed, consideration for the local community is very much entrenched in many countries mine-related legislation and sustainability of operations appears to be a growing concern for those in the mining sector. Added to this, the fact that this is a strong message that should not be overlooked is suggested by the fact that a Google search for social license to mine, without inverted commas, on the 8th of December 2011 produced an impressive 112,000,000 results. The fact that this strong signal is not being taken into account as much as it potentially should be does not bode well for risks that are associated with weak signals. Section 4.3 elaborates on some of the political reasons which may influence the ranking of the social licence to mine. 3.6 CAPITAL PROJECT EXECUTION

E&Y notes that capital project execution had fallen from E&Ys ranking of it as the auditing firms most important identified risk in 2010 to its 5th most important risk in the 2011-2012 report on risks encountered by the mining and metals industry. This change in ranking had occurred because 2010 was more of an uncertain economic time and price volatility, limited cash flow and reduced debt capital, made spending decisions difficult, E&Y notes.

E&Y suggests that capital project execution remains important because: A large number of projects by different companies are coming on stream and may require the same resources. These projects make up a large percentage of company expenditure at present so attention to budgets and scheduling is important.

32 The companies sampled appear to take some of the issues that relate to capital project execution into account and Exxaro and AngloGold Ashanti risk assessments seem to accord best with that of E&Y.

Exxaro stresses capital project execution under the two headings of: Delays to projects as a result of the time taken to get mining and environmental right approvals (which it lists as its 4th most important risk). More specific to the topic being discussed, the late commissioning of growth projects that are important for the companys sustainability (which Exxaro lists as the 8th most important risk that it identifies). This suggests that it, like E&Y, regards project execution as very important and a considerable risk for the company if it is not achieved effectively.

AngloGold Ashanti (2011), similarly, seems to regard project execution as important since it notes that it faces many risks related to the development of its mining projects that may adversely affect the companys results of operations and profitability. This it mentions 6th of the risks that it outlines, making its estimation of the ranking of capital project execution similar to that of E&Y.

Gold Fields, meanwhile, notes delivery on project feasibility studies as its 6th most important risk. This item includes the roll out of the companys Capital Investment Framework and project management guidelines and the establishment of project risk registers and a revised contracting strategy to prevent delivery risks for individual projects. However, since this risk relates to feasibility studies rather than project execution, it appears that Gold Fields is more concerned with the earlier stages of projects rather than the later stages in which projects are implemented, even though some of the interventions that it suggests for the earlier stages of projects can no doubt be applied to the later stages of project execution too. In its discussion of its risk integration process, moreover, the company explicitly refers to the importance of capital projects being delivered on time and within budget, noting that its risk tolerance allows it to have a 10% to 15% overrun on these issues. This suggests that, while capital project execution is one of its key risk areas it does not translate into one of the risks that the company identifies as being part of its heat map (the companys terminology) of top risks.

Northam, meanwhile, appears not to take this risk into account at all in its risk assessment write up. This lack of consideration for this risk is not accounted for by the fact that it has no capital expansions under way, since it appears that the company is in the process of undertaking early

33 infrastructural work and a boxcut at its Booysendal project (Northam, 2011). This could suggest that this seemingly very important risk is not being considered by the company. One wonders if this suggests that this is a potential wildcard for the company due to its not being mentioned in the risk assessment write-up. Section 4.2 further explores whether the nature of the reporting medium as one that emphasises briefness may also play a role in obscuring the importance of the risk to the company. 3.7 PRICE AND CURRENCY VOLATILITY

E&Y has noted that price and currency volatility has been increasing as a risk for mining and metals companies, as it had ranked this risk as the 9th most important risk in 2010, but has since ranked it as the sectors 6th most important risk due to operating costs often being determined in another currency than earnings and new developments in commodity investment and speculation.

This is one factor that all of the sampled companies note in their risk assessments. Gold Fields ranks it as its 7th most important risk; Northam lists financial and market risk as the second heading that it addresses; Exxaro lists it as its second most important risk; and AngloGold Ashanti lists it first among the risk factors that it considers.

Interestingly, many of the companies rank this risk much higher than many of the other risks that they rank, and this research report hypothesises that the importance of this risk to these companies could be given greater weight than it deserves and potentially this could be detracting attention away from various other risks that may not be getting the attention that they deserve. Section 4.4 further discusses why this may be the case. 3.8 CAPITAL ALLOCATION

Capital allocation is ranked by E&Y as the 7th most important risk facing the industry. This is because it has become increasingly difficult for mining and metals companies to determine the best way of allocating capital and ensuring their sustainability in an environment in which their mineral resources are increasingly getting depleted. E&Y notes that companies are using their capital to: Integrate vertically. Add additional value to products. Expand into other geographical regions to mitigate their political risk exposure.

34 Many of the companies sampled incorporate this risk into their risk assessment write-ups and appear to take cognisance of it in a variety of instances and ways in their documentation on risk on their websites.

Gold Fields once again does not appear to feature this as a key risk for the company, but notes it among the risk areas and tolerance levels by calling attention to the fact that a proper assessment of risks and returns needs to be undertaken at the time of a merger or acquisition and by noting that geological potential and political risk need to be balanced against each other when considering exploration projects.

Exxaro (2011b) notes that investment opportunities do not yield expected returns is its 18th most important risk of 20. This research report takes this reference to be similar to the capital allocation criteria outlined by E&Y since it also prioritises the importance of weighing up capital allocation against the returns that it expects. Exxaro also notes that this is a high impact, low probability event and does not appear to give it the same level of status that this risk is given by E&Y.

AngloGold Ashanti (2011), meanwhile, notes ideas related to the importance of assessing where capital is spent in relation to risks and has headings in its risk assessment information such as: AngloGold Ashanti faces many risks related to the development of its mining projects that may adversely affect the companys results or operations and profitability, the companys 7th mentioned risk; and AngloGold Ashanti faces uncertainty and risks in exploration, feasibility studies and other project evaluation activities, the companys 8th mentioned risk. The company also stresses that it may experience unforeseen difficulties, delays or costs in successfully implementing its business strategy and its strategy may not result in the anticipated benefits. 3.9 COST MANAGEMENT

E&Y notes that cost management is the risk that it regards as the 8th most important risk influencing the mining sector as a result of the scarcity or key inputs and the high cost of transportation items that are increasing at a rate high above that of inflation.

Several companies of those sampled had tackled the issue of HR availability in parts of their risk assessment write-ups, as mentioned in the earlier discussion. Others discussions about capital

35 allocation had stressed the management of capital budgets to ensure that costs did not balloon out of proportion, as discussed under the risk entitled capital allocation. This risk that links with many other types of risk categories as outlined by E&Y is also specifically mentioned in relation to, among other items: Gold Fields 3rd most important risk, involving the erosion of margins, where the company notes that the company needs to implement stricter cost controls. Northams discussion of its 2nd highlighted risk of financial and market risk, where it explicitly mentions the rising cost of raw materials. Exxaros 12th most important risk which it describes as the adverse impact of above inflation increases on operating costs, profitability and cost of capital projects and its 15th most important risk of not successfully implementing improvement project initiatives thereby not realising revenue, cost reduction and increased operational efficiency target. AngloGold Ashantis discussion of its 6th listed risk of inflation.

As a result of the proliferation of terms such as cost and associated concepts in the various companies discussions on risk, it is difficult to compare whether the companies regard this risk as equally important, and depending on how they rank this risk determine whether they are not perceiving it as enough of a risk or perceiving it as too much of a risk.

One thing is certain, however, and that is that there is some disagreement even among the main auditing firms on where this risk should lie in the relative rankings of risks appropriate to companies. KPMG (2011), for instance, disagrees with E&Ys ranking of cost as a risk, and place cost escalation as its most important risk for the mining sector in its Business risks facing the Mining Industry publication. It notes that cost escalation can be viewed as a derivative of other risks in the mining industry, including commodity prices and capital costs for projects. As a result, this risk may be being taken account in many sections where risk is being discussed.

In any event, this cross cutting nature of the risk assures that it is likely to not be a wildcard since it is not a low-probability event by anyones estimations.

However, this being said, it is still a possibility that the magnitude of cost escalations or specific cost escalations related to a single input into the mining process may be unforeseen or not planned for. Village Main Reef CEO Bernard Swanepoel, for instance, has noted that while everyone is talking about cost obsession, this obsession is not being enacted in many operations (Ryan:

36 2011). This to me suggests that it is possible that this risk may yet be unanticipated or unplanned for at an operational level, and thus it may be a wildcard at the operational level of many companies. 3.10 INTERRUPTIONS TO SUPPLY

E&Y notes that a spate of natural and environmental disasters has so affected the mining industry of late that the risk of interruptions to supply has moved up its list of risks affecting the mining industry to become the 9th most important risk for the sector. The auditing firm notes that these natural and environmental disasters have influenced all aspects of the supply chain, including the transportation required to get companies products to market.

This risk is described separately to the risk of climate change, since this risk is described by E&Y as mainly related to government instituted schemes to tax or in some way price carbon emissions. This risk is ranked by E&Y as the 13th of the risks likely to influence the mining and metals sectors.

Only AngloGold Ashanti appears to specifically address interruptions to supply [due to natural disasters], and does so as a small item under risks related to its operations where it notes that natural phenomena, such as floods, droughts or inclement weather conditions, potentially exacerbated by climate change. This does not seem to suggest that this issue is addressed to the extent that E&Y suggests that it should be.

Moreover, the other discussions on risk appear to tackle this issue in even less detail. Gold Fields notes, for instance, simply mention that as part of its integrated approach to business sustainability, our environmental, social, health and safety risks are fully integrated into the EWRM [Enterprise Wide Risk Management] process, and places a footnote that notes that environmental includes water-related and climate change risks. The company goes on to provide a climate change vulnerability map to illustrate the fact that it identifies and proactively manages longer term risks, but again mentions of climate change are not to rank it as a risk to the company but to illustrate how wide and inclusive the companys risk assessments are. 3.11 FRAUD AND CORRUPTION

E&Y notes that fraud and corruption are growing risks for the mining industry, and the auditing firm has increased its ranking of this as a risk from 14th in the 2010 review to 10th in the review for 2011-2012. This is because mining and metals companies are entering new political environments in their search for mineral resources that are being depleted elsewhere in the word and are

37 increasing their exposure to jurisdictions where corporate governance is not always highly esteemed.

Of the sampled companies, only Exxaro mentions Fraud perpetrated resulting in quantifiable losses, and this it does as its 14th listed risk. It notes that this is a high impact high probability risk that it is considering.

The other companies, if they mention fraud and corruption as a risk, do so as a preamble to their discussion of their main risk items. Thus, Gold Fields mentions ethics and corporate governance as among its risk areas in its discussion of its Risk management assurance programme but does not include any item related to ethics among the top ten risks it includes as important for its business. This lack of mentioning of this important risk, or lack of mentioning of it among the key risks that they mention, suggests that some companies may not be taking sufficient cognisance of this important risk and it may be a wildcard since an event related to fraud and corruption could result in quantifiable losses for the company.

Exxaro, meanwhile, does mention that climate change adversely impacting on the sustainability of its operations and this is its 7th most important risk. However, the company does not elaborate on what it means by climate change. The reader is therefore not certain whether this risk relates to natural and environmental disasters that are likely to affect it, or whether it is intent on reducing its carbon footprint in anticipation of a potential carbon levy or quota limit that may be imposed on it. The lack of explanation of this risk by Exxaro makes it difficult to ascertain whether this risk, and all aspects of this risk, are being considered and planned for or whether some aspects of this risk are unforeseen and unplanned for. However, the signals for the importance of this risk do not appear to be weak, and they have received extensive media coverage, as is suggested by the fact that a Google search on the term climate change, in inverted commas, on the 9th of December 2011, produced an impressive 123,000,000 results, although these results would include all aspects of climate change, including those aspects that relate to government regulation, which E&Y lists as a separate risk.

3.12

CONCLUSION

Chapter 3 offers a textual analysis of the risk reports of various companies and demonstrates that: Exxaro, Gold Fields, AngloGold Ashanti and Northam in some cases share the estimation of the importance of a particular risk as outlined by E&Y.

38 In other cases, the sampled companies collectively, or most often individually, suggest that a particular risk is more important or less important than the importance ranking that is outlined by E&Y. The sampled companies, most often individually rather than collectively, sometimes omit to mention a risk that E&Y regards as important, thereby suggesting that they do not regard that particular risk as paramount for their organisations. The risks that are not mentioned, or are mentioned in a way that suggests that they are not seen as as important as indicated by E&Y, could suggest that these are wildcards or events that may influence a company without their being planned for. Cases such as these could suggest an almost inexplicable under-estimation of risk There are occasions when a disagreement with E&Ys ranking of a particular risk could be a correct statement of the risks that are perceived by a particular company, and their emphasis on, or their negation of, the importance of a particular risk may be due to specific factors, such as the commodity being mined. There are occasions when companies appear to deliberately mis-state the importance of a risk. The political environment or the jurisdiction in which the company is located may play a role in that case. Apparent mis-stating of a risk may also be due to the fact that the risk is covered under various headings, that when read together suggest that the risk has being given the cognisance that it deserves.

39

CHAPTER 4 ANALYSIS OF ISSUES RELATED TO RISK REPORTING AND WILDCARD RISK REPORTING
4.1 INTRODUCTION

Chapter 4 is a more in depth analysis of some of the issues that had been hinted at in Chapter 3 and attempts to explain why companies might be underestimating risks or mis-stating risks. It explores various issues including whether the web format adopted by AngloGold Ashanti, Northam, Gold Fields and Exxaro plays any role in their reporting; how risk reporting differs from risk assessment; whether the confidence that companies display about dealing with risks leads to a misrepresentation of risks; whether companies are influenced by trends in reporting; and whether risks can be ranked at all. 4.2 WEB FORMAT

The discussion of the risk assessment write-ups on a sample group of mining companies raises the issue of how risk reporting differs from risk assessment, particularly on a web platform.

The sampled mining companies adopt different approaches to displaying their information, although all reported on risk on their websites, possibly in compliance with the King III report, which requires that boards should allow risk information to be accessible to stakeholders (PwC: 2011a).

Gold Fields has collapsible and expandable sections that can be opened and closed by the reader. Its text on risk management roughly spans six printed pages. This research report could not determine how closely this mirrored information presented in its annual report and appeared to be a new section that is not represented in the annual report.

Northam opts for about two pages that the reader scrolls down, with a link to its annual report. The link to the annual report allows readers to navigate the document and click on the section on the report that describes business and the risk environment. It is clear that the website information on risk is a modified version of that available in the annual report and it appears that the risks that are mentioned on the website are updated versions of the information presented in the annual report. However, it is clear that the website information on risk is roughly comparable to the risks represented in the annual report and, while it is an updated version of the risks presented in the annual report, is not materially shorter than the information represented in the annual report and therefore should not be regarded as a summary of this information.

40

Exxaros website text on risk spans approximately five pages and requires the reader to scroll down this information to read it. There are items in the right hand panel that promise that the reader can click on them to read more, but on the 12th December 2011 these links did not work. However, on searching the 2010 Annual Results, the text on risk in that document and on the website were found to be identical and are not an updated version of the risks identified in the companys annual results report.

AngloGold Ashanti has a risk assessment write-up on its website that is a duplicate of that contained in its Annual Financial Statements. This spans approximately 18 pages of printed text.

The author of this research report assumed on starting the assessment of the various sample companies that they might have condensed the information that they make available in the public domain in their annual reports on their websites. This, however, does not appear to be the case. It appears that the risk information available on their websites is the fullest representation of what they share with the public in their annual reports.

However, both text in an annual report and text on a website are necessarily not as voluminous as internal risk assessment documents and it is probable that much of the thought behind the sampled companies risk assessments is not conveyed due to the conciseness of the mediums. Since wildcards are likely to be considered the least material of the risks that are mentioned in these reports, it is likely that, if anything is left out, it is likely to be these. It is thus probable that the summary reports of internal risk assessments may not contain the depth of internal discussion that takes place about wildcards.

Notwithstanding the size limits of the reporting medium, there are also likely to be financial issues surrounding the assessment and reporting of risks. Although it is not inevitable, it is likely that the bigger the firm, the more it has to spend on risk assessment and reporting. This, at least would be my assessment of the fact that AngloGold Ashanti dedicates about 18 pages to the reporting of risks compared to Northams two pages. It would also be my hunch that Northam may not have the risk assessment resources of firms like Gold Fields, which notes that it uses service providers such as Control Risk, Deloitte, International Mining Industry Underwriters, the World Economic Forum Global Risk Network and Maplecroft to assist it in identifying, managing and assessing risks.

41 Because the nature of the medium would allow the companies to update their risk information regularly, the author of this research report also assumed that companies would take advantage of this to provide investors with the most current assessment of their risks. This appears not to be the case, with the exception of Northam, which this research report assumes has updated the risks represented on its website, since there are items that are different to those risks represented in its annual report. There thus does not seem to be correlation with the size of the company, represented by its market capitalisation, and its preparedness to provide updated risk assessment information, although since my sample of companies is so small, this cannot be reliably and definitively concluded.

While most companies emphasise that risk assessments are done regularly, with reviews of the key risks also being carried out regularly, with quarterly assessments and biannual reviews in the case of Gold Fields, for instance, there appears to be a delay in updating these risks, with the sampled companies for the most part decided to use annual risk assessment data. This suggests that the information provided in the risk reports may not reflect the most up-to-date risks and might not reflect the current view of the relative rankings of the various risks. This could also be construed as being contrary to the King III Report guidelines (PwC: 2011a), which suggests that reporting should be timely, although King III does allow the annual reporting of risk, so it does in fact allow for what some may view as fairly dated risk assessment.

It is also anticipated that the format of reporting risks so that they are valid over the whole year might lead some companies to be wary of stating all but the most certain of risk that could occur over a year. Even wildcard risks that might be plausible to report on at the time of the annual report might be avoided since it is possible that their greater uncertainty would result in there being farfetched when seen in the context of the span of a year.

A case in point might be discussions on financing. Depending on which date the annual report of the various companies comes out, it is likely that they will have divergent views on the likelihood of access to capital being a risk. Exxaro and AngloGold Ashanti mention the possibility of balance sheet and other resource constraints and the possibility of a lack of credit availability influencing their flexibility and the solvency of their suppliers. This appears insightful given the current uncertainty about the global banking sectors stability and the fact that at the time of writing this section of the MPhil research report (December 2011) the likelihood of a regional financial crisis in Europe is not implausible.

42 Given that these risk assessments were likely written before this issue came to the fore, the risk of access to finance was probably less likely than it is today. While Exxaro and AngloGold Ashantis seeming anticipation of the unfolding of events in Europe seems uncanny now, the lack of mentioning of this issue by the other companies makes their reports seems out of date when viewed today, especially using a medium which allows immediate updating. However, had current financial events not occurred, AngloGold Ashantis specific mention of the possibility of credit unavailability might have seemed less insightful and a hindsight assessment of it might have shown that the assessment was not true.

Dobler (2008:197) notes that risk assessments in many jurisdictions require some level of verification. While this is often done through a mandatory verification process, stakeholders often also look at forecasts later to assess their credibility. Dobler (2008:197) suggests that this may result in an increase in the verified and credible risk reporting, but it may also result in unverified risk information being withheld. This research report suggests that where risk reporting is only released to the public once a year, its credibility over the span of the year becomes more important. The research report writer would also hypothesise that it may be more difficult to report on wildcards as a result, since only a few of them will come to pass. Some may pass the criteria of having them being able to be verified later to assess their validity but, since wildcards by their nature often do not come to pass and are not widely accepted by the general public as representing a likelihood of occurring, it may represent a risk to companies to disclose them in documents that are expected to remain valid over an extended time period.

4.3

RISK REPORTING VS. RISK ASSESSMENT

Numerous researchers have highlighted the distinction between risk reporting and risk assessment. Lajili and Zeghal (2005:128), for instance, note the fact that there is a significant difference between internal risk reporting that is intended to assist management and employees; risk information that is presented to the board; and external reporting, such as the reporting that is being discussed in this MPhil research report. They highlight the fact that these different types of reporting practises can be informal or formal and are often characterised by information asymmetries between management and stakeholders.

Dobler (2008:186) further elaborates on the theme of information asymmetries and notes that managers have incentives to withhold or disclose information in public reports.

43 With reference to several of the topics outlined in the previous chapter, it is interesting to note that resource nationalism is not prioritised by the sampled companies as much as E&Y suggest that it should be. While the writer of this research report has, in Chapter 3, suggested that the lack of prioritisation of this risk may indicate that this is a wildcard, in relation to information asymmetry, it should also be acknowledged that the may be an attempt (perhaps unintentional) of not upsetting government.

This hypothesis is given credence by the fact that governments historically, and particularly in South Africa, have been keen readers of annual reports and especially of the risks that are represented in them. This is illustrated by the fact that Sasol was accused of bad mouthing South Africa, when it noted that black empowerment equity transactions were a risk to its business as was recent mining legislation (Battersby:2003). The incident in which the then president of the country, Thabo Mbeki, was a lead participant and commentator, could have potentially resulted in companies becoming more light footed around their representation of risk related to resource nationalism and new mining legislation, and may be resulting in a diminishing of the rankings of these risks in the reporting of mining risk factors.

All of the companies that were sampled have assets in South Africa and all will, as a result, be dependent on the State to give them their mining and prospecting licences. It would seem, as a result, that companies may not want to offend government, and have taken this position. This might be more likely in cases where there is a licence pending or where government is a purchaser of the commodity involved, such as would be the case for many of the coal mines within South Africa that depend on the purchase of coal by State electricity utility Eskom.

However, it is also possible that companies on some level will be trying to influence government through lobbying in their annual reports. Minister of Mineral Resources Susan Shabangu, for instance, is well aware of how investor confidence can be affected by poor reports of the countrys investment climate and responds publicly, trying to address issues that could negatively affect future investment (Janse van Vuuren: 2011). As a result, it is possible that companies may be trying to influence government policy on various issues through the court of public opinion that it can address through their annual and other public reports.

Dobler (2008:195) also notes that reports have also been described in terms of games, and it has been suggested that reports have been used to present unfavourable information, in this case negative risks that are influencing the company, to competitors in the hopes of dissuading them from investing in the sector. This motivation is countered by a desire to present private positive

44 information, some of which can potentially not be supported with evidence, to shareholders in the hope of attracting investor attention.

In the case of trying to dissuade competitors from entering the sector or seeking to obtain rights in a nearby area, it is likely that this motivation might result in numerous risks being mentioned and possibly even those risks that are considered wildcards, since the volume and importance given to these risks could influence competitors behaviours in entering into a sector.

In the case of trying to persuade investors to invest in a mining firm, at first glance one might anticipate that the identification of fewer risks and the downgrading of the likelihood of them occurring and the impact of them occurring would be the best strategy to attract investors. There is also the strategy of showing risks that are likely to result in something positive. However, some research now suggests that investors view greater detail in the reporting of risks in a positive light, with a firms valuation going up with the finer information that is contained in the reporting of risk (Dobler 2008:194). This would suggest that the most optimal strategy in formulating a risk communicating strategy would be to list all known risks, describing them fully, in the hope of conveying to shareholders that one is knowledgeable about the potential risks that one is likely to face and will be in a position to more easily combat these risks as a result.

However, as far as wildcard reporting is concerned there could be the fear that shareholders might believe that a company was not being realistic in its representation of risk. Many wildcards are regarded as having not been widely accepted in the community and, if they are deemed to be outlandish, it is likely that the investor would not have great confidence in the company that is reporting the risk. Thus, it is perhaps a good strategy for companies to stay away from pronouncements that are too outlandish to be accepted by the general investor.

The fact that companies are very aware of which risks are acceptable to report and which risks are unacceptable to report is given credence by the observation that companies tend to disclose risks in herds (Dobler 2008:193). Dobler notes that if a sufficient number of companies come to disclose a particular risk, it is likely to be followed by the whole economy or at least the industry in which those companies are located. This suggests that risks tend to only be foregrounded where they have gained great acceptance in the industry as a large and, while some companies may place an emphasis on a wildcard, it is more likely that companies will report and consider the same widely appreciated risks. As a result, at least at a formal external reporting level, the likelihood of a wildcard risk being reported diminishes significantly.

45

The issue of which risks are reported publicly is also likely to be affected by the information asymmetries that occur earlier on in the risk reporting cycle , when reporting of risks is made at a board level. It is likely that there is some skewing of risk representation to a board that is politically connected, especially when it comes to the representation of risks such as changes in regulation and resource nationalisation. It seems to me that it would be human nature to alter the tone of the risk information that is conveyed to a board on which members linked to the ruling party serve. A source who is involved in risk assessments has also attested to the fact that one company was assured by one of its politically-connected boardmembers that their rights would not be contested. Based on this information, the company decided that there was not a risk involved in its security of tenure and, to its detriment, did not foresee or plan for this risk, which did eventually materialise. Thus, the very nature of the board influencing how risks are perceived should not be underestimated.

Besides the government or politically-connected stakeholders who read the risks involved in mining, there are also community and labour stakeholders. It is likely that risk reporting could take these stakeholders into account.

One would expect that labour stakeholders would be interested to hear that skills shortages were a significant risk for a company, and potentially use statements along these lines to support aboveinflation wage demands and strike action.

One would also expect that communities would be eager to read whether companies believe that there is any likelihood of their social licence being taken away, as well as any potential reasons for this occurring. They might appreciate that they are being considered and they might appreciate that issues that affect their environment, health and safety, etc., are being looked at with due concern. However, companies would also have to be wary of disclosing such information if they were endangering the environment, health and safety of the community in any way, since the community could use the risk write-ups that describe this as ammunition for bargaining or for closing down the mine, etc. The importance of considering community stakeholders in the readership of public reports is underscored by the fact that the reader has heard from undisclosed sources that companies are even particularly cautious about showing before-mining and aftermining photographs in their company reports.

46 4.4 NATURE OF RISKS DISCLOSED

Much of the risk assessment research that has been carried out in the past has been carried out on the management discussion and analysis sections of annual reports and on the notes to the Financial Statements, although Beretta and Bozzolan (2004:267) acknowledge that in some jurisdictions, such as Germany, risks are contained in their own section. It may be for this reason, that many global companies report risks in a fairly narrow fashion and mainly list market and credit related risks when they discuss risks related to their companies (Beretta and Bozzolan 2004:267). The author of this research report would suggest that this trend towards a narrowly understood set of risks that is reported on may obscure the importance of low probability risk reporting, and is likely to result in fewer wildcards being reported on.

This research report has investigated companies that have dedicated sections of information related to risk, and they tend to be the companies that have a broader conception of risk than that related to the market or credit. They are thus not those companies that typically have notes to a financial report, where a discussion of climate change or skills shortages may seem out of place. They are also those companies that are more likely to discuss risks that do not relate specifically to economic risk.

The sampled companies presence in South Africa, where they have been exposed to the King III Report may also be a factor that has resulted in their broader conception of risk. King III, after all, calls for complete risk disclosure and requires that any undue, unexpected or unusual risks or material losses be noted (PwC: 2011a). This, to me, suggests a broad understanding of risk and an understanding of risk that goes beyond what is typically construed as a risk, and potentially an endorsement of the disclosure of high-impact low-probability events, i.e. wildcards. However, the King III Reports insistence on accurate risk disclosure might also act to decrease the likelihood of wildcard risks being noted, since the term accurate suggests verifiability, and it has been noted in the discussion that preceded this that this often could result in unverified, or potentially not widely accepted, information being withheld.

Sections 3.7, 3.8 and 3.9 identify risks that specifically relate to financial information, i.e. to price and currency volatility, capital allocation and cost management, so, according to what has been discussed previously, it is possible that risk paradigms that had prioritised financial information may be having an influence on the ranking of these items, especially where they appear to be being ranked higher than potentially they should be.

47 4.5 CONFIDENCE IN HANDLING RISKS

The King III Report also insists that the board should ensure and that management considers and implements appropriate risk responses (PwC: 2011a). This confidence in their ability to manage risks, possibly influenced by King III, comes through in all of the risk write-ups of the sampled companies since they typically list control or mitigation measures, sometimes in greater length than their identification of the risk, alongside the risks that they highlight.

However, this sense of being able to control risks and being able to explain them accurately and fully may actually give investors and stakeholders a lack of a sense of how vulnerable firms are to risks, may result in risks for which no satisfactory mitigation measure has been thought about not being disclosed, and may result in a false sense of comfort about the companys ability to control its environment and identify risks.

Dobler (2008:201) discusses the possibility of having negative reports that force managers to disclose where they are not informed about a particular risk or the extent of that risk. Clearly this is not the approach taken by the King III Report, and it is possible that allowing negative reports would at least force managers to acknowledge which risks are so far off their radar screen that they have not considered them at all. Potentially, some of these might be the wildcard events that mining companies may be ignoring.

Taleb (2007:48) notes that an attitude of learned ignorance is the first step towards honest inquiries after the truth and that the illusion of understanding is often an obstacle towards identifying black swans, or wildcards. However, it is unlikely that this avowal of ignorance would go down well with investors who want to be assured that a company is prepared for any risk that it is likely to encounter. As a result, companies are unlikely to volunteer information that presents their not being able to control and manipulate the environment in which they operate.

The closest that one of the companies that was sampled comes to acknowledging a lack of control over their immediate environment is the risk write up that comes from Northam. The company refers to constantly changing environmental laws and regulations as well as increasing community and social obligations. It also refers to the fact that the mining sector in South Africa is subject to changes in regulatory requirements. The frequent mention of change and the dynamic environment suggest a regulatory risk environment that is in flux and that needs to be adapted to. Just how well investors respond to this type of language remains to be seen: it is possible that they may reward Northam for its honesty and invest or avoid Northam because its future is more

48 uncertain than the future that is represented by some of its peers. However, it is certain that the investment community and how it perceives the reporting of uncertainty in risk write-ups will continue to influence how these write-ups are compiled. It will also be interesting to note if, as a result of their exposure to ideas of uncertainty due to the recent financial and other shocks and a sense that it is not possible to always be in control of ones immediate environment, there will be a change in the acceptance levels of investors towards risk write-ups that do not convey the expected mastery over their environment that many mining companies risk assessments tend to convey. For this, a study covering these types of reports pre and post the financial crisis period could perhaps be instructive in understanding how uncertain events have shaped investors reception of shareholder-directed reports. 4.6 RANKINGS OF RISK

4.5.1. Commodity, country or mining method specific risks Thus far, it has only been alluded to in the discussion on infrastructure (Section 3.4) that there may be reasons that are commodity specific why one risk may apply more to one mineral producer than another.

The same is true of risks that may be more country specific or mining method specific. Such may be the case with secure and cost effective electricity. This E&Y (2011:30) lists this as a risk because underdeveloped countries have not invested sufficiently in energy production, which has resulted in a difficult production environment for those dependent of electricity and particularly for those involved in underground mining, which requires electricity for production and for the provision of services, such as ventilation. The auditing firm ranks this as its 11th most important risk though and it is thus a risk that the company regards as under the radar.

For South African mineral producers this lower risk ranking may seem unusual. Gold Fields mentions energy security as its 8th most important risk; Northam mentions Infrastructural services supply risk as the 3rd risk heading that it discusses and deals exclusively with its security of energy supply; and Exxaro mentions the lack of security of supply and the cost of energy as its 5th most important risk. Only AngloGold Ashanti does not devote considerable space to noting that this is an important issue, and only notes electrical power interruptions as among the many risks faced by its operations.

While the amount of concern given to electricity supply security and cost seems out of proportion to this risks ranking by E&Y, South Africas frequent recent spates of power interruptions as well as its numerous tariff increases, the concern over electricity seems particularly appropriate in a South

49 African mining environment. As a result, the sampled companies rank this higher and will be prepared for the possibilities of supply interruptions in a way that they might not have been prior to the electricity interruptions; in that sense what might have been a wildcard that had a tremendous impact on their businesses in the past has now been accounted for. To this extent, in a South African mining environment, not mentioning this risk, or mentioning it in passing, may suggest that this risk is not properly accounted for.

4.5.2. Interlinked risks It has also been suggested previously that several risks may be so intertwined with each other, that a ranking of one over another would be non-sensical since each implies the other to a certain extent. Such may, for instance, be the case with interruptions in supply (caused by natural and environmental disasters) and climate change (Section 3.10). Such may also be the case, as has been noted, with skills scarcity, which may suggest increased costs, due to labour action, and a likelihood of a company not being able to meet its employment equity target, due to competitive poaching by other firms (Section 3.3).

Interlinked risks may also be the case with the risk of increased regulation. E&Y only ranks increased regulation as its 17th most important risk, despite the fact that it ranks related concepts much higher. For instance, it describes resource nationalisation as its most important risk, and this is linked to increased regulation as increased regulation is likely to have to be introduced to ensure that the State gets a greater share of the mining pie. Increased regulation is also linked to ensuring that one has a social licence to operate (another of E&Ys higher ranked risks) since the State ensures that the health and safety of communities and workers is taken into account and the environment is protected by introducing legislation. Northam, in particular, spends a considerable amount of space tackling this increase in regulation, and, while this may seem peculiar given E&Ys low ranking of this risk, it may be perfectly justifiable given that regulations relate to many of the risks that E&Y does identify.

The lack of noticeable linking between the risks is perhaps also a function of the fact that they appear as a list, and would probably be better portrayed as a systems map. The list has its advantage of making risk assessment formatters concretise specific risks, but it is possible that some additional details are lost.

50 4.5.3. Risk as identifiable and assessable The discussion so far has also assumed uncritically that E&Y has identified the key risks that the mining and minerals sector will face and that it is able to know unequivocally what these risks are. The companys qualifications to know what risks affect the sector is somehow assumed and its superior knowledge of the mining sector over companies that are involved in mining has gone unchallenged.

While E&Y notes that it has used discussions from its own analysts as well as discussions with mining firms to compile this list, it does not detail which companies it surveyed or describe how it came to its conclusions. It does not even state that its choices of the top ten risks to influence the mining sector is a consensus view, leading one to query on what basis one should accept its view of the nature of risk in the mining sector.

It is clear from comparing E&Ys list with that of the sample of those in the mining sector, that there are considerable differences of opinion on what constitutes the most important risks for those involved in the mining sector. There are also considerable differences in opinion between the sampled firms on the most important risks facing the mining sector or themselves in particular.

The lack of clarity on a list of the most important risks facing the mining sector is further emphasised by the fact that a competing auditing firm has compiled its own list of risks facing the mining sector and its list is very different in ordering and in nature. KPMG (2011) generates a list of the top five business risks that the mining sector will face based on a survey of mining executives. It lists cost escalation first - E&Ys 3rd most important risk - which it follows with government involvement in the industry, access to new projects, ability to raise capital, and labour shortages. This research report suggest that KPMGs government involvement in the industry incorporates E&Ys most important risk of resource nationalism, as well as its 17th most important risk increased regulation. As a result of KPMGs first two risks being in E&Ys top three list of risks, it is likely that they are fairly comparable. However, when it comes to KPMGs 3rd, 4th and 5th most important risks there is some divergence in opinion especially with regards to the 3rd and 4th risks which E&Y ranks as its 12th and 15th risks, respectively.

This lack of comparability may be partially a result of the companys demonstrating that they are different and that they offer an independent perspective of risk. The up and down movement of the risks each year on each of the auditing firms lists may also be cynically seen to be important in order to confirm that the risk environment is a complex one that the auditing firms need to be

51 consulted on continually. Equally cynically, this movement of risks makes the lists that are drawn up an eagerly anticipated read, which might not be so enthusiastically expected if there were not the dramatic shifts in which risks are among the top, which are new entrants into the list and which risks are falling in importance.

However, it may also be that it is not so easy to perceive and capture the lists of risks that are likely to influence a particular sector. Since the exact influence of a risk on a sector is hard to determine even where that risk is widely regarded as important, the same may be considered to be true of wildcards which, by their definition, are difficult to identify as important influences on a company in the future.

4.5.4. The importance of history Companies that have had an experience with a particular risk tend to rank these risks higher (Baissac, 2011). This is in evidence particularly in the risk reporting of AngloGold Ashanti, which highlights the actual conditions that it is facing, noting that it has borrowings of ~UDS1.9bn when discussing indebtedness, that its growth initiatives will require USD2.5bn over the next three years in its discussion of its financing arrangements and how 2,500 staffmembers are receiving antiretroviral drugs when discusses the diseases, including HIV/AIDS, that it faces.

An intimate knowledge of the company could present many weak signals that could suggest potentially a wildcard risks. Gradual changes could also be suggested and these could assist companies to identify events that will happen with a strong likelihood and with a high impact.

Interestingly, Baissac also notes that those companies that have had experience of resource nationalism, for instance, will also be among those that take this risk most seriously. One would therefore expect that companies in South Africa that have experienced a re-writing of much of the mining legislation, the introduction of mining royalties, and the proposal for increased beneficiation requirements would take resource nationalisation more seriously, notwithstanding the political reasons not to that were mentioned in Section 4.3.

One would also expect companies that had just come through a recession which has gripped the world to consider this as a serious risk. Of the sampled companies, AngloGold Ashanti outlines this risk most explicitly. The company notes that global economic conditions could adversely affect the profitability of AngloGold Ashantis operations. It notes that this could influence supplier insolvency, changes in its anticipated income and expenses, unforeseen cash payments into

52 pension funds due to their underperformance and, importantly, a reduced ability in its ability to obtain finance.

The fact that access to capital is high on the list of risk concerns for many of the companies sampled is potential support for the idea that these companies had experienced the difficulty of raising capital during the recession and havent forgotten this lesson.

This sensitivity to this risk is understandable given the recent global financial woes, which could continue if problems in the Euro-zone are not solved. However, the fact that E&Y sees this risk as diminishing (reducing its ranking from 8th on its list of concerns to 12th on its list of concerns) while various of the sampled companies suggest that this remains a risk is either due to some misperception of the risk by E&Y or by the companies involved. In all events, it appears that many of the mining companies sampled will not be as surprised if another financial crisis results in a shortage of available capital.

While the global economic collapse could be seen as having been a wildcard when it happened, it is clear that companies are prepared for another collapse of a similar nature and will not be caught napping if such a collapse occurs once more.

4.7

CONCLUSION

Chapter 4 describes some of the subtleties that may influence risk reports and the understanding of risk reports as presented in Chapter 3. These include: The format of the risk reports, which may influence their length and the ability of users to update the risk reports in addition to being associated with a certain cost that may not be equally well borne by all companies writing risk reports. Information asymmetries that are involved in risk reporting, and which may give managers incentives to withhold or disclose information in public reports. These asymmetries may result in companies trying to influence other roleplayers in the mining sector through their reports. There being a tendency to report risks that relate to financial information. The possibility that global mining sector rankings, as presented by E&Y, disguise the importance of commodity country, commodity and mining method-specific risks and that risks may be interlinked.

53 The possibility that rankings of risks by companies may be more of an accident of history than a faithful representation of the risks faced by a company.

54

CHAPTER 5 WILDCARDS AND LOWER PROBABILITY EVENTS

5.1 INTRODUCTION

E&Y mentions several other issues that it describes as off the radar and which do not make it on the companys top ten list of risk affecting the mining and metals sectors. These include: Access to secure and cost effective energy. Access to capital. Climate change concerns. Consolidation. Pipeline shrinkage, referring to the scarcity of projects that are available for investment in. Scarcity of water. Increased regulation. New communication vehicles for community activism. New technology.

Several of these receive significant attention from the sampled companies, including on the issues of access to secure and cost effective energy (discussed further in Section 4.5.1), access to capital (discussed further in Sections 4.5.4) and increased regulation (discussed further in Section 4.5.3).

Others of these E&Y off-the-radar risks receive less attention or even no attention by the sampled companies, including new communication vehicles for community activism and new technology. These could potentially be the next wildcards for companies, since they are clearly not giving these issues the attention that E&Y suggests that they possibly should since they are included on the auditing firms set of risks. The sections that follow discuss two of the off-the-radar risks and some of the risks that Exxaro, Gold Fields, AngloGold Ashanti and Northam mention that E&Y doesnt. 5.2 NEW COMMUNICATION VEHICLES FOR COMMUNITY ACTIVISM

E&Y describes this risk as the 18th most important risk facing the mining sector and, as such, views it as an off-the-radar screen risk since it does not feature among the top ten risks that it describes in its report on The top 10 business risks for mining and metals. It further notes that this risk has fallen from being the 16th most important risk, although the auditing firm acknowledges that public concern over the mining and metals sectors is being played out openly on this new

55 platform. The mining companies sampled, similarly, do not feature this as a significant risk and even fail to mention it in their risk reports, thereby indicating that it is less than noteworthy.

However, this stance by both E&Y and the mining companies that have been sampled seems surprising given the publicity in 2011 and early 2012 about concerted campaigns using new communication media to topple governments and raise awareness about business practises. The usage of new media over this time has included its use to publicise and promote political action in the Middle East, to galvanise people against the abuses of the current economic order through the Occupy Wall Street movement, and, at the time of writing this report, to raise awareness of working conditions in China (The Economist, 2012).

The author of this research report believes that the omission of this important risk may result from a certain apathy from various mining companies to new communication media. This is confirmed by the fact that some suggest (Spicer: 2011b) that there is a significant difference in the uptake of new media by mining companies outside of Australia and Canada and those located in Australia and Canada, with those in Australia and Canada appearing to be early adopters of the media. There is also a significant difference between junior mining companies and major mining companies acceptance of new media, with junior mining companies being early adopters of this medium.

For Exxaro, AngloGold Ashanti, Gold Fields and Northam it is perhaps an accident of location and an unfamiliarity with new communication media that results in these companies not mentioning this as a risk. The contention that there is a lack of interest in new media by these firms is reinforced by the fact that only AngloGold Ashanti, of the companies surveyed, appears to have a presence on a medium such as Twitter, and this seems to be reduced to its owning the user ID, since it is not an active user on the new media platform (Spicer: 2011b). 5.3 NEW TECHNOLOGY

Another surprising issue that appears not to be taken cognisance of by Exxaro, Gold Fields, AngloGold Ashanti or Northam is that of new technology. To be fair, even E&Y suggest that this is not a significant risk to the industry by ranking it as the 19th of 20 risks that it outlines and by ascribing it the title of a risk that is off the radar screen. Moreover, E&Ys analysis suggests that this risk has even fallen from the 17th most important risk faced by the mining sector to being the 19th most important risk.

56 However, given that South Africa is at the forefront of deep-level gold and platinum mining, the research report writer would have thought that Gold Fields, AngloGold Ashanti and Northam, producers of gold and platinum, would have suggested that this is a risk that is worth considering. This is particularly true of AngloGold Ashanti, which is spearheading moves to promote mechanisation and automation, and is promising to have peopleless stopes (Creamer: 2011). The inexplicable not mentioning of new technology and the importance of obtaining and making this technology work in deep level mines can only be explained away by suggesting that those

involved in the technology development programme are not actively working together with those involved in risk reporting and risk assessment

In a case such as this, it appears that global mining concerns have resulted in companies with South African operations ignoring risks that are particularly prominent in the South African mining sector.

5.4

RISKS NOT MENTIONED BY E&Y, BUT MENTIONED BY THE SAMPLED COMPANIES

There are issues that are not included in E&Ys off the radar list but are mentioned by the sampled companies. These include items such as negative investor perceptions of the jurisdiction that a company invests in, the possibility that previous software versions might influencing information security and availability or that there might be a loss of information and integrity of data, the possibility of geological risk, the risk of delays in obtaining mining and environmental rights, the vulnerability to operational performance that may be out of the companys control due to the operation being run by a contractor, the risk of the interpretation and application of accounting literature influencing the bottom line, the difficulties involved with security and political instability, the costs of occupational health diseases and the risk of high cost insurance premiums, among others.

These are risks that the author of this research report believes are particularly applicable to the mining industry. They do not reflect any real surprises, although it is surprising that E&Y does not list them among those risk that it believes are particularly important for the mining sector. This may suggest that E&Y can perhaps also learn from mining companies about the risks that typically affect them, and that the auditing firm is not the sole arbiter of what should be construed as an important risk, as has already been suggested.

57 These risks suggest that companies are exploring risks that differ from a high level overview of what the typical risks in the mining sector should be, and suggest that there may be a break from the herd reporting that has been discussed previously (Section 4.3). This bodes well for the uncovering of wildcards, which are often not accepted by the majority of the interested roleplayers and are by definition not reported by the herd. It also suggests that these low probability events, which remain unacknowledged by many, may be wildcards.

However, even these seem a far cry from some of the Petersens Out of the Blue Wildcard Catalogue (1997 quoted in Petersen et al 2009:14-16) since the sampled companies outlined risks are very much tied to what has happened historically or what there is some evidence for occurring. Petersens wildcards, in contrast, include: EARTH AND SKY o o o o o o o o o The Earths Axis Shifts. Asteroid or Comet Hits Earth. Ice Cap Breaks Up. Gulf or Jet Stream Shifts Location Permanently. Global Food Shortage. Extraordinary West Coast Natural Disaster. Rapid Climate Change. Collapse of the Worlds Fisheries. Major Break in Alaskan Pipeline.

BIOMEDICAL DEVELOPMENTS o o o o o o o o o Bacteria Become Immune to Antibiotics. Worldwide Epidemic. Foetal Sex Selection Becomes the Norm. Human Mutation. Health and Medical Breakthrough. Long-term Side Effects of a Medication Are Discovered. Human Cloning Is Perfected. Life Expectancy Approaches 100. Birth Defects Are Eliminated.

58 o Collapse of the Sperm Count.

GEOPOLITICAL AND SOCIOLOGICAL CHANGES o o o o o o o o o o o o o o o o o o o o o o o o o o Civil War in the United States. U.S. Economy Fails. No-Carbon Economy Worldwide. Altruism Outbreak. Social Breakdown in the United States. Israel Defeated in War. Collapse of the U.S. Dollar. Economic and/or Environmental Criminals Are Prosecuted. Rise of an American Strong Man. Stock Market Crash. Civil War between Soviet States Goes Nuclear. Major U.S. Military Unit Mutinies. The Growth of Religious Environmentalism. End of Intergenerational Solidarity. New Age Attitudes Blossom. Religious Right Political Party Gains Power. Mass Migrations. Africa Unravels. U.S. Government Redesigned. Electronic Cash Enables Tax Revolt in the United States. Western State Secedes from the United States. Illiterate, Dysfunctional New Generation. Collapse of the United Nations. Mexican Economy Fails, United States Takes Over. End of the Nation-state. Society Turns away from the Military.

TECHNOLOGY AND INFRASTRUCTURE UPHEAVAL

59 o o o o o o o o o o o o o o o o o o o o Long-term Global Communications Disruption. Massive, Lengthy Disruption of National Electrical Supply. Energy Revolution. Time Travel Invented. Y2K: The Year 2000 Problem. A New Chernobyl. Encryption Invalidated. Loss of Intellectual Property Rights. Fuel Cells Replace Internal Combustion Engines. Room Temperature Superconductivity Arrives. Developing Nation Demonstrates Nanotech Weapon. Cold Fusion Embraced by Developing Country. Faster-than-Light Travel. Virtual Reality, Holography Move Information, Instead of People. Virtual Reality Revolutionizes Education. Self-Aware Machine Intelligence Is Developed. Technology Gets out of Hand. Humans Directly Interface with the Net. Nanotechnology Takes Off. Computers/Robots Think Like Humans.

NEW THREATS AND OLD THREATS FROM NEW SOURCES o o o o o o o Information War Breaks Out. Major Information Systems Disruption. Nuclear Terrorists Attack the United States. Terrorism Swamps Government Defences. Terrorism Goes Biological. Hackers Blackmail the Federal Reserve. Inner Cities Arm and Revolt.

SPIRITUAL AND PARANORMAL

60 o o o o o The Arrival of Extraterrestrials. The Return of the Awaited One. Remote Viewing Becomes Widespread. Life is Discovered in Other Dimensions/Realms. Future Prediction Becomes Standard Business.

Some of the events on Petersens list of wildcards are events that one could easily conceive of as happening or have to some extent already happened, including terrorism goes biological, collapse of the US dollar, US economy fails, mass migrations, and inner cities arm and revolt.

Petersens list, however, seems quite sensational and is reminiscent of attention getting newspaper headlines, which the risks outlined by the sampled mining companies are anything besides. Many of the risks that Petersen outlines also seem quite inconceivable, including the arrival of extraterrestrials, time travel invented and the return of the awaited one. Never in the author of this research reports wildest imaginings can she ever envision a mining companys annual report or risk reporting documents to contain such risks.

It is evident that the risks that the sampled companies outline could be conceived of as possible by the broader community and not nearly as outlandish although they could potentially be conceived as wildcards due to the risks unacknowledged status. 5.5 CONCLUSION

Certain risks that E&Y relegates to the off the radar screen category are perhaps being ignored by South African mining companies at their peril. These include the risk of new communication media to their businesses as well as the risk of not adopting new technology to access gold and platinum orebodies that are becoming deeper. These could be potentially seen as wildcard risks if they are not being anticipated as worthy of consideration.

In the same way, E&Y could potentially be seen as missing some risks that are integral to the mining sector. The risks that Exxaro, Gold Fields, AngloGold Ashanti and Northam identify that are unmentioned by E&Y are, however, risks that are intuitively felt to be important and may not be of the same type as the risks that some theorists are listing as wildcard risks (some of which seem quite inconceivable).

61

CHAPTER 5 SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 INTRODUCTION

Chapter 5 discusses some of the main findings of the research report and makes several recommendations for risk assessments. The findings and the recommendations relate to risks in general as well as to wildcard risks. The chapter concludes with a discussion of further research that could be undertaken as a follow up to this research report, and specifically highlights further research related to wildcard risks. 5.2 SUMMARY OF MAIN FINDINGS

Some of the main findings of this research report are: There does not seem to be a clear definition of what would constitute a wildcard. Mining companies tend to report on what they perceive to be high-impact (and oftentimes high-probability) events, rather than considering low-probability high-impact events In a comparison of mining company risk reports and an E&Y assessment of these risks there are divergent assessments of what constitutes the most important risks facing the mining industry. There are a number of reasons why there may be divergent assessments of what are the most important risks facing the mining industry, including: o Information asymmetries between the writers and readers of reports that ensure that readers are not given the full details regarding a particular risk or are given misleading information related to a particular risk. o o Psychological barriers to accepting particular risks. Structural issues that determine which risks are considered important, including the jurisdiction in which companies are located. o Historical factors that suggest that companies will be more aware of a particular risk if they have encountered it before. o The nature of the medium of risk reporting that does not allow the reporting of risks as interlinked with each other, forces companies to report with an acceptable level of brevity and does not require that companies update their lists of important risks regularly enough.

62 It is suggested that wildcard risks reporting would face similar disclosure obstacles as the reporting of risks that are considered the most important risks facing the mining industry. Where there is a significant discrepancy between what is commonly regarded as the most important risks facing the mining industry and what the company perceives to be the most important risks facing it, this could suggest that important risks are being overlooked and these risks could represent wildcards for particular companies. Where companies are reporting on particular risks that their peers are not, these risks may have been foreshadowed by weak signals, that have been picked up by some and not others, and they may be regarded as wildcards. South African mining firms reporting of risks, and even risks that are not discussed by others, does not describe many of the fairly outlandish wildcard risks that are discussed by some theorists. 5.3 RECOMMENDATIONS

There are several recommendations that are suggested by the research report. These are discussed below and overleaf.

5.3.1 Greater attention to wildcards From the discussion in Section 1.4, there are several reasons why greater attention should be invested in examining wildcards that may influence a business, including the fact that they may have a significant influence on that business and the fact that greater transparency and awareness about risks are being required by shareholders and legislators. To this end, it might be advantageous for those in the mining industry to discuss these risks openly and even to join forums such as iknow (2012), if they are not members already, to get a better sense of the weak signals that might suggest wildcards that could potentially affect the world or particular industry sectors.

5.3.2 The removal of information asymmetries From the discussion in Section 4.3, it is apparent that information asymmetries reduce the possibility that information is transferred from the risk assessor to the risk report writer and to the reader unfiltered by political and economic considerations. While it may be wishful thinking to suggest that complete transparency might be possible in risk reporting, this might be a noble aim to strive towards, and may even present the possibility of an upward valuation of a companys shares, since investors are indicating that they prefer companies that are knowledgeable and transparent about the risks that affect their businesses, as has been suggested in this research report.

63

5.3.3 Greater coordination of risk management It is clear from the research report that there may be different groups of people who are involved in risk reporting and risk assessment (never mind those people at an operational level who are charged with implementing the risk management strategy). Those that report the risks may be performing somewhat of a public relations function, since they may also be responsible for ensuring that an acceptable image of the company is portrayed in public reports, while those implementing risk management strategies may not perceive the importance of risk assessments that are often carried out in a top-down fashion. This disconnection between members of a risk management team can result in various members not fully understanding the importance of various risks, not including these risks in their communication to the general public and not implementing measures that would indicate that these risks are considered important risks likely to affect a particular business. As a result, it may be prudent to ensure that all members of a risk management strategy team understand the risks affecting the business, including those risks that are typically described as wildcards.

5.3.4 An improved understanding of group think The nature of herd reporting is discussed in Section 4.3, where it is noted that sectors tend to disclose risks as a herd, with only those that are accepted by all being promoted. The group think surrounding these issues as well as the group reporting habits are unlikely to present anything that truly challenges the status quo, even though some of what is presented may be mildly surprising.

Markley (2011:4-5) notes that there are several reasons why wildcard events have low credibility, including: Passive disbelief, caused by no attention being given to a subject, worldviews that conflict with consideration of a subject, a lack of dissemination of information on a subject, or not a lack of dissemination in a convincing way. Active disbelief, where wildcards conflict with held beliefs. Disinformation, where important information related to a wildcard has been distorted. Taboo, where talking about a wildcard would undermine someones credibility. Censorship, where authorities limit discussion of certain wildcards. Disrepute, where those discussing wildcards are wary of being regarded as a prophet.

64 It is important that those that are involved in risk assessment and risk reporting actively examine their assumptions and whether their thinking has in any way be conditioned by the inputs of others. An awareness of this group think phenomenon should be encouraged, as should actively challenging belief structures and exploring alternative belief structures.

5.3.5 Exploring new presentation methods for risk assessments It has been suggested in this research report that the ranking of risks in short lists, without showing their interlinkages, is not the most appropriate way to explore the most important risks affecting the mining sector or of showing wildcard risks that may be ignored through this means of presenting.

Baissac (2011) has suggested more innovative ways of exploring the risks related to the mining sector, including through the stories, poems, etc. These may show more of the interconnectedness of the risks involved in a sector and involve less of the politicised representation of risk. However, given that these forms of risk presentation may be too novel for shareholders or those who are familiar with traditional representations of risk, it might be advisable to suggest that risk reporting adapts a newer but more acceptable method of presentation such as a systems map of risks, showing their interconnections as a web and indicating a larger number of risks, some of which may be regarded as peripheral but come to be seen as important wildcard events. 5.4 FURTHER RESEARCH

5.4.1 Fundamental questions of this research report Going back to the assumptions that are involved in a research report of this nature, readers can recall that some of the fundamental questions raised by this report are: We can know what risks (including wildcard risks) will influence the mining sector. We want to know what risks (including wildcard risks) influence the mining sector. We want to do something about the risks (including wildcard risks) that influence the mining sector. We can report about the risks (including wildcard risks) that influence the mining sector. We want to report about the risks (including wildcard risks) that influence the mining sector.

This research report has touched on many of the aspects listed, but dealt mostly with the first point as well as the last two points. Each of the individual assumptions merits further research in its own right.

65

5.4.2 Limitations of this research report The author of this research report had originally anticipated the need to interview representatives of mining companies since the author anticipated that the wildcards that may be considered by companies may not be stated in public-domain documentation because they might be regarded as too outlandish for investors, who may not want to invest in companies which consider all-manner of seemingly inconceivable risks in their risk planning. However, due to time constraints, and a lack of response from the four mining companies that the author of this research report contacted, this did not happen.

This has limited the study significantly, and has resulted in a textual analysis of the risk reports that are available in the public domain. Further research, perhaps including interviews from the companies involved or perhaps including primary research from having been involved as a participant in risk assessments, may prove to be valuable and could be a source of additional research.

5.4.3 Exploration of wildcards and their incorporation into strategic planning While this research report attempted to examine how mining companies incorporate wildcards into their strategic planning, it would be interesting to examine what the methodology would be used to discuss some of the more outlandish wildcards that are listed by Petersen (2009). In addition, besides this practical aspect of how to assess wildcards of the nature suggested by Petersen, it would be interesting to determine whether the time spent on examining these wildcards, including the wildcard risk of extraterrestrials arriving, would be seen as a waste of shareholder money and possibly a breach of corporate ethics.

It may be true that this list serves as a mental exercise to open up the mind to new possibilities, even though some of Petersens suggested wildcards have been shown to have occurred and are plausible. However, there are very real issues about the practicality of investigating wildcards such as these, as well as ethical issues such as the misuse of shareholder money in investigating risks that are in some cases quite far fetched.

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