Professional Documents
Culture Documents
Contents
Executive summary
10
1. Resource nationalism
11
2. Skills shortage
14
3. Infrastructure access
17
4. Cost ination
20
23
26
28
32
35
38
40
42
Getting prepared
46
Up from 2011
Same as 2011
New entry
The risks closest to the center of the radar are those that pose the greatest challenges to
the mining and metals sector in 2012 and into 2013.
Executive
summary
On the surface, the top ten risks dont look all that different
from last year, but below the surface there has been an absolute
shift that has made them signicantly different. The risks facing
the sector have become more extreme and more complex over
the past 12 months due to the fast changing investment and
operational environment. Two signicant contributing factors are:
1. Softening commodity prices which have seen mining and
metals companies taking on more risk relative to the short
term returns
2. Capacity changes in terms of skills and infrastructure which
have affected organizations short term commitment to capital
projects with life of mine of at least 10 years
Resource nationalism retains the number one risk ranking as governments seek to transfer
even more value from the mining and metals sector. Many governments around the world have
now gone beyond taxation in seeking a greater take from the sector, with a wave of
requirements introduced such as mandated beneciation, export levies and limits on foreign
ownership.
There is no doubt projects around the world have been deferred and delayed, and in some
cases investment withdrawn altogether, because of the degraded risk/reward equation. The
uncertainty and destruction of value caused by sudden changes in policy by the governments
of resource-rich nations cannot be understated. Mining and metals companies looking to
preserve value are actively negotiating value trade-offs with less politically sensitive policies
than resource nationalism. As this risk continues to grow in signicance, we dont expect a
slowing in this trend. Indeed, mining and metals companies must continue to engage with
governments to foster a greater understanding of the value a project brings to the host
government, to better communicate the implications of changes in the risk/reward equation,
and to more effectively negotiate appropriate trade-offs that preserve the value to both the
companies and the governments.
Global skills shortage and infrastructure access retained second and third spots on the risk
rankings this year. Both these risks are more acute in more locations now than they were
12 months ago, highlighting the supply capacity constraints that have hampered the sector
for some time. Rapidly escalating costs over the past year, where rising prices have not
covered this impact, have brought further challenges for mining and metals companies,
pushing cost ination up from number eight to four on our risk rankings.
Sharing the benets makes its debut at number nine this year. The relative prosperity of the
mining and metals sector at a time when many other sectors in the global economy are
struggling has seen this new risk emerge for mining and metals companies. Stakeholders
ranging from the government to employees, the local community and suppliers, feel they
are entitled to a greater proportion of value created by mining and metals companies. This
has forced companies to balance the expectations and the needs of their many
stakeholders. When they fail to do so, it results in strikes, supply disruptions, shareholder
activism and governments using their power to achieve their portion through resource
nationalism. Miners are willing to yield some returns on the appropriate transfer of risk to
stakeholders. However, many of the stakeholders, who want an increased share of the
mining and metals prots, are not taking on additional risk for their increased return,
leaving the mining and metals companies to carry all of the risk.
Rounding out the top 10 risks are cost ination, capital project execution, social license to
operate, price and currency volatility, capital management and access, and fraud and
corruption, with almost all of the top 10 risks more complex and more critical for mining
and metals companies now than they were last year.
2012
01
Skills shortage
01
Resource nationalism
02
Industry consolidation
02
Skills shortage
03
Infrastructure access
03
Infrastructure access
04
04
Cost ination
05
05
06
06
07
Pipeline shrinkage
07
08
Resource nationalism
08
09
10
Increased regulation
new
10
So although we havent seen large changes in the ranking of risks year on year, the bigger
swings are evident over the medium term. Five of the risks have consistently remained
crucial risks over this period, while the remaining ve have fallen out of the top 10 table
altogether.
In a rising market, the returns have justied taking on more risk. While the demand outlook
remains strong, the price peaks have passed and so there is a much greater imperative for
mining and metals companies to remain nimble and sure-footed in how they manage these
fast-changing risks in order to balance the relative risk/reward equations demanded by both
the Board and shareholders.
01
Skills shortage
02
The acute skills shortage seen in Australia and Canada has spread
to more places during the past year, with projects in Indonesia,
Mongolia, Brazil, Chile, Peru and Mozambique all plagued by this
challenge. Strong commodity prices and condence in the
long-term sector fundamentals have reinvigorated investment in
mining and metals to quickly develop new projects or ramp up
production from existing ones. This increased investment is in turn
driving demand for skilled workers around the world and drawing
on the same global pool of talent. The risk is that this could slow
growth and increase costs.
Infrastructure access
03
Cost ination
04
05
06
07
08
09
10
Fraud and corruption remains on this years risk radar due to the
increased political risk weve observed in a number of key mining
and metals companies investment destinations, and also
increased regulation and enforcement activities. The effects of
fraud and corruption can impact a companys reputation, social
license to operate and bottom line. Additionally, the extent of
fraud and corruption and the associated effect on both private and
public citizens of countries have led governments to implement far
reaching regulatory changes.
The top 10
business
risks
10
(same as 2011)
01
Resource nationalism
Resource nationalism continues to be the number one risk facing
mining and metals companies as governments go beyond taxation
in seeking a greater take from the sector. The uncertainty and
destruction of value caused by sudden changes in policy by the
governments of resource-rich nations cannot be understated.
We are observing three key trends of resource nationalism which
we will believe will continue throughout 2012/13:
During 2011 and for the rst six months of 2012, a number of
countries have announced or enacted increases to taxes or royalties
including Democratic Republic of Congo, Ghana, Mongolia, Peru,
Poland, and the USA, to name a few.
11
12
Andy Miller
Global Mining & Metals Tax Leader, Ernst & Young
With the massive increase in resource nationalism, comes an increased need for tax directors to be
more involved in strategic risk decisions.
Product of consultation
In many resource-rich countries, the capital investment can be
signicant. For example, in Peru, the Government is forecasting
investment into its mining sector of US$53b over the next ve
years.3 As previously mentioned, a recent change of regime in Peru
led to an increase in tax on mining operations. In anticipation of the
regime change, organizations in Peru met with the new
Government, presented comparisons of the government take in
alternative mining and metals locations, and discussed a range of
options to enhance tax revenues from the current and future
operations in Peru. The new levies were based on net income from
the sector and there was recognition that new revenues were
needed. In addition, many of the big mining and metals companies
in Peru have agreed to pay additional taxes over that agreed in
their stability tax agreements, as long as they are not
unreasonably high.4
The inevitability of increased government take during a super-cycle
has led mining and metals companies to move from outright
opposition to changes in scal terms, to negotiating offsets. This
has been because the political weight behind an increased take has
been increasing but value restoring trade-offs are politically
achievable. Some of these offsets include:
Corporate governance
Resource nationalism and political changes in resource-rich
countries creates further unpredictability for organizations
investing in long-term projects. There will be increased political
uncertainty in determining project economics, which increases the
overall cost of doing business and the related risk. In addition,
political changes have an effect on contract stability and often this
is not just a one-off event. Countries can make a series of changes
to their mining laws over a number of years.
As a result, the decisions about investments have become riskier,
which will require greater involvement by the board in tax matters
and tax planning. In 2009, the Ernst & Young Mining and Metals Tax
Survey found that only 65% of tax directors presented periodically
at the board level. We predict that with the increase in resource
nationalism, tax directors will be getting more airtime with the
boards of their companies, which will need to increase their focus
on tax considerations and implications on risk.
Steps mining and metals companies can take to respond to this risk:
Invest in transparent relationships with host governments to
foster a greater understanding of the value of the project to
the host
13
(same as 2011)
02
Skills shortage
Identifying, attracting and retaining critical operational and
construction skills remains a top priority for the mining and
metals sector in 2012. Continued sector growth with 136 new
projects planned or announced in the 2012 calendar year1 once
again magnies and escalates the problem. However, the outlook
on investment is cautious, with companies prioritizing and
sequencing investment in projects, thus impacting skills demandand-supply dynamics. The scaling back or shelving of several
large projects during the year may provide some temporary relief
from the skills shortage. However, in this volatile environment,
it is increasingly difcult to forecast and plan future workforce
requirements, and this is why skills shortage remains the second
most critical risk in the mining and metals sector.
The risks associated with skills shortages are signicant:
1. Impact to production output there is a risk that insufcient
skills may limit current and/or planned output. According to BHP
Billiton, Australias resources industry needs an extra 170,000
workers in the next ve years.2 In Canada, the Mining Industry
Human Resources Councils 2010 National Employer Survey
reported that 40% of the Canadian mining workforce will be
eligible for retirement by 2014, taking with them an average of
21 years of mining sector experience each, and driving the need
for skilled workers to 60,00090,000 by 2017.3
2. Delay, downsizing or cancellation of projects the shortages in
both skilled and unskilled labor contribute to project delays, the
impact of which is felt by both mining and metals companies and
contractors. Meeting contractual obligations will be difcult, and
the viability of projects will also be impacted as there is not
enough labor to successfully implement the number of planned
projects. In Canada alone, operations in 32 Canadian mines were
either suspended or shelved during 20092011.4 Even the
larger mining and metals companies are experiencing the impact
of the skills shortage, e.g., rising skills costs was one of the
contributing factors that led to Newmont Mining writing off the
Hope Bay gold project.5
14
6 Nassers defence is all-out attack, The Age, 17 May 2012, via Factiva 2012 Copyright John
Fairfax Holdings Limited
Louise Rolland
Executive Director, Advisory, Ernst & Young
There is no easy x to the skills shortage issue, but being creative and exible in your approach can
open up new pools of talent.
b. Non-financial benefi ts
(includes flexibility,
career development)
a. Attractive compensation
(includes remuneration,
incentives, benefits, allowances)
7 Attracting workers to the mines and retaining them, Ernst & Young, 2008
c. Individually tailored
8 8/6;7/7: Example of rotating roster where working 8 days on/6 days off and 7 nights
on/7 nights off
9 Career and life survey, Ernst & Young
15
Five things that leading companies do well when attracting and retaining staff
1. Get the employment offer right and effectively communicate
and reinforce it
Steps mining
companies
and can
metals
takecompanies
to respondcan
to this
takerisk:
to respond to this risk:
Source skills from aligned sectors and a broader demographic
Account for demographic and diversity factors when making
investment decisions
Initiate programs that encourage semi-skilled and retired
workers to re-enter the work-force
Target initiatives to retain critical skills held by older workers
close to retirement
10 Attracting workers to the mines and retaining them, Ernst & Young, 2008
11 Attracting workers to the mines and retaining them, Ernst & Young, 2008
12 Canadian Mining Industry Employment and Hiring Forecasts 2010, Mining Industry Human
Resource Council
16
13 Gender pay equity and associated issues for women in mining Survey Report, The AusIMM,
http://www.ausimm.com.au/content/docs/gender_pay_equity_wim_report.pdf,
accessed 24 May 2012
14 Sacked steel workers wanted in WA, Australian Broadcasting Corporation (ABC) News, 24 August
2011, via Factiva 2011 Dow Jones & Company, Inc.
(same as 2011)
03
Infrastructure access
While prices have moderated over the past year, they remain
above historical averages driven by economic growth in the
rapidly developing economies. This continues to challenge the
mining and metals sector with its supply response. The need
to expand existing production or develop stranded deposits
is keeping infrastructure access in the top three sector risks.
Indeed, global mining capital expenditure is expected to grow 14%
in calendar year 2012. This is being driven by a range of mining
development projects in developed economies like Australia
and emerging markets of China, and Africa.1 Resources sector
investors from countries like China, Japan, Korea and India have
emerged as new infrastructure sector investors in the last few
years, in addition to traditional funding from OECD countries.
For example, Japanese rm Mitsubishi Corp is championing the
Oakajee Port and Rail development in Australia2 and Chalco
and Rio Tinto are developing the Simandou iron ore project in
Guinea, Africa.3
One of the clear impacts of the long running minerals boom has
been that resource deposits long classed as marginal or
uneconomical have gradually become more viable. Typically these
deposits have been of lower quality or remote from existing supply
chains and thus the lack of sufcient infrastructure, either logistics
or secondary processing, has been the primary obstacle to rapid
development of these resources. Speed is seen as essential in
developing these deposits as there are only so many of these
standard assets that will be developed. Remoteness naturally brings
additional challenges in terms of cost, risk and scale of development
of the required transport, utilities and supporting infrastructure. We
see a real divide in the approaches of individual organizations:
The tier one mining and metals organizations have the balance
sheet strength to proceed with integrated mine/logistics
developments but are under shareholder pressure to restrict new
capital expenditure
4 Sundance Resources regulatory lings to Australian Stock Exchange in 2011 and 2012
5 Rio Tinto completes formation of Simandou joint venture with Chalco, Rio Tinto press
release, 25 April 2012
17
6 Boom under threat from higher costs, Australian Financial Review, 30 May 2012
18
Neal Johnston
Partner, Infrastructure Advisory, Ernst & Young Oceania
Changing market conditions will force resource producers to amend infrastructure development plans.
Given the softening commodity prices, the cost curve will play a more critical role in determining which
projects will proceed and most importantly when they will be developed.
Outlook
Infrastructure blockages remain prevalent in rail and port
infrastructure supply chains and are increasingly impacting mine
supporting infrastructure and power and utilities networks due to
the remote development locations.
The current uncertainty over global nancial markets has added
additional risk to the process of pit to port mine development. A
downward trend in resource prices would force an immediate
reassessment of marginally economic deposits, so the need for
rapid development while the price environment remains benign is a
key concern for all mining and metals organizations. The task then
is unlocking the value of co-ordination and collaboration between
organizations so that the full infrastructure cost prole is efciently
allocated and funded.
Steps mining and metals companies can take to respond to this risk:
Consider the extent to which infrastructure decits may impact
on enterprise value
Understand the return on all capital expenditure, including
infrastructure, and consider appropriate nancing
Look for other stakeholders to co-develop a solution with shared
benets
19
04
Cost ination*
Over the past decade as the sector and its suppliers have
struggled to increase supply, cost ination has re-emerged
as a major risk for mining and metals companies globally. It is
estimated that the sector experienced cost ination of between
10% and 15% in 2011, with overall cost ination averaging
roughly 57% in the last 10 years (this equates to a doubling
of costs every 1014 years).1 Cost ination in the industry is
expected to intensify over the next several years due to a number
of factors, including labor, energy, ore grades, and taxes.
* Renamed from Cost management in 2011 as it better reects the inationary environment
1 Cost ination is major theme for metals production: Deutche Bank, Commodity
Online, 16 April 2012
2 Commodity prices spark Rio Tinto warning, Australian Broadcasting Corporation (ABC)
News, 28 November 2011 via Factiva (c) 2011 Australian Broadcasting Corporation
3 More pain looms for aluminium, The Australian Financial Review, 13 January 2012
4 1st Quarter Earnings Conference, Alcoa Quarterly Earnings Presentations, 10 April 2012
5 BHP Billiton Results for the Half Year Ended 31 December, BHP Billiton press
release, 8 February 2012
6 Performance of Vale in 1Q12, Vale nancial performance, 25 April 2012
20
Paul Mitchell
Global Mining & Metals Advisory Leader, Ernst & Young
Cost ination is a risk that keeps growing, and continues to threaten prot margins and the viability
of projects.
8 Canadas Nunavut awaits its day in the sun, Reuters News, 2 April 2012
9 Rio Tinto to divest US$8bn of aluminium assets, The Financial Times, 17 October 2011; Alcoa Sees
Aluminum Cuts as Production Gains: Commodities, Bloomberg, 10 April 2012
10 Western Areas buys Kagara nickel mine, The Australian, 2 March 2012; BHP to make rst job cuts
since GFC as nickel dives, The Australian, 2 February 2012
21
Rising costs are also driving consolidation within the industry for
synergies, economies of scale and greater negotiating power.
Larger companies tend to be in a stronger position to negotiate
better terms with contractors and suppliers. Interestingly, some
sector players are beginning to forge collaborative relationships
with their contractors and suppliers, with the aim to achieve greater
savings and increased productivity. For example, to identify
opportunities for waste removal from the supply chain, Vales
procurement team holds collaborative workshops not only with
other functions within the company, but also with suppliers. Vales
collaborate to innovate workshops have helped save costs worth
roughly US$500m over a span of just three years.11 The category
management approach is also gaining popularity with procurement
teams, whereby the relationship between a miner and its suppliers
moves to one of collaboration, rather than the traditional
adversarial relationship. Such an approach generally entails the
exchange of information, sharing of data and joint business
building, with common turnover, protability and cost-saving
targets that mutually benet the miner and supplier/contractor.
Companies are increasingly turning to technological solutions to
mitigate wage ination. The high cost of supporting a y-in y-out
workforce is pushing companies to invest in automation. Rio Tinto is
Steps mining
companies
and can
metals
takecompanies
to respondcan
to this
takerisk:
to respond to this risk:
Focus on sustainable cost reduction programs
Outsourcing
22
(same as 2011)
05
2 Signs of Fatigue in the Commodities Supercycle, The Wall Street Journal, 23 May 2012
3 BHP Billiton pulls back from US$80bn spend, The Telegraph, 16 May 2012; BHP moves to ease
worries over mega project spend, Reuters, 2 May 2012; BHP Billiton tweaking capex plans, CEO says,
http://www.marketwatch.com, 15 May 2012
4 Rio Tinto reafrms condence in demand outlook , http://www.marketwatch.com, 9 May 2011
5 Vale announces investment budget for 2012, Vale press release, www.vale.com
23
24
Claus Jensen
Advisory Partner, Ernst & Young Oceania
The focus is shifting from a rapid increase in production capacity to careful evaluation of capital projects
in an environment of heightened volatility.
Steps mining and metals companies can take to respond to this risk:
Rigorous portfolio management and greater scrutiny around
project selection, prioritization and management is vital
Operationalize knowledge management through incorporating
learning, technological advancements and benchmarks into all
procedures and databases
Implement an effective risk management process where there is
a clear line of sight between project, portfolio and strategic risk
management such that objectives are supported by appropriate
tactics that address all potential project threats
25
06
Acquisition challenges
Increased expectations
Mining and metals companies are nding social license obligations
increasingly expensive both due to higher expectations and the
costs of the community partnerships. Costs are rising not only
in terms of actual payments, but also in the time and money
involved in developing appropriate agreements. For smaller
companies and explorers, these negotiations and costs can be
especially challenging.
1 Chilean miners opt for new tax regime, Platts Metals Week, 24 January 2011
26
Helen Adair
Executive Director, Climate Change and Sustainability Services
Social license to operate has been ranked as a top six risk over the last ve years as it represents a
consistent long term challenge.
3 ICMM hosts CEO Panel at PDAC International Convention, YouTube video, 17 April 2012,
http://www.youtube.com/watch?v=ulDfE3GYm8w. Accessed 13 June 2012
4 ICMM hosts CEO Panel at PDAC International Convention, YouTube video, 17 April 2012,
http://www.youtube.com/watch?v=ulDfE3GYm8w. Accessed 13 June 2012
27
Editorial
28
Polling time
Elections and the promises made during campaigns
often create policy uncertainty for the sector. The sheer
number of polls scheduled in countries with both an
established and emerging mining and metals sector this
year places electoral politics at the heart of political
risks to watch (see map). Mongolia, where investment in
the emerging mining and metals sector is transforming
Ukraine
Mongolia
Romania
United States
Mali
Mexico
Mauritania
Burkina Faso
Philippines
Togo
Congo
Venezuela
Ecuador
Guinea
Ghana
Sierra Leone
Papua New
Guinea
Kenya
Angola
Zambia
East Timor
Malaysia
Madagascar
Zimbabwe
Counting ballots
General or presidential elections are scheduled in an array of important mining markets, including the United
States. In sub-Saharan Africa they include the regional mining giants of Guinea, Ghana, Zambia and Zimbabwe,
along with lesser players Angola, Burkina Faso, Congo (Brazzaville), Kenya, Madagascar, Mali, Mauritania,
Sierra Leone and Togo. In Latin America, Mexico, Venezuela and Ecuador will all host polls, while in Mongolia,
Papua New Guinea, Timor-Leste, Malaysia and the Philippines will vote in Asia. Mining and metals hubs in
Europe set to cast ballots include Ukraine and Romania.
Source: International Foundation for Electoral System calendar, media sources
29
30
Tightening regulations
Aside from new anti-corruption legislation, there is a
proliferation of regulations and standards governing the
environmental and social impacts of mining and metals
activities. These range from national level legislation
and international project nance standards (such as the
Equator Principles) to international restrictions on trade
in conict minerals (notably those set by the OECD), and
non-statutory expectations of human rights impacts
(such as the Voluntary Principles on Security and
Human Rights). These instruments generally seek to
improve the transparency and effectiveness of the
sector, often giving welcome guidance, but can be
complex and time-consuming to absorb into operations.
For instance, in Indonesia, increasing devolution of
regulation to local administrations multiplies the
number of political actors with whom organizations
need to interact. In the worst case, legitimate efforts
at improving the sector can be used by unscrupulous
parties to exercise inuence for political ends. The
experience of mining and metals companies at the
hands of regulators over alleged violations of
environmental and other conditions notably in Russia
several years ago can leave lasting impressions on
foreign companies seeking to do business in a country.
Upsides
It is easy to view political risks as bringing only negative
consequences, but there can also be positives that are
not immediately evident. For the mining and metals
sector, what are currently viewed as downside risks
resource nationalism or increasing regulation for social
and environmental impacts over the long term may
produce positive results, by making the sector more
transparent and ultimately strengthening the capacity
of countries of extraction to manage social expectations
and engender long-term development.
A recently-launched review of Cte dIvoires mining
code points to improvements in the investment climate
for operators there in 2012 and 2013. Anti-mining
sentiment in the early post-independence period and
instability during the 1990s and 2000s dampened
investor interest in the sector. However, the gradual
normalization of the political and security environment
following post-election conict in 201011, and
President Alassane Ouattaras desire to place foreign
investment at the heart of the countrys post-conict
recovery, has opened up new opportunities for mining
Steps mining and metals companies can take to respond to this risk:
Mining and metals companies are increasingly aware
of the need to understand their political risk exposure
before considering investments, as well as in response
to sudden developments. The level of detail required
and the need for forward-looking analysis depend on
the stage of investment and the perceived stability of
the country or area in question. Risk assessments are
often carried out in conjunction with other studies that
are required as a matter of course by the industry (for
example, environmental and social impact
assessments (ESIA), and community or social
stakeholder engagement studies). Others focus on a
rolling assessment of developments and related
impacts on assets or commercial activity.
Control Risks is an independent, global risk consultancy specializing in political, security and integrity risk.
We help our clients understand and manage the risks of operating in complex or hostile environments.
Established in 1975, Control Risks unique combination of services, geographical reach, extensive experience
and client partnerships allow us to deliver solutions to address specic issues, identify new opportunities and
monitor global developments that have an impact on our clients and their commercial activities.
Editorial
The business risk report Mining and metals 20122013
31
07
The equity market has also not kept pace with metals prices. When
indexed against the Philadelphia Stock Exchange (PHLX)4 and
AMEX Gold Basket of Unhedged Gold Stocks Index (HUI)5, it is
evident that although gold prices have continued to rise, equities
have not. Between July 2008 and May 2012, gold prices increased
66%, vs. HUI which fell 9% and PHX which fell 22%, despite HUI and
PHLX increasing by 11% and 9% in the last half of May as compared
to bullion increasing by only 1%. In the latest Ernst & Young Capital
1 Gold investment statistics commentary: price, volatility and correlation performance during 2011,
World Gold Council, January 2012
2 Mergers, acquisitions and capital raising in mining and metals: 2011 trends 2012 outlook,
Ernst & Young, February 2012
3 EYeSight on Consolidation: Backpedalling on the cycle, Ernst & Young, November 2007
4 Top ten constituents as at 10 May 2012: Barrick Gold Corp, Freeport McMoRan, Goldcorp,
Newmont Mining, Yamana Gold, Silver Wheaton Corp, Kinross Gold, Agnico-Eagle, Compaia de Minas
Buenaventura, Anglogold Ashanti. Source: https://indexes.nasdaqomx.com/pdf/pdfreport.
ashx?IndexSymbol=XAU
5 Top ten constituents as at 10 May 2012: Barrick Gold Corp, Goldcorp Inc., Newmont Mining Corp.,
Yamana Gold Inc., AngloGold Ashanti Ltd., Randgold Resources Limited, New Gold, Gold Fields Ltd.,
Harmony Gold Mining Co. Ltd., Agnico-Eagle Mines Ltd., IAMGOLD Corp., Compania de Minas
Buenaventura S.A. , Coeur DAlene Mines, Hecla Mining Co., Allied Nevada Gold, Kinross Gold Corp.,
Eldorado Gold Corp. Source: http://www.nyse.com/about/listed/amex_components.html?ticker=hui
32
160.0
140.0
120.0
100.0
80.0
60.0
40.0
HUI
PHLX
5/3/2012
4/3/2012
3/3/2012
2/3/2012
1/3/2012
12/3/2011
11/3/2011
9/3/2011
10/3/2011
8/3/2011
7/3/2011
6/3/2011
5/3/2011
4/3/2011
20.0
3/3/2011
2/3/2011
1/3/2011
Gold
6 Capital Condence Barometer mining and metals data, Ernst & Young, April 2012
7 Vale S.A. Form 20-F, United States Securities and Exchange Commission, 17 April 2012
Jay Patel
Transactions Partner, Canadian Mining and Metals, Ernst & Young
Current global issues will fuel uncertainty and therefore volatility. Successful miners will be those that
recognize and exploit value from volatility.
12 Barrick Gold fourth quarter and year-end report 2011, 16 February 2012
33
Outlook
Global market dynamics from a slow recovery and a recession will
result in ongoing commodity price and foreign exchange volatility.
Currency movements will continue to be inuenced by everchanging speculation about the relative strength of different
economies. If the situation in Europe continues to deteriorate, then
commodity currencies will likely continue to devalue and the US
dollar should strengthen further. If fears of European debt problems
recede, the Chinese economy continues to grow strongly and the
US economy continues to improve, then commodity currencies will
likely start appreciating again as commodity prices rally. In the
interim, companies need to consider various strategies to reduce
the negative impacts of volatility to maintain predictable cash ow.
While volatility is generally perceived as negative, managing it
through an effective strategy and a management action plan is
imperative. The more successful mining and metals companies in
the future will be those that prove they can recognize and exploit
value from volatility.
Steps mining and metals companies can take to respond to this risk:
Identify sources of volatility that can be effectively managed
input prices, currencies and metal prices
13 http://www.ey.com/Publication/vwLUAssets/Board_Matters_Quarterly_Issue10_Dec2011/$FILE/
Board%20Matters%20Quarterly%20-%20Issue%2010%20-%20December%202011.pdf
34
08
Capital allocation
Effective capital management involves the allocation of capital
resources in a way that best exploits a companys core
competencies and the market opportunities. The macro-economic
backdrop and outlook (such as expected commodity demand and
availability of capital) inuence these choices.
Rising metals prices, encouraged by Chinas rapid industrial growth,
along with cheap debt afforded the pursuit of mergers and
acquisitions (M&A) (buy) over the period to 2007. The global
economic crash of 2008 refocused attention on preserving balance
sheet strength including de-leveraging through rights issues, and
conserving cash. The 2H 20092010 recovery in prices was met
with a more cautious approach to growth. Large-scale M&A,
perceived to be high risk and difcult to execute, was largely
replaced by an overwhelming focus on capital expenditure (build)
that would see an estimated US$200b invested by just ve of the
industrys largest companies into organic growth programs over
the next ve years.2
* Renamed from Capital allocation in 2011 to better reect the broader environment which includes
both capital allocation / management and access
1 BHP Billiton, 2012 Global metals, mining and steel conference audiocast, 15 May 2012; Rios
capital costs global problem, Sydney Morning Herald, 3 May 2012
2 Miners: they think its all over?, Liberum Capital, 14 May 2012
3 Metals and mining: opportunity within structural decline, Credit Suisse, 30 March 2012
35
We are also seeing this at the junior end of the market, where
divestment of individual projects can prove a means of unlocking
latent value in a competitive market, and of prioritizing limited
nancial and management resources.
Divesting to invest
Building in options
Research shows that companies who deliver best returns are those
with a proactive and active capital reallocation strategy11 that is,
those with the exibility to re-allocate capital across business units
according to relative market or strategic opportunities. This could
be reallocation of investment from high cost/low return businesses
to those that can realize better returns now or in the future, or the
phasing and prioritization of capital expenditure to reduce capex
intensity and free up future growth options.
Capex control
4 Vale agrees to terminate the agreement to acquire assets in the African copperbelt, Vale press
release, 11 July 2011
5 BHP Billiton, 2012 Global metals, mining and steel conference audiocast, 15 May 2012
6 Breaking strategic inertia: tips from two leaders, McKinsey Quarterly, April 2012
7 Ernst & Young Capital Condence Barometer, April 2012. www.ey.com/GL/en/Services/
Transactions/Capital-Condence-Barometer
8 The Executive Board decides the further strategic development of ThyssenKrupp, Thyssenkrupp
press release, 5 May 2011
36
9 Australia, the global context, speech by Jac Nasser, BHP Billiton Chairman, to the Australian
Institute of Company Directors. 16 May 2012. Accessed via www.bhpbilliton.com
10 The changing face of supply, Xstrata presentation for Bank of America Merrill Lynch 2012 Global
Metals and Mining & Steel Conference, Miami, 15 May 2012. Accessed via www.xstrata.com
11 How to put your money where your strategy is, McKinsey Quarterly, March 2012
Lee Downham
Global Mining & Metals Transactions Leader
With economic uncertainty continuing to drive volatility and limit availability of nance, it is
imperative that capital is allocated with discipline and rigour in order to deliver long term returns
for shareholders.
Build in options
12 Performance of the Ernst & Young Mining Eye over the period 1 January 2012 to 30 May 2012
37
(new)
Government
As mining and metals companies push into emerging markets, they
are increasingly engaging with governments that are struggling to
meet the needs of their citizens, not only from a lack of capacity
and resource perspective, but from a capability point of view. Of the
60 resource-rich developing and transition economies, it is
estimated that the 1.5 billion people living in them survive on less
than US$2 a day.1 With the high levels of protability that mining
and metals companies are experiencing with above trend
commodity prices, governments believe that mining and metals
companies should take on a role of greater support and
responsibility to the state/province and country in which it is
operating.
In the Resource Nationalism section (Risk 1), we discussed how
governments have achieved a direct nancial return in mining and
metals projects by way of increased royalties and taxes or
mandatory government stakes. However, governments now have
greater expectations of mining and metals companies to be involved
in broader community development, including:
Social infrastructure (e.g., schools, hospitals)
Logistics infrastructure (e.g., ports, rail, roads, power)
Skills development
09
Local communities
Local communities are no longer looking for a basic economic
return for hosting a project, but are expecting a greater dividend
from mining and metals companies. Communities have two primary
needs from miners: 1) Mining activity will have minimal disruption
or impact on them; and 2) They will benet both economically and
socially. This could range from employment opportunities to
investment in education, social programs or infrastructure. And
local communities have signicant power to agitate or stop a
project from going ahead or operating efciently if their needs are
not met, forcing mining and metals companies to compromise.
Signicant conict can also arise when communities feel that the
government isnt directing enough of the prots from local projects
back into the region, with companies being caught in the crossre.
Underlying inequalities in the distribution of wealth can be ignited
by new projects. For example, in Calama in Chile, residents have
been protesting for increased resources and funding allocated to
the area by the State to address the impacts of nearby mining
projects. Residents are demanding that the Government recognize
the contribution of the region to the national budget. Mining and
metals companies can be severely impacted nancially by these
protests through delays and interruptions to projects and
production.3
Employees
With an industry-wide skills shortage as leverage, mining and
metals company employees are seeking a greater share of company
prots through higher wages and benets for their contribution to
production. Employees are often in a strong bargaining position as
the unrest is very costly to companies in lost production.
1 Consultation of IMF Resources Work, Publish What You Pay UK, http://www.imf.org/external/np/exr/
consult/2012/nr/pdf/Comment6.pdf
2 Publish What You Pay (PWYP), Investor Watch Institute, http://www.revenuewatch.org/training/
resource_center/backgrounders/publish-what-you-pay-pwyp
3 Decentralizing Chile, bUSiness Chile Magazine, 18 April 2012, http://www.businesschile.cl/en/news/
special-report/decentralizing-chile
38
Mike Elliott
Global Mining & Metals Leader, Ernst & Young
Mahatma Gandhi once said, Earth provides enough to satisfy every mans needs, but not every mans
greed. More effort is being expended in sharing the benets rather than growing the benets.
Shareholders
Suppliers
Outlook
Steps mining and metals companies can take to respond to this risk:
Assess stakeholder claims in the context of mine valuation
Obtain trade-offs that limit the impact on mine valuation
Use risk transfers as a value creating trade-off
4 Freeport-McMoRan Copper & Gold Inc. Announces Successful Resolution of PT-FI Labor Issues
and Updates Status of PT-FI Operations, Freeport-McMoRan Copper & Gold press
release, 14 December 2012
5 Worlds biggest miner pulling in its horns, Mining Weekly, 16 May 2012 , http://www.miningweekly.
com/article/worlds-biggest-miner-pulling-in-its-horns-2012-05-16
39
(same as 2011)
10
2008
2009
New regulations
2010
New laws, including the UK Bribery Act and the US Dodd-Frank Act,
are aimed at more strongly enforcing corporate responsibility. In
addition, an increasing number of countries are adopting their own
anti-bribery laws, including China, Russia and Mexico, with laws
being drafted to establish or broaden bribery offences in Brazil and
India. This, combined with increasing co-operation between global
enforcement agencies, is putting further pressure on companies to
strengthen their fraud and corruption controls as companies have
become more accountable for their actions, and management and
company directors now hold a higher level of personal risk.
2011
11
40
Paul Fontanot
Fraud Investigation & Dispute Services, Oceania Managing Partner, Ernst & Young
Bribery and corruption remain a threat to participants in the mining and metals sector. Companies are
increasingly concerned about the potential negative impact on its reputation, and realize the importance
of having an active anti-corruption control program in place that includes continuous rather than
periodic monitoring.
The Ernst & Young 2012 Global Fraud Survey showed that some
companies still did not fully understand the implications of this, with
15% of CFOs still believing that third parties were liable for their own
actions, therefore opening up the company to possible prosecution.
Whistle-blowing
The mining and metals industry has seen an increase in the number
of whistleblower claims as a result of the Dodd-Frank Act. Not only
has the number increased, but so too has the quality of the claims
with nancial incentives given to whistle-blowers. This has forced
companies to become active in encouraging internal whistle-blowing
by providing a credible alternative to external whistle-blowing.
According to Ernst & Youngs 2012 Global Fraud Survey, 53% of
respondents had established a whistle blowing hotline.
Outlook
As cross border business continues to grow in the mining and
metals sector, companies will become increasingly challenged,
particularly in emerging markets where they have to abide by more
stringently applied regulations. To comply with continued
aggressive global enforcement efforts to stamp out corruption,
those companies involved in the extractive industries sector need to
examine their existing anti-corruption efforts and benchmark them
against leading practice.
It is important to instil the right culture and focus on setting a
strong tone from the top around zero tolerance to corrupt activities
at all levels within the organization; and management are the
custodians of this culture.
Steps mining and metals companies can take to respond to this risk:
Know and understand the key anti-corruption and bribery laws
and their reach globally
41
42
11
Access to water
and energy
(Water up from 16 in 2011;
energy the same at 11 in 2011)
12
Working with joint
venture partners
(new)
The focus on energy supply and energy mix is based on concerns about rising energy prices, energy
security concerns and sustainability goals. Increasing afuence in the developing world is boosting
energy demands. A tightening of access to conventional supply and advances in technology have made
unconventional sources commercially viable.1 Revenue lost from power outages, fuel shortages, and
intermittent or inconsistent energy supplies are a strong economic driver to include on-site renewable
energy technologies in the energy portfolio of mining and metals operations. Renewable energy
technologies are presently attractive because of the climate change implications throughout the world.
However, the mining and metals sector usually mandates that appropriate site-specic renewable
energy technologies must be able to compete with traditional energy sources at the bottom line and be
more reliable and consistent in delivering energy. Competing demands for energy are expected to
fundamentally reshape parts of the sector, such as aluminium production in China and India, and
ferrochrome production in Southern Africa.
With a growing population, and further climate change, pressure on water supplies is set to continue,
especially in developing markets. This poses a signicant threat to the mining and metals sector, as it
potentially faces more stringent regulation, higher costs and reduced water allocation. The scarcity of
fresh water, and non-market based competition for it with other productive sectors such as agriculture
and manufacturing, has led mining and metals companies to look at alternatives. With limited water
availability, technological responses to the water scarcity issues are increasingly sophisticated, and
national and international engineering companies are working intensively to nd new solutions, such as
the use of seawater via desalination, water recirculation and innovative waste disposal solutions.2
The search for growth is leading mining and metals companies to bring in partners to source new
projects, improve utilization of expensive infrastructure, access economies-of-scale, help manage
technical or political risk and comply with local regulations. To this end, joint arrangements have always
been, and continue to be, a common structure in the sector. The majority of mining and metals entities
are party to at least one joint arrangement. With the increase in joint ventures comes an increased
exposure to risks (both operator and non-operator), particularly when the sector faces more stringent
regulations around fraud and corruption, climate change, tax, etc. Companies are therefore under
pressure to be more transparent. Also, decisions will likely be driven by the operating partner of a
specic mine with the risk being that the optimal position for the operator may not be optimal for
the non-operator (e.g., the allocation of scarce resources).
In addition, for some joint arrangements, the accounting is also about to change signicantly, and not
all arrangements commonly described as joint ventures or joint arrangements will continue to be
accounted for as in the past and careful assessment will be required.3 Partners need to be cognisant of
the difculty of this task which will be impacted by the number and complexity of the arrangements to
which an entity is a party. Robust systems and processes will need to be developed and put into place to
enable the ongoing assessment of current and new arrangements.
1 Turn risks and opportunities into results: Exploring the top 10 risks and opportunities for global organizations, Ernst & Young Oil and
Gas Sector, 2011
2 Mining in Chile: a report by Global Business Reports, Engineering & Mining Journal, March 2012
3 Rening IFRS Managing the risk of joint ventures, Ernst & Young, 2011
43
13
Competing demands
for land use
(new)
14
Climate change
concerns
(down from 13 in 2011)
Increased urbanization, food security, protection of biodiversity and environmental areas, and greater
protection of cultural links to the land are all competing in the minig and metals sector for the future
use of land. Companies need to be able to dene the value in mining and deal with potential risks such
as litigation and regulatory delays. A recent example of how a developed country government is trying
to facilitate competing land use demands is the Draft Strategic Regional Land Use Plan put forward by
the New South Wales Government in Australia.4 Through this plan, the Government aims to produce a
framework that provides the infrastructure, housing and community services needed to support
expected growth in the resources sector in their agriculturally rich region. The key policy response for
resolving land use conict is a proposed gateway process, with a panel of independent experts
assessing mining proposals at an early stage to determine whether they are suitable on the subject of
land. If a proposal does not pass this stage, it cannot proceed to development application. The
continuous development of a regulatory framework is, and will remain, a major and pervasive factor in
the relationship between mining and land use to ensure that land usage decisions are made
transparently and consistently.
Climate change remains a concern for the sector. Climate change impacts must be viewed by the
sector in two ways; rstly how mining and metals activities contribute to climate change, and secondly
how climate change will impact mining and metals activities. International treaties and accords
regarding climate change are key economic drivers moving the sector to adopt and incorporate
renewable energy technologies into the mainstream of their operations. As a price on carbon becomes
more common, a carbon footprint will become an increasing liability. A strong stance on sustainability
in the sector has come to translate directly into shareholder value, resulting in a stronger position for
publicly traded companies. Many investors have come to include a companys position on climate
change as a benchmark for investment in a company, and environmental performance is increasingly
considered by host governments and lenders. Most of the major players in the international mining and
metals sector have become sensitive to this reality and consider it a major concern within the overall
scope of operations. AngloGold Ashanti, for example, has set greenhouse gas (GHG) reduction targets
that are linked to the amount of ounces of gold it produces. Recognizing cost savings and offset
opportunities from emissions trading, the company has also instigated initiatives for Clean
Development Mechanism (CDM) projects. In order to reduce greenhouse gas generation, the
installation of low-carbon electricity generation capacity (hydropower) and energy-efcient
technologies, such as efcient compressed air systems, are under consideration in the DRC and
South Africa. If projects meet the international criteria, carbon credits will be generated and traded.5
Climate change impacts on mining and metals companies include more frequent and extreme weather
events such as ooding and droughts which have forced companies to review their risk management
processes. Additionally, companies have had to review their operations in light of a potentially changed
environment (e.g., reduced water supply or frequent ooding events) and reassess viability.
15
New technologies
Mining and metals companies are investing heavily in research programs around the world to develop
new technologies and practices to increase productivity, improve safety, discover new ore bodies,
improve recovery rates, remove waste and decrease energy use. As current ore bodies mature, fewer
tier-one deposits are found and technology has become an enabler in ensuring companies can meet
the challenges of supply. As part of their Mine of the Future program, Rio Tinto announced a
US$518m investment in driverless trains6 and trucks7 for its Australian iron-ore business, as well as
large-scale testing of technologies in underground tunnelling and recovery. How well mining and metals
companies innovate will drive long term enterprise value.
4 Draft Upper Hunter Strategic Regional Land Use Plan, State of New South Wales through the Department of Planning and
Infrastructure, March 2012
5 AngloGold Ashanti Sustainability Report 2011, 16 March 2012
6 Rio Tinto invests US$518 million in autonomous trains for Pilbara iron ore rail network in Western Australia, Rio Tinto news
release, 20 February 2012
7 Rio Tinto expands Mine of the FutureTM programme with new technologies in underground tunnelling and mineral recovery,
Rio Tinto news release, 21 February 2012
44
16
Increased regulation
(up from 17 in 2011)
17
Pipeline shrinkage
(down from 15 in 2011)
18
Consolidation
(down from 14 in 2011)
19
New communication
vehicles for community
activism
As mining and metals companies expand their global footprint, they are exposed to both greater
regulation and greater diversity in regulation. The latest Doing Business8 ndings show a high level of
coordination and commitment from some developing and emerging market economies to regulatory
reform. Economies making the greatest strides in creating a more business-friendly regulatory
environment have been revamping their regulatory and administrative systems in multiple areas to
encourage private sector activity. However, in addition to regulation on a national level, companies are
battling regulation and reporting requirements relating to climate change, fraud and corruption
reporting through different legislation, and conict free minerals independent verication, amongst
others. Penalties for non-compliance are also increasing and can result in large pecuniary losses, loss
of license to operate and even criminal sanctions against executives and directors.
Mining and metals companies are experiencing signicant fatigue around managing the myriad of often
redundant compliance and regulatory reporting activities, the cost of which is massive and burdensome.
Increasingly, companies may seek risk convergence initiatives which allow them to coordinate the
various risk and control processes. These may help to drive down costs and, perhaps most importantly,
help enable more detailed enterprise-wide risk reporting to senior management and the board.
Despite periods of weakness and volatility, metals prices, the primary driver of exploration spending,
have improved signicantly since bottoming in early 2009, and have remained well above their long
term trends in recent years. This has boosted both exploration spending, as well as capital expenditure
on nonferrous metals mining.9 The Metals Economics Group found nonferrous metals exploration
spending rose to US$18.2b in 2011, up 50.4% from 2010. This was the largest increase since 2004.10
On the supply side, the industry still faces many of the limitations that existed prior to the 2008
economic downturn that effectively set back the clock on many developments. Despite near term
volatility, most major and intermediate producers remain committed to exploration to replace mined
reserves and strengthen and grow their pipelines, particularly while metals prices stay relatively
strong. Junior miners undertaking most of the greeneld exploration are, however, struggling to get
nance as these projects are often high risk and few succeed. The long term sustainability of the sector
is dependent on this type of investment, with discovery rates falling and new resources taking seven to
ten years from discovery to production. Future demand projections exceed supply in many cases and
ore grades are in gradual but permanent decline.
During 2011, strategic M&A dominated in the mining and metals sector where the urge to
simultaneously drive down operational costs and achieve growth remained the focus of many mining
and metals executives. Sensible, lower risk transacting was top of the agenda, which gave rise to an
increase in large scale domestic consolidations, for example in the North American coal market,
offering the promise of synergies conducted in a familiar environment.11
Continued volatility in 2012 is impacting the level of the sectors M&A activity, but a strong pipeline
indicates mining and metals companies are showing an appetite to do deals. Miners are increasingly
unwilling to sit out the volatility and are prepared to act opportunistically and strategically. Robust long
term demand fundamentals and strong balance sheets will drive deal activity through 2012. Closing
deals may prove difcult due to the following challenges: reaching agreement on valuation in the
current volatile environment; resistance from shareholders; complexities of dealing with state and local
governments; and post-merger integration risks.
The advent of Cloud computing, smart mobility and social networking will continue to transform
business and society, blurring industry and geographic boundaries. Social media and blogs connect
social activists, and online articles and discussions inuence traditional coverage by newspapers and
broadcasters on issues such as the green debate, played out openly on these new media platforms.
To mitigate the risk, a number of corporations and governments are putting more resources into
direct-to-the-public and non-government organizations communications, with facilities for feedback
and debate.
45
Getting prepared
46
This report illustrates the top 10 risks for mining and metals companies now and in the
coming year and outlines our view of other major challenges that could pose a threat in the
near future. It is important to note that this is only a current snapshot, and that risks are
subject to change at any time. These are not predictions, but taking them into
consideration may help companies to prepare.
Approached properly, the process of risk management can be of assistance even if a
specic event does not occur. Working through scenarios and impact studies can result in
opportunities to tighten processes and controls, leading to dialogue and action plans that
deliver value.
Ernst & Youngs experience with companies around the world suggests there is a body of
risk management practice emerging, but many companies are still doing very little to
address this issue. Many global companies are identifying gaps in their risk coverage that
tend to be business and operational, rather than nancial. There are steps that company
leadership can take to address these issues:
Conduct regular risk assessments that dene key risks and weights probability
and impact on business drivers. Many companies undertake some form of risk
assessment, but our experience suggests that many of them do not do this on a frequent
or ongoing basis. Risk assessment needs to go beyond nancial and regulatory risk to
consider the strategic environment in which your organization operates and the full
extent of its operations. This includes placing effective controls on mergers and
acquisitions, IT effectiveness, business continuity planning, project development,
operations, transaction integration and expanding into new international territories.
Conduct scenario planning for the major risks that you identify, and develop a
number of operational responses. This can be a useful part of the planning cycle and can
help to encourage innovative thinking.
Effectively monitor and control processes as they will provide you with earlier
warning and improved ability to respond.
Keep an open mind about where risks can come from. Ours is an
increasingly interdependent global economy and risks that can damage your business
can arise in any market sector.
47
With a strong but volatile outlook for the sector, the global mining and metals industry is
focused on future growth through expanded production, without losing sight of operational
efciency and cost optimization. The sector is also faced with the increased challenges of
changing expectations in the maintenance of its social license to operate, skills shortages,
effectively executing capital projects and meeting government revenue expectations.
Ernst & Youngs Global Mining & Metals Center brings together a worldwide team of
professionals to help you achieve your potential a team with deep technical experience in
providing assurance, tax, transactions and advisory services to the mining and metals
sector.
The Center is where people and ideas come together to help mining and metals companies
meet the issues of today and anticipate those of tomorrow. Ultimately it enables us to help
you meet your goals and compete more effectively. Its how Ernst & Young makes a
difference.
Area contacts
Global Mining & Metals Leader
Mike Elliott
Tel: +61 2 9248 4588
michael.elliott@au.ey.com
Oceania
Scott Grimley
Tel: +61 3 9655 2509
scott.grimley@au.ey.com
China and Mongolia
Peter Markey
Tel: +86 21 2228 2616
peter.markey@cn.ey.com
Japan
Andrew Cowell
Tel: +81 3 3503 3435
cowell-ndrw@shinnihon.or.jp
Europe, Middle East, India
and Africa Leader
Mick Bardella
Tel: +44 20 795 16486
mbardella@uk.ey.com
Wickus Botha
Tel: +27 11 772 3386
wickus.botha@za.ey.com
Evgeni Khrustalev
Tel: +7 495 648 9624
evgeni.khrustalev@ru.ey.com
France and Luxemburg
Christian Mion
Tel: +33 1 46 93 65 47
christian.mion@fr.ey.com
India
Anjani Agrawal
Tel: +91 982 061 4141
anjani.agrawal@in.ey.com
Andy Miller
Tel: +1 314 290 1205
andy.miller@ey.com
Canada
Tom Whelan
Tel: +1 604 891 8381
tom.s.whelan@ca.ey.com
South America and Brazil Leader
Carlos Assis
Tel: +55 21 2109 1606
carlos.assis@br.ey.com
Tom Whelan
Tel: +1 604 891 8381
tom.s.whelan@ca.ey.com
Global IFRS Leader
Commonwealth of
Independent States
Tracey Waring
Tel: +44 20 7980 0646
tracey.waring@uk.ey.com
Global Tax Leader
Andy Miller
Tel: +1 314 290 1205
andy.miller@ey.com
Global Transactions Leader
Lee Downham
Tel: +44 20 7951 2178
ldownham@uk.ey.com
www.ey.com/miningmetals
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