Resource nationalism is top of the business risk list for mining and metals companies around the world, while supply capacity constraint issues continue to dominate the top 10 rankings in Ernst & Young’s annual Business risks facing mining & metals report 2011.
The rapid spread of resource nationalism around the world has seen it jump from number four in the 2010 rankings to top spot, while the global skills shortage remains in second spot and capital allocation has dropped back from top spot in 2010 to number seven this year.
Ernst & Young Global Mining & Metals Leader Mike Elliott says in the past 12-18 months at least 25 countries have increased or announced intentions to increase their government take via taxes or royalties.
“Resource nationalism is taking other forms as well, including greater controls on foreign participation, mandated beneficiation, use it or lose it demands and mandated government participation,” says Elliott.
However, Elliott says it is the myriad of supply capacity constraints that continue to dominate the risk list, accounting for six of the top 10 – including the global skills shortage, capital allocation, infrastructure access, capital project execution, cost management and interruptions to supply.
“The market is probably excessively optimistic about how much and how quickly new production is going to come on. All these supply capacity risks mean companies are unlikely to be able to capture the premium pricing as quickly. It also impacts the cost profile of projects, so there will need to be a higher rate of return to attract new investment and as a result commodity prices will need to be higher.”
“The companies that better manage these risks will deliver superior returns and have a competitive advantage in attracting new investment.”
The 2011 top strategic business risks in the mining and metals sector are:
1. Resource nationalism (4 in 2010)
2. Skills shortage (2)
3. Infrastructure access (6)
4. Social licence to operate (5)
5. Capital project execution (new)
6. Price and currency volatility (9)
7. Capital allocation (1)
8. Cost management (3)
9. Interruptions to supply (new)
10. Fraud and corruption (new)
Elliott says resource nationalism is one of a number of the top 10 risks that reflect changes in the expectations and attitudes of stakeholders for companies in the sector.
“Resource nationalism reflects the expectation among governments that the sector should be contributing more for the right to exploit natural resources,” he says.
“Similarly, with regard to their social licence to operate, community expectations around factors such as the environment, safety performance, and sustainable community investment are changing at such a rate that it is making it difficult for companies around the world to stay ahead of the game.”
“In regard to fraud and corruption, investors and the wider community expect companies that are based in developed markets to be at the forefront of eliminating corruption. The quest for growth to meet strong demand continues to encourage faster expansion into frontier markets where the risk of fraud and corruption is higher, and at the same time companies are being held more accountable for how they deal with it.”
Elliott says while the myriad of strategic business risks facing mining companies has arguably never been greater, those that manage these risks better can drive superior returns.
“Done well, working through scenarios and impact analysis can deliver opportunities to preserve shareholder value, tight processes and controls and even enhance shareholder value.”
MORE ARTICLES ON RISK MANAGEMENT