Tài liệu Business risks facing mining and metals 2012–2013 pptx

Business risks facing mining and metals 2012–2013 Organizations that succeed do so because they are best able to optimize the risk and reward equation for both strategic and operational issues. Contents The Ernst & Young business risk radar for mining and metals 3 Executive summary 4 The top 10 business risks 10 1. Resource nationalism 11 2. Skills shortage 14 3. Infrastructure access 17 4. Cost infl ation 20 5. Capital project execution 23 6. Social license to operate 26 Editorial — Prospects and perils: facing up to political risks in mining and metals 28 7. Price and currency volatility 32 8. Capital management and access 35 9. Sharing the benefi ts 38 10. Fraud and corruption 40 Under the radar 42 Getting prepared 46 3 The business risk report Mining and metals 2012–2013 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. The Ernst & Young business risk radar for mining and metals Up from 2011 Same as 2011 New entryDown from 2011 The business risk report Mining and metals 2012–2013 4 Executive summary 5 The business risk report Mining and metals 2012–2013 On the surface, the top ten risks don’t look all that different from last year, but below the surface there has been an absolute shift that has made them signifi cantly 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 signifi cant 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 benefi ciation, 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 There is no doubt projects around the world have been deferred and delayed, and in some cases investment withdrawn altogether, because of the degraded risk/reward equation.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 signifi cance, we don’t 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. A more complex and extreme risk environment “The bottom line is that if returns start to wane, then there is a greater imperative for organizations to tightly and more effectively manage their risks to maintain an adequate risk/reward balance.” Mike Elliott Global Mining and Metals Leader, Ernst & Young The business risk report Mining and metals 2012–2013 6 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 infl ation up from number eight to four on our risk rankings. Sharing the benefi ts 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 profi ts, 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 infl ation, 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. So although we haven’t 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 fi ve have fallen out of the top 10 table altogether. In a rising market, the returns have justifi ed 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. Top ten risks over fi ve years 2008 2012 01 Skills shortage 02 Industry consolidation 03 Infrastructure access 04 Maintaining a social license to operate 05 Climate change concerns 06 Rising costs (cost infl ation ) 07 Pipeline shrink age 08 Resource nationalism 09 Access to secure energy 10 Increased regulation 01 Resource nationalism 02 Skills shortage 03 Infrastructure access 04 Cost infl ation 05 Capital project execution 06 Maintaining a social license to operate 07 Price and currency volatility 08 Capital management and access new Sharing the benefi ts 10 F raud and corruption Remained in the top 10 over 5 years 7 The business risk report Mining and metals 2012–2013 The top 10 business risks for mining and metals 010203 Resource nationalism Resource nationalism retains the number one risk ranking with many governments around the world going beyond taxation in seeking a greater take from the sector, with a wave of requirements introduced around mandated benefi ciation, export levies and limits on foreign ownership. The uncertainty and destruction of value caused by sudden changes in policy by the governments of resource-rich nations cannot be understated as projects around the world have been deferred and delayed, and in some cases investment withdrawn altogether because of the changed risk/reward equation. Miners should continue to engage with governments to foster a greater understanding of the value a project brings to the host government and be better able to negotiate appropriate trade-offs that preserve the value to both mining and metal companies and governments. This includes encouraging governments to take a broader view of the return from natural resource development, as well as negotiating tax incentives and offsets. Skills shortage 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 confi dence 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. Signifi cant risks associated with skills shortage include impact to production, project delays, and increasing labor costs. Identifying, attracting and retaining critical operational and construction skills remains a top priority for the mining and metal sector. Innovative approaches used by organizations include: 1. Differentiated employee value proposition — to retain employees, companies are offering not only attractive compensation but also individually tailoring non-fi nancial benefi ts 2. Accessing non-traditional and underrepresented labor pools — such as women and indigenous communities 3. Resourcing from other sectors — companies are hiring resources from industries with similar and/or complementary skills, such as oil and gas, and manufacturing Infrastructure access The long running minerals super-cycle has made lower quality or remote deposits viable, with the lack of suffi cient infrastructure being the primary obstacle to the development of these resources. Governments are no longer the natural vehicle through which infrastructure projects are funded, mainly due to their current weak budgetary positions. This means that fi nancing has fallen to the private sector. Large miners with balance sheet strength are under increased shareholder pressure to restrict new capital expenditure, and small miners often lack required fi nancial strength to solely develop these projects. The key infl uences on infrastructure fi nancing include: • The changing role of government to planning, approving and incentivizing fi nancing of infrastructure • The rising number of foreign investors in infrastructure from countries like China, Japan, Korea and India • Funding from institutional investors including pension, sovereign wealth and infrastructure funds • The increasing focus on corporate governance which has seen closer Board scrutiny of the return on investment which often results in projects with large infrastructure needs being less likely to be approved To fulfi l infrastructure needs, changes need to be made to procurement processes and risk allocation between government, users, developers and funders. For this to be effective, traditional views around construction risk, residual value, revenue/pricing risk, capacity, operational control, credit risk and tax need to be re-assessed. Unless the commercial risks can be adequately addressed and the take or pay contracts be bankable, then development of infrastructure will continue be slower and more complicated than would appear necessary. The business risk report Mining and metals 2012–2013 8 04050607 Capital project execution There is a massive pipeline of projects in 2012–2015. At the same time, there has been high delivery cost infl ation and heightened macroeconomic uncertainty. This uncertainty has been putting downward pressure on prices of mined commodities since 2H 2011, with mining and metals companies now reconsidering, revising and prioritizing or sequencing previously announced capital project plans to mitigate these factors. Mining and metals companies are adapting to emerging capital project risks by: • Raising the bar on business case justifi cation and rigor — there is a renewed focus on the integrity of data around estimated project costs and benefi ts to aid/improve management’s level of decision-making confi dence • Prioritizing the investment pipeline to align with a changing appetite for cost and cash exposure — as leadership teams develop customized criteria to sequence their project pipeline, prioritization considerations extend beyond return on investment to strategic alignment, cash fl ow exposure and delivery complexity • Enhancing project controls to drive standardized delivery against plan — project teams must embed the right project control disciplines to drive delivery against plan in a standardized and consistent manner Maintaining a social license to operate The consistent ranking of maintaining a social license to operate within the top six risks over the last fi ve years demonstrates it is an important element of doing business as opposed to being a compliance exercise. While the reputation of being a company which does the right thing can provide a competitive edge through better access to capital and solid government relationships, it is essential in being able to access the next project. Trends which challenge companies include: • Increased expectations — stakeholders such as governments and communities want more from mining and metals companies operating in their jurisdictions, from basic fi nancial returns to benefi ts for the community and the country. To stay ahead, companies need to be proactive, timely and transparent in their dealings with these stakeholders • Acquisition challenges — Acquisitive companies need to be increasingly aware of the standards of their potential targets, moving quickly to set clear expectations of how they do business and build fi rm partnerships with stakeholders • Changing how business is done — companies are changing how they approach business by focusing more closely on building strong partnerships with stakeholders and communities right from the start so they are engaged and understand every aspect of the project Price and currency volatility Equity markets are becoming increasingly sensitive to macroeconomic news, and for many organizations increases in commodity prices are often not fully impacting share prices, whereas decreases are. The erosion of the gold premium is a prime example. This is creating differing asset valuation expectations, impacting the ability to complete transactions. Companies’ operating costs are often not in their functional currency, and therefore volatility in foreign exchange prices can put extreme pressure on them. To combat this volatility, mining and metals companies need to consider metals price and currency hedging strategies, and hedging inputs to production. Scenario planning could help them assess their ability to withstand price shocks and capitalize on the current metal price cycle. During periods of great volatility, mining and metals companies most value fl exibility to vary the level of production at little or no cost. Dynamic Discounted Cash Flow (DCF) and Real Option (RO) modelling are providing decision-makers with enhanced cash fl ow models that improve risk assessment and fi nancing options of mining projects. Only a handful of mining and metals companies are, however, implementing these techniques and generally seem to be battling with scenario planning. We expect to see increasing board level focus on currency and metal price volatility strategy and management as they strive to recognize and exploit value from volatility. Cost infl ation Cost infl ation in the sector is expected to intensify over the next several years, due to a number of factors, including labor, energy, ore grades, currencies, supplier constraints and taxes. In the prevailing environment of global economic uncertainty, softening commodity prices, higher input costs, and strengthening local currencies in many mining and metals jurisdictions are increasing the pressure on margins. Companies are revisiting their capital expenditure plans as spiraling capital costs threaten the viability of new projects. Furthermore, high crude oil prices, wage infl ation and increasing complexity are driving operating costs. In response, mining and metals companies are reviewing their portfolios to identify underperforming assets, with plans to shut down or divest high cost and non-core assets. Industry consolidation, automation technology, owner-operated mines and investment in energy assets are some of the steps that companies are taking to lessen the impact of rising costs. 9 The business risk report Mining and metals 2012–2013 Sharing the benefi ts As the mining sector continues to fl ourish while other sectors fl ounder, a wider range of stakeholders are looking for a greater share in the perceived profi ts. These stakeholders feel entitled to a portion of the value created by mining and metals companies and balancing these varied and competing expectations is challenging. • Governments are placing pressure on mining and metals companies to take a greater role in supporting the broader community through social and logistical infrastructure, community developments, and local hiring and procurement practices • Local communities are not just looking for minimal disruption but also to share the economic and social benefi t from local mine operations. They have a lot of power to disrupt projects if their needs and interests are not met • Employees are seeking higher wages and greater workplace benefi ts and can incite industrial unrest if they are not achieved • Suppliers can charge greater premiums as mining and metals companies are dependent on their goods and services to increase production output • Shareholders are expecting a greater return on their investments for the perceived risk of owning mining and metals stock, squeezing the profi ts already shared amongst the other stakeholders Fraud and corruption Fraud and corruption remains on this year’s risk radar due to the increased political risk we’ve 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 company’s 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. In response to new regulation and enforcement, companies are actively changing the way they do business: • Compliance monitoring — this is becoming crucial in itself and additionally many companies are seeking assurance of their compliance • Third party liability — mining and metals companies are substantially increasing due diligence initiatives around third parties as part of their corruption gap analysis, which includes specifi c anti-corruption provisions in their standard contract terms • Whistle-blowing — companies have been forced to become active in encouraging internal whistle-blowing by providing a credible alternative to external whistle-blowing 080910 Capital management and access Boards in 2012 are facing an extremely complex and uncertain environment within which to undertake capital allocation decisions. The volatility seen on capital markets is raising the risk that funding to the sector could become increasingly limited. Rising cost infl ation and a volatile investment backdrop are challenging the returns expected on major organic growth programs. And an apparent undervaluation by the markets, amidst increasing pressure for greater return of capital to shareholders, is driving companies to revisit their overarching capital allocation strategies. The risk of sub-optimal allocation of capital can have a signifi cant and long-lasting impact. Companies are responding to this risk by building options and fl exibility into their capital agendas through: • Opportunistic refi nancing • Strategic divestments and reallocation of capital • Innovative approaches to capex discipline The challenge for mining and metals companies is to remain true to their long-term strategy, while building in fl exibility to respond to short/medium term opportunities and risks. The business risk report Mining and metals 2012–2013 10 The top 10 business risks [...]... metals 2012–2013 27 Prospects and perils: facing up to political risks in mining and metals By Jean Devlin and Gemma O’Loghlen at Control Risks The mining and metals sector bears the brunt of the political risks that come with operating in complex environments With limited flexibility over where to access resources and a huge volume of upfront investment needed, understanding and managing these risks. .. in demand outlook , http://www.marketwatch.com, 9 May 2011 5 Vale announces investment budget for 2012, Vale press release, www.vale.com The business risk report Mining and metals 2012–2013 23 The metals and mining community adapts Leading mining and metals companies are adapting to emerging capital project risks by raising the bar on business case justification, prioritizing investment pipelines and. .. clear tone and expectation of how business will be conducted moving forwards and significant efforts need to be invested in building relationships with the host communities and governments This requires mining and metals companies to be especially transparent with both communities and governments to develop trust and build long term sustainable partnerships Changing how business is done Mining and metals. .. the country’s post-conflict recovery, has opened up new opportunities for mining The business risk report Mining and metals 2012–2013 and metals companies for the first time in decades The relative lack of institutional knowledge of the mining and metals sector — which has rendered market entry and permit negotiation processes slow and problematic — can be expected to improve with the review process firmly... managed to build up a strong mining and metals sector in the past two decades and attracted significant outside investment even though the government retains a major stake in the sector For now, however, irrespective of the jurisdiction, the greatest certainty remains that when it comes to the mining and metals sector, politics is business and business is politics Steps mining and metals companies can take... global mining and metals sector totalled US$676b at the end of 2011 — an immense 20% y-o-y rise.1 Mining and metals leaders are increasingly aware of global macro-economic trends and are actively shaping their delivery strategies accordingly These trends stem from heightened global economic volatility and continuing delivery cost inflation: • Uncertainty around the rate of growth in demand for metals and. .. requisite investment Mining and metals companies will make choices for future and current investments across projects and countries based on the expected returns as risk adjusted Those governments which increase their take will lower the returns and increase the risk for mining and metals companies, and will jeopardize future foreign direct investment Broader economic impact of mining investment Governments... review against business case requirements, and are controlled by robust cost, schedule, risk and interface management processes and tools Well managed projects invest in upfront planning, leverage and standardize leading tools and processes, and are governed with an emphasis on timely and informed decision-making Roles and accountabilities are agreed between project, program, owner and contractor teams... realize royalties and direct mining taxes from the natural resource as it is developed, but will also realize income taxes and other taxes such as VAT on purchases of equipment and other property, ad valorem taxes and payroll taxes In addition, mining activities provide direct mining jobs and indirect jobs through infrastructure development and suppliers, and the associated income and payroll tax revenue... 3 Peru dangles its investment credentials, MiningnewsPremium, 23 May 2012 4 Peruvian miners brace for tax news, Financial Times, 25 August 2011 The business risk report Mining and metals 2012–2013 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 . opportunities and risks. The business risk report Mining and metals 2012–2013 10 The top 10 business risks 11 The business risk report Mining and metals 2012–2013 Resource. the top 10 over 5 years 7 The business risk report Mining and metals 2012–2013 The top 10 business risks for mining and metals 010203 Resource nationalism Resource