Significant Business Risks in Mining of Metals and their Implications

By Ignatius Kamwanje

The mining industry has a reputation of being a risky business and careful considerations coupled with good management can see a positive impact in the business entity. Fluctuations in the risks may highlight ongoing disruption in the mining sector and it is worth noting that there are always opportunities in time of change. There are many risks that can be identified in mining of metals as a business but the most significant ones are outlined below:

1. Maximizing Returns

The long-term goal arising from mining of metals is to increase capital returns while reducing the volatility. Mining companies need to think more broadly about how to maximize their returns and adopt new approaches that may be radically different from those of the past. Mining companies will also need to re-evaluate their appetite for risk to ensure that they are not missing out any new opportunities by taking more conservative approaches to allocating capital. To achieve this, some areas that may be considered include the following:

  • engaging in joint ventures.
  •  portfolio rethinking (change management, divestments, reconfiguring existing operations).
  • engaging local content in other areas.
  •  funding transformation.

2. Social Licence to Operate (SLTO)

The term social licence to operate emerged from within the mining industry as a response to social risk. It refers to the ongoing acceptance and approval of a mining development by local community members and other stakeholders that can affect its profitability. License to operate and disruptions run through risks as social responsibility and broader stakeholder demands manifest. Social licence to operate can be considered as a routine part of doing business for mining and metals companies. The nature of the threat continues to increase and evolve and projects continue to be delayed or shelved completely because of conflicting community interests, with governments increasingly backing these communities.

In countries where there is political tension, transformation and unrest(no political stability), extended periods of elections ,guerilla attacks and resultant government changes bring about uncertainty to the political environment of the country which  creates volatility environment in the commodity/metal markets. In addition, the mining sector faces greater scrutiny from end consumers, demanding a transparent ethical supply chain as well.

Illegal mining activities also threaten a company’s Social Licence To Operate, with poor conditions, dangerous practices and environmentally hazardous activities, continuing to threaten the health and safety of employees and local economies that can lead to mine closures. Activists with broad-ranging agendas are becoming more organized with advocacy on widely spreading anti-mining sentiment. Some governments are now giving greater powers to communities to make the final decision in approving mining and metals activities in their area. With billions of dollars in project investment at stake, ongoing engagement, collaboration and effective communication with all of these stakeholders is crucial and mutually-beneficial solutions are expected. The risk has become even more political, with many projects being abandoned or postponed due to an inability to obtain a social licence to operate.

3. Resource Nationalization

Resource Nationalization continues to form mandated beneficiation and tax transparency measures around the world and also continues to be an ever-changing risk to businesses though at a slower pace. It is the tendency of people and governments to assert control over natural resources located in their territory. This activity is being driven by the perception that mining and metal companies do not necessarily pay their fair share to host nations. It is a drive to combat corruption that has resulted in new transparency laws being enacted that allows companies to start reporting taxes and other government payments (Publish What You Pay). Mining and metal companies will need to ensure that they are ready for these new reporting requirements. Changes are made to reporting systems to ensure all data is collected and companies are happy with the story it tells. Organizations should take advantage of these changes to fully demonstrate the value they are adding back into communities, thereby creating a better understanding and slowing future resource nationalism activity.  

In advancing transparency, the disclosure by extractive industry companies of payments made to governments is not new as the concept began with the Extractive Industries Transparency Initiative (EITI). The EITI goal is to enhance good governance of natural resource development through improving transparency and accountability in the extractive industries. Under EITI, companies publish (disclose) what they pay to a specific jurisdiction and the government publishes what it receives in a process that is overseen by a multistakeholder group of governments, companies and civil society. The new age of transparency means increased reporting requirements have left a number of sector participants scrambling to comply.

4. Workforce /Employees

Technological innovation has the potential to improve production, safety and environmental management in the mining industry.

To date, mining companies are still rethinking about the future of the workforce and the required skills. So companies are debating on whether to build skills using the already absorbed workforce or import. Given the competitive market for digital and data-related skills, the workforce might be hard to get into the mining sector. To attain metal productivity, mining companies need to think how they are going to build, recruit or borrow the right skills and capabilities across the organization, retain senior employees to minimize the negative impact of attrition, create a compelling employee value proposition, equip future leaders with the skills needed to manage teams in a digital age, creative strategies, benchmarking to work towards best practices as an industry etc.

5. Digital Innovations

While application of technology has become business as usual, there is need to explore more if mining companies are doing it right with the expertise they engage. The risk that is involved here is the management of data that will give value for maximum production. Any twist or diversion from the data set collected due to digital manipulation will affect production trends and this puts a risk in business. Data holds the key to increase productivity and minimizing costs and enables decision automation to minimize loss across the entire value chain. As digital becomes business as usual, the threat surface that can be attacked is increasing exponentially. This is largely due to contributing factors such as Information Technology (IT) data analytics and optimization, Artificial Intelligence etc. It is through these that digital adaptations should have excellence in security issues/fundamentals to avoid mine data being compromised. Automation and increased maturity in the use of data is proving to have significant benefits to large mining operations, in terms of providing an uplift in productivity and hence reduction in production costs per tonne.

6.Rising Costs as mining becomes more complex

Cost reduction needs to be sustainable and a keen focus on productivity will help to manage the impact of rising costs.

Automation and increased maturity in the use of data is proving to have significant benefits to large mining operations, in terms of providing an uplift in productivity and hence reduction in production costs per tonne. The market conditions have facilitated the rise of alternative sources of finance, such as, royalties, bonds and agreements, pre-finance offtake and equity-linked instruments. In such a situation, companies are faced with limited choices i.e. either to accept the options on the table or risk project stagnation, loss of competitive positioning and, at worst, loss of ownership (take it or leave it). As a result, they are often accepting terms that may be expensive to arrange and maintain, and may dilute future earnings, present loss of control and damage future financing prospects. Some steps which companies can take to respond to this risk are:

  • Focus on sustainable cost reduction programs
  • Encourage innovation and partnerships to help with longer-term reduction of costs
  • Review capital tied up in high levels of pre-stripping, advance development and stockpiles
  • Consider the use of contract mining vs. sale or leaseback
  • Create strategic joint ventures to optimize economies of scale
  • Reduce costs from a support function — automation in the back office
  • Divest non-core assets
  • Review supplier and service contracts
  • Outsource

7. Access to energy

Energy must be sustainable, cost-effective and uninterrupted. Rising energy prices in an environment of declining metal prices and the resultant margin squeeze gives a higher risk. While falling factor, oil prices have brought some relief to mining and metals companies. In the event of a slump in oil due to results of oversupply and the imbalance, it becomes even more critical as mining and metals companies expand operations to remote areas with under-developed energy infrastructure.

Increasing affluence of the local population in developing markets has also increased demand for residential energy and created competition for energy between the community and the miners. Besides, ensuring energy security in a sustainable, cost-effective and uninterrupted manner requires an integrated approach, right from the project conception and planning stage. Companies can explore a number of alternatives to ensure access to affordable energy.

38 thoughts on “Significant Business Risks in Mining of Metals and their Implications

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