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Top 10 business risks facing mining and metals

Digital effectiveness has emerged as the number one risk for the mining and metals industry, according to the EY Top 10 business risks facing mining and metals, 2017-2018 report, as companies strive to improve productivity by introducing new technologies. With the sector increasingly investing in digital, cyber risk has risen from ninth to
third position in the ranking as the convergence of information technology and operational technology has made companies more vulnerable to rogue activity. While the majority of sector companies have started their digital journey, poor implementation of technology and a gap between progress and the scale of the opportunity leaves companies at risk of falling behind leading adopters.

Meanwhile, despite the unprecedented rise in cyberattacks year-on-year, the report indicates that the sector is yet to catch-up in cybersecurity awareness.

Paul Mitchell, EY Global Mining & Metals Advisory Leader, says: “The opportunity through digital is huge. But digital goes beyond just adopting new technologies: it is a critical enabler to address the sector’s most urgent operational challenge – improving productivity across the value chain. And as the sector increasingly moves toward digital transformation, the attack surface is also becoming larger and it is critical that mining and metals companies accelerate their cybersecurity program.”

New risks emerge as the sector switches to growth
Cash optimisation fell from first to sixth position in this year’s ranking, in the wake of higher margins and improved cash generation. The need to drive competitive shareholder returns, however, calls for companies to manage the competing demands of short-term capital allocation with longer-term investment in growth, according to the report.

While 2017 has seen companies reduce leverage and return cash to shareholders through dividends and share buyback programs, this is a short-term response to the underperformance of recent years, as return on capital employed has consistently fallen below the weighted average cost of capital. Now that balance sheets have been restored and excess cash returned, the sector will begin to look for investment opportunities that drive long-term return on capital. For those companies that fail to do so, the report points to increasing pressure from activist shareholders – even at the risk of takeover.

New world commodities enters as the fourth biggest risk to mining and metals

How quickly renewables will step up and replace the need for fossil fuels is the question hanging over the coal market. Future demand dynamics for coal are largely being driven by innovation associated with emission-reducing technology.

Scott Grimley, EY Oceania Mining and Metals Leader says: “We have seen the volume of coal deals increase as miners, investors and vertically aligned energy companies make a bet on coal’s future through the acquisition of higher-grade coals in Australia.”

Demand for battery power

Increased requirements in battery power and storage for electric vehicles (EVs) has driven up the price of key commodities associated with making batteries. While demand is expected to rise for cobalt and lithium, more traditional commodities, such as copper will also be required for electric cars in greater volumes than petroleum cars.

“Miners will need to adopt a level of flexibility in their business models to be agile to change and regularly review their portfolios, considering all future growth assets — new and old”. Mr Grimley said.

Regulatory risk surges while new technologies disrupt the sector

Regulatory risk is a new entrant to the top 10, as governments demand a greater return from their natural resources in light of improving commodity prices and profits, while transparency initiatives continue to gain momentum.

Mr Grimley says: “Australia is not immune to companies facing regulatory risks. We continue to see proposals to change royalty and tax regimes for projects where significant capital has previously been invested or committed to. A stronger collaboration between the three key stakeholder groups, being the Government, local communities and miners would assist to reduce this risk.”

Mitchell says: “This year’s business risks report clearly reflects the positive uptick in the market – volatility has eased-off in a number of commodities, and balance sheets are in a better position. It is now all about how companies stay ahead of the competition – gaining competitive advantage and being at the lower end of the cost curve is key. Managing the risks will assist mining and metals companies in achieving this.”

 

SEE THE FULL REPORT HERE: http://www.ey.com/gl/en/industries/mining—metals/business-risks-in-mining-and-metals

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