VANCOUVER (miningweekly.com) – Capital considerations dominate the top three business risks in the mining and metals sector, according to professional services firm EY’s latest ‘Top 10 business risks facing mining and metals 2016-2017’ report.

“Much like our global counterparts, Canadian mining and metals companies are facing challenges amid prolonged volatility in the sector. Companies who proactively mitigate risks with a well-managed and cost-effective end-to-end value chain, will be best positioned for growth,” stated EY’s Canadian mining and metals leader Bruce Sprague.

Cash optimisation replaces ‘switch to growth’ – which fell from first to sixth position – as the top risk in the latest report. The change comes as mining and metals companies increase their focus on cash to maintain strong balance sheets and plan for longer-term profitability.

CAPITAL ACCESS
According to EY, the last couple of years have seen a sharp decline in loan finance to the sector. In 2015, capital raised was down by 10% year-on-year. Securing funding and credit terms has been particularly challenging as traditional forms of debt and equity are not readily available in today’s market.

Globally, debt markets are expected to improve more rapidly than equity markets.

In Canada, equity markets are expected to remain subdued, with the potential risk of shareholder dilution as a result of placements or rights issues brought on by companies facing financial distress.

“Unless the commodity pricing environment improves, we expect the cost of capital to remain elevated. As companies plan for the future, sourcing alternative finance options and raising capital is crucial,” Sprague said.

OUTPUT FOCUSED
Productivity declined significantly during the sector boom as companies adopted a “volume at any cost” mindset. This approach resulted in a singular focus on the mine and created an integration gap between the mine and production plant, maintenance and supply chain, EY explained.

“Mining and metals is one of the few sectors that has actually fallen behind on productivity. The upside of that, however, is that there are great opportunities to learn from other sectors that have increased output through innovative process improvements,” Sprague cautioned.

Innovation remains in the top ten risks for 2016/17.

“Innovation is central for the industry and will be a key factor in solving issues around productivity. It’s about disrupting the industry, engaging in digital tools and finding efficient ways to do everyday tasks,” Sprague added.

While adopting process models and embracing digital, he argues, companies need to effectively manage liquidity, while focusing on long-term profitability. These key enablers will help address and mitigate sector risks and help companies position themselves for continued growth, EY stated.