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Productivity now top business risk for mining

Productivity now top business risk for mining

Photo by Bloomberg

28th July 2014

By: Esmarie Iannucci

Creamer Media Senior Deputy Editor: Australasia

  

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PERTH (miningweekly.com) – The mining and metals industry has identified productivity as the top business risk facing the industry globally, advisory firm EY has found in its latest business risks report.

EY global mining and metals leader Mike Elliott said on Monday that the decade-long decline in productivity, as the sector chased growth during the commodity boom, would require complete business transformations to fully recover.

Productivity ranked at two on last year’s risk list and was ranked at number four in 2012.

Elliott pointed out that boards and CEOs were now realising that regaining lost productivity and gaining new ground were critical for long-term profitability and required a whole-of-business response.

“Cost-cutting measures alone will not achieve the longer-term productivity gains required. The supercycle altered the DNA of mining companies to adapt the processes, performance measures and culture solely toward growth. The transformation has occurred by stealth and the counter-transformation will need to be far more radical.”

Capital allocation and access to capital, which was top of the risk list a year ago, remained a key issue at number two, while social licence to operate moved up from four to number three. Access to water and energy is a new entry in the top rankings at number 10.

The capital allocation dilemmas have fallen from last year’s top spot, reflecting progress made during the year in addressing this challenge, Elliott said.

He noted that major industry players have made steady progress on capital management and optimisation following a spate of asset write-downs in 2013. However, at the other end of the sector, little has changed in the past 12 months for many juniors and explorers and they remain cash-starved and focused on survival.

“Social licence to operate has consistently been near the top of the risk rankings and this year is no different. The number and size of projects being delayed or stopped due to community and environmental activists continues to rise,” Elliott added.

“Organisations cannot assume that acceptance from the community and its stakeholders will always be maintained. Organisations should be integrating the activities required to obtain and maintain a social licence into the broader strategic plan of a more sustainable business.”

He added that despite declining commodity prices, there remained waves of resource nationalism by countries keen to gain a greater return from the mining and metals sector.

On the one hand, some countries have changed mining tax policies to become more attractive to mining investment in a lower investment environment. However, at the same time, countries such as Indonesia, South Africa and Zimbabwe have introduced mandated beneficiation and increased State ownership.

“Mining and metals companies need to continue to educate governments on the impact of resource nationalism on investment decisions, whether that is taxes or in-country processing requirements and the like. They must continue to demonstrate the benefits of mining to the community and that raising the cost of doing business may jeopardise those benefits.”

Meanwhile, the EY report found that while the public capital markets still did not have an appetite for investment in new supply, mining and metals companies were beginning to prepare for the inevitable investment as reserves needed replacing and the cycle changed.

“Mining companies do not want to make the same mistakes they made during the super-cycle and boards will be demanding much more robust capital project management to avoid the failures of the past,” Elliott said.

“As supply shortages for many commodities start to come through and investments get the green light, this risk will be high on CEO and board agendas.”

Edited by Mariaan Webb
Creamer Media Senior Deputy Editor Online

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