Report: "Business risks facing mining and metals 2012–2013"

984
-1

Published on

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

Read the full report here.

Published in: Business
0 Comments
3 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
984
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
38
Comments
0
Likes
3
Embeds 0
No embeds

No notes for slide

Report: "Business risks facing mining and metals 2012–2013"

  1. 1. Business risks facing mining and metals 2012–2013
  2. 2. Organizations that succeed do sobecause they are best able to optimizethe risk and reward equation for bothstrategic 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 inflation 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 benefits 38 10. Fraud and corruption 40 Under the radar 42 Getting prepared 46
  3. 3. The Ernst & Youngbusiness risk radarfor mining and metals Up from 2011 Down from 2011 Same as 2011 New entry 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 business risk report Mining and metals 2012–2013 3
  4. 4. Executive summary4 The business risk report Mining and metals 2012–2013
  5. 5. A more complex and extremerisk 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 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 significantly 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 significant 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 beneficiation, 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 significance, 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. The business risk report Mining and metals 2012–2013 5
  6. 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 inflation up from number eight to four on our risk rankings. Sharing the benefits 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 profits, 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 inflation, 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. Top ten risks over five years 2008 2012 01 Skills shortage 01 Resource nationalism 02 Industry consolidation 02 Skills shortage 03 Infrastructure access 03 Infrastructure access 04 Maintaining a social license to operate 04 Cost inflation 05 Climate change concerns 05 Capital project execution 06 Rising costs (cost inflation) 06 Maintaining a social license to operate 07 Pipeline shrinkage 07 Price and currency volatility 08 Resource nationalism 08 Capital management and access 09 Access to secure energy new Sharing the benefits 10 Increased regulation 10 Fraud and corruption Remained in the top 10 over 5 years 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 five have fallen out of the top 10 table altogether. In a rising market, the returns have justified 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.6 The business risk report Mining and metals 2012–2013
  7. 7. The top 10 business risks formining and metalsResource nationalismResource nationalism retains the number one risk ranking with altogether because of the changed risk/reward equation.many governments around the world going beyond taxation in Miners should continue to engage with governments to foster aseeking a greater take from the sector, with a wave of greater understanding of the value a project brings to the host 01requirements introduced around mandated beneficiation, export government and be better able to negotiate appropriate trade-offslevies and limits on foreign ownership. that preserve the value to both mining and metal companies andThe uncertainty and destruction of value caused by sudden governments. This includes encouraging governments to take achanges in policy by the governments of resource-rich nations broader view of the return from natural resource development, ascannot be understated as projects around the world have been well as negotiating tax incentives and offsets.deferred and delayed, and in some cases investment withdrawnSkills shortageThe acute skills shortage seen in Australia and Canada has spread attracting and retaining critical operational and construction skillsto more places during the past year, with projects in Indonesia, remains a top priority for the mining and metal sector. InnovativeMongolia, Brazil, Chile, Peru and Mozambique all plagued by this approaches used by organizations include:challenge. Strong commodity prices and confidence in the 1. Differentiated employee value proposition — to retainlong-term sector fundamentals have reinvigorated investment in employees, companies are offering not only attractive 02mining and metals to quickly develop new projects or ramp up compensation but also individually tailoring non-financialproduction from existing ones. This increased investment is in turn benefitsdriving demand for skilled workers around the world and drawing 2. Accessing non-traditional and underrepresented laboron the same global pool of talent. The risk is that this could slow pools — such as women and indigenous communitiesgrowth and increase costs. 3. Resourcing from other sectors — companies are hiringSignificant risks associated with skills shortage include impact to resources from industries with similar and/or complementaryproduction, project delays, and increasing labor costs. Identifying, skills, such as oil and gas, and manufacturingInfrastructure accessThe long running minerals super-cycle has made lower quality or • Funding from institutional investors including pension,remote deposits viable, with the lack of sufficient infrastructure sovereign wealth and infrastructure fundsbeing the primary obstacle to the development of these resources. • The increasing focus on corporate governance which has seenGovernments are no longer the natural vehicle through which closer Board scrutiny of the return on investment which ofteninfrastructure projects are funded, mainly due to their current results in projects with large infrastructure needs being lessweak budgetary positions. This means that financing has fallen to likely to be approved 03the private sector. Large miners with balance sheet strength are To fulfil infrastructure needs, changes need to be made tounder increased shareholder pressure to restrict new capital procurement processes and risk allocation between government,expenditure, and small miners often lack required financial users, developers and funders. For this to be effective, traditionalstrength to solely develop these projects. views around construction risk, residual value, revenue/pricingThe key influences on infrastructure financing include: risk, capacity, operational control, credit risk and tax need to be• The changing role of government to planning, approving and re-assessed. Unless the commercial risks can be adequately incentivizing financing of infrastructure addressed and the take or pay contracts be bankable, then• The rising number of foreign investors in infrastructure from development of infrastructure will continue be slower and more countries like China, Japan, Korea and India complicated than would appear necessary. The business risk report Mining and metals 2012–2013 7
  8. 8. Cost inflation Cost inflation in the sector is expected to intensify over the next spiraling capital costs threaten the viability of new projects. several years, due to a number of factors, including labor, energy, Furthermore, high crude oil prices, wage inflation and increasing ore grades, currencies, supplier constraints and taxes. In the complexity are driving operating costs. In response, mining and04 prevailing environment of global economic uncertainty, softening metals companies are reviewing their portfolios to identify commodity prices, higher input costs, and strengthening local underperforming assets, with plans to shut down or divest high currencies in many mining and metals jurisdictions are increasing cost and non-core assets. Industry consolidation, automation the pressure on margins. technology, owner-operated mines and investment in energy Companies are revisiting their capital expenditure plans as assets are some of the steps that companies are taking to lessen the impact of rising costs. Capital project execution There is a massive pipeline of projects in 2012–2015. At the same estimated project costs and benefits to aid/improve time, there has been high delivery cost inflation and heightened management’s level of decision-making confidence macroeconomic uncertainty. This uncertainty has been putting • Prioritizing the investment pipeline to align with a changing downward pressure on prices of mined commodities since 2H appetite for cost and cash exposure — as leadership teams 2011, with mining and metals companies now reconsidering,05 develop customized criteria to sequence their project pipeline, revising and prioritizing or sequencing previously announced prioritization considerations extend beyond return on capital project plans to mitigate these factors. investment to strategic alignment, cash flow exposure and Mining and metals companies are adapting to emerging capital delivery complexity project risks by: • Enhancing project controls to drive standardized delivery • Raising the bar on business case justification and rigor — against plan — project teams must embed the right project there is a renewed focus on the integrity of data around 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 ahead, companies need to be proactive, timely and transparent within the top six risks over the last five years demonstrates it is in their dealings with these stakeholders an important element of doing business as opposed to being a • Acquisition challenges — Acquisitive companies need to be compliance exercise. While the reputation of being a company increasingly aware of the standards of their potential targets, which does the right thing can provide a competitive edge through06 moving quickly to set clear expectations of how they do better access to capital and solid government relationships, it is business and build firm partnerships with stakeholders essential in being able to access the next project. Trends which • Changing how business is done — companies are changing how challenge companies include: they approach business by focusing more closely on building • Increased expectations — stakeholders such as governments strong partnerships with stakeholders and communities right and communities want more from mining and metals from the start so they are engaged and understand every companies operating in their jurisdictions, from basic financial aspect of the project returns to benefits for the community and the country. To stay Price and currency volatility Equity markets are becoming increasingly sensitive to During periods of great volatility, mining and metals companies macroeconomic news, and for many organizations increases in most value flexibility to vary the level of production at little or no commodity prices are often not fully impacting share prices, cost. Dynamic Discounted Cash Flow (DCF) and Real Option (RO) whereas decreases are. The erosion of the gold premium is a modelling are providing decision-makers with enhanced cash flow prime example. This is creating differing asset valuation models that improve risk assessment and financing options of07 expectations, impacting the ability to complete transactions. mining projects. Only a handful of mining and metals companies Companies’ operating costs are often not in their functional are, however, implementing these techniques and generally seem currency, and therefore volatility in foreign exchange prices can to be battling with scenario planning. We expect to see increasing put extreme pressure on them. To combat this volatility, mining board level focus on currency and metal price volatility strategy and metals companies need to consider metals price and currency and management as they strive to recognize and exploit value hedging strategies, and hedging inputs to production. Scenario from volatility. planning could help them assess their ability to withstand price shocks and capitalize on the current metal price cycle. 8 The business risk report Mining and metals 2012–2013
  9. 9. Capital management and accessBoards in 2012 are facing an extremely complex and uncertain The risk of sub-optimal allocation of capital can have a significantenvironment within which to undertake capital allocation and long-lasting impact. Companies are responding to this risk bydecisions. The volatility seen on capital markets is raising the risk building options and flexibility into their capital agendas through:that funding to the sector could become increasingly limited. • Opportunistic refinancing 08Rising cost inflation and a volatile investment backdrop are • Strategic divestments and reallocation of capitalchallenging the returns expected on major organic growthprograms. And an apparent undervaluation by the markets, • Innovative approaches to capex disciplineamidst increasing pressure for greater return of capital to The challenge for mining and metals companies is to remain trueshareholders, is driving companies to revisit their overarching to their long-term strategy, while building in flexibility to respondcapital allocation strategies. to short/medium term opportunities and risks.Sharing the benefitsAs the mining sector continues to flourish while other sectors mine operations. They have a lot of power to disrupt projects ifflounder, a wider range of stakeholders are looking for a greater their needs and interests are not metshare in the perceived profits. These stakeholders feel entitled to a • Employees are seeking higher wages and greater workplaceportion of the value created by mining and metals companies and benefits and can incite industrial unrest if they are not achievedbalancing these varied and competing expectations is challenging. 09 • Suppliers can charge greater premiums as mining and metals• Governments are placing pressure on mining and metals companies are dependent on their goods and services to companies to take a greater role in supporting the broader increase production output community through social and logistical infrastructure, • Shareholders are expecting a greater return on their community developments, and local hiring and procurement investments for the perceived risk of owning mining and metals practices stock, squeezing the profits already shared amongst the other• Local communities are not just looking for minimal disruption stakeholders but also to share the economic and social benefit from localFraud and corruptionFraud and corruption remains on this year’s risk radar due to the • Compliance monitoring — this is becoming crucial in itself andincreased political risk we’ve observed in a number of key mining additionally many companies are seeking assurance of theirand metals companies’ investment destinations, and also complianceincreased regulation and enforcement activities. The effects of • Third party liability — mining and metals companies are 10fraud and corruption can impact a company’s reputation, social substantially increasing due diligence initiatives around thirdlicense to operate and bottom line. Additionally, the extent of parties as part of their corruption gap analysis, which includesfraud and corruption and the associated effect on both private and specific anti-corruption provisions in their standard contractpublic citizens of countries have led governments to implement far termsreaching regulatory changes. • Whistle-blowing — companies have been forced to becomeIn response to new regulation and enforcement, companies are active in encouraging internal whistle-blowing by providing aactively changing the way they do business: credible alternative to external whistle-blowing The business risk report Mining and metals 2012–2013 9
  10. 10. The top 10 business risks10 The business risk report Mining and metals 2012–2013
  11. 11. (same as 2011) Resource nationalism 01Resource nationalism continues to be the number one risk facing 2. Mandated beneficiation/export leviesmining and metals companies as governments go beyond taxation Many governments are now seeking to have minerals beneficiatedin seeking a greater take from the sector. The uncertainty and in-country prior to export. South Africa has announced adestruction of value caused by sudden changes in policy by the beneficiation strategy, as has Zimbabwe, Indonesia, Brazil andgovernments of resource-rich nations cannot be understated. Vietnam. In theory, this will capture more of the value-chain as theWe are observing three key trends of resource nationalism which products will achieve higher prices.we will believe will continue throughout 2012/13: Changes to the risk profile due to mandated beneficiation include:1. Imposition/increasing of royalties or mining taxes • The high cost of establishing refineries or smelters if not alreadyAmendments to mining and tax laws can result in changes to capital established in the countryallocation based on a weaker risk/reward profile. • The need for both low cost power and infrastructure forThe announcement in 2010 of a proposed new ‘super profits’ beneficiation plants — both of which are often in short supply inmining tax in Australia had a significant ripple effect around the these countriesworld. Many mining and metals jurisdictions announced increases in • The need for skilled labor for value-added processingtaxes and royalties during the course of 2011–12 and many looked • Loss of flexibility in global supply chainat Australia’s action as commercial cover for proposed changes. For • Concentration of investment riskexample, in March 2012, an Indian Government taskforce startedworking on modalities for a new levy on minerals mined on forested • Relatively higher taxes on value addregions of the country. The proposal for a new levy followed • Less integration with customers supply chaindemands raised by several provinces in India for a new mineral • Threats to existing business models where miners are forced toresource rent tax with a minimum of 50% on ‘super profits’ earned move downstreamby miners. The provincial governments had suggested modellingthe new resource rent tax along the lines of the Australian Typical of the reaction to mandated beneficiation came from oneproposal.1 company which made the following comment on the changes to the Indonesian export regime — while they were happy to commitOther tax and royalty increases are being proposed and enacted US$500m to Indonesia for a mine, they were not happy to commitacross the world in the resource rich emerging markets. After the US$1.5b for a mine and a smelter as the returns did not justify that2011 elections, Peru enacted a new mining tax and royalty regime much exposure to the country.2that used as a template similar changes that occurred in Chile theyear before. These levies are based on net mining income with In order to better ensure in-country beneficiation, governments arecertain adjustments, e.g., interest expense is not allowed as a imposing new steep export levies on unrefined ores. For instancededuction. Indonesia, as part of its mining tax changes, has proposed a new export levy of 25% on mining exports in 2012, increasing to 50% inDuring 2011 and for the first six months of 2012, a number of 2013. The Indonesian Government said in announcing the proposalcountries have announced or enacted increases to taxes or royalties that it is seeking to develop its mining sector, create jobs and turnincluding Democratic Republic of Congo, Ghana, Mongolia, Peru, itself into a producer of higher value finished goods from anPoland, and the USA, to name a few. exporter of raw materials.1 India working on mining tax, Mining Weekly, 20 March 2012 2 Anonymous company quote to Ernst & Young contact The business risk report Mining and metals 2012–2013 11
  12. 12. 3. Retaining state or national ownership of resources have a choice on the location of that investment and recent or proposed changes in tax regimes will impact those choices. TheGovernments are also seeking to ensure that they retain ownership hurdle rates for those investments will have to take into account theof their minerals, which is not a new phenomenon. While trying to higher risk associated with resource nationalism.eliminate discussion about nationalization, South Africa, whichalready has Black Economic Empowerment (26% participation), is Mining and metals companies will also be considering the impact ofalso canvassing the idea of the mandatory participation of a state resource nationalism on their existing projects. Changes to theowned mining company. Indonesia has announced a plan to limit mining laws or tax regimes will lead to a re-evaluation of a miningforeign ownership of mines to 49% after 10 years. Zimbabwe has and metals company’s operations. New taxes or the prospect of newalready commenced its 51% indigenization laws, and Mongolia has levies will weigh into whether the company divests its interest orplaced a 49% cap on foreign ownership of strategic mines. China sells down to maximize its investment return.and India have restrictions on foreign ownership of certain minerals. Mining and metals companies should evaluate current operationsThese changes in ownership laws can have a significant impact on just as they evaluate new investments and the risk reward ratiosthe reward miners’ expect to receive for the risk they have taken. have changed in those jurisdictions where resource nationalism isWhen partial divestment is done part way through a mine life, the occurring or trending. Companies will be working this into their lifemining company has paid for 100% of the investment, including the of mine models.upfront exploration, development, commissioning and early The average global risk has increased for investment so the relatedoperating risk, but will be giving up a percentage of the future reward must be higher in order to make the requisite investment.investment return. That can be the equivalent of a very high tax. Mining and metals companies will make choices for future andEven if they can sell shares to locals, the value of those shares will current investments across projects and countries based on thelikely be at a reduced market value as fewer buyers can afford an expected returns as risk adjusted. Those governments whichinterest so they may have to sell down ownership at a loss. There is increase their take will lower the returns and increase the risk foran increased need for project economics and modelling before any mining and metals companies, and will jeopardize future foreigninvestment is undertaken to factor in the probability of changes in direct investment.policy, e.g., how will forecast returns be affected if there is a 40%chance the mining and metals company has to sell 49% of its Broader economic impact of mining investmentshareholding at a loss? Governments are currently seeking a higher return on their naturalCapital, risk/reward ratio and the sell decision endowment but should consider a broader view of the return from natural resource development. Governments will not only realizeThe increasing spread of resource nationalism has an effect on royalties and direct mining taxes from the natural resource as it iswhere mining and metals companies invest their capital. Mining and developed, but will also realize income taxes and other taxes suchmetals companies are weighing up the risk-reward ratio and will as VAT on purchases of equipment and other property, ad valoremtake into account any potential policy changes when modelling the taxes and payroll taxes. In addition, mining activities provide directeconomics of any future projects. In the 2012 Capital Confidence mining jobs and indirect jobs through infrastructure developmentBarometer survey undertaken by Ernst & Young, almost two-thirds and suppliers, and the associated income and payroll tax revenueof surveyed senior mining and metals industry executives indicated from those jobs. Hence, there is often a significant ‘multiplier effect’that they will invest in organic growth over the next twelve months. associated with the development of new mines.This means they will be looking to invest capital in new, greenfieldsites or in expanding existing operations. In either case, they will12 The business risk report Mining and metals 2012–2013
  13. 13. Andy Miller Global Mining & Metals Tax Leader, Ernst & Young “With the massive increase in resource nationalism, comes an increased need for tax directors to be more involved in strategic risk decisions.”Product of consultation Mining and metals companies are looking at the government consultation process as a means of preserving value as opposed toIn many resource-rich countries, the capital investment can be just defending fiscal terms.significant. For example, in Peru, the Government is forecastinginvestment into its mining sector of US$53b over the next five Corporate governanceyears.3 As previously mentioned, a recent change of regime in Peru Resource nationalism and political changes in resource-richled to an increase in tax on mining operations. In anticipation of the countries creates further unpredictability for organizationsregime change, organizations in Peru met with the new investing in long-term projects. There will be increased politicalGovernment, presented comparisons of the ‘government take’ in uncertainty in determining project economics, which increases thealternative mining and metals locations, and discussed a range of overall cost of doing business and the related risk. In addition,options to enhance tax revenues from the current and future political changes have an effect on contract stability and often thisoperations in Peru. The new levies were based on net income from is not just a one-off event. Countries can make a series of changesthe sector and there was recognition that new revenues were to their mining laws over a number of years.needed. In addition, many of the big mining and metals companiesin Peru have agreed to pay additional taxes over that agreed in As a result, the decisions about investments have become riskier,their stability tax agreements, as long as they are not which will require greater involvement by the board in tax mattersunreasonably high.4 and tax planning. In 2009, the Ernst & Young Mining and Metals Tax Survey found that only 65% of tax directors presented periodicallyThe inevitability of increased government take during a super-cycle at the board level. We predict that with the increase in resourcehas led mining and metals companies to move from outright nationalism, tax directors will be getting more airtime with theopposition to changes in fiscal terms, to negotiating offsets. This boards of their companies, which will need to increase their focushas been because the political weight behind an increased take has on tax considerations and implications on risk.been increasing but value restoring trade-offs are politicallyachievable. Some of these offsets include:• A more efficient (profit based) taxation system• Removal of inefficient taxes• Speeding up the development approval process• Improving flexibility of labor Steps mining and metals companies can take to respond to this risk: • Invest in transparent relationships with host governments to • Align with multi-lateral agencies, such as the World Bank, to foster a greater understanding of the value of the project to achieve a ‘prominent victim’ status in the face of mounting the host resource nationalism • Align with the host government’s long-term economic and • Partner with state owned enterprises that have strong political incentives and thereby become an invaluable part of Government-to-Government relationships the infrastructure in the host country • Encourage direct government participation • Focus on generating direct and sustainable benefits for the host community through pro-active and well organized social and community development programs3 Peru dangles its investment credentials, MiningnewsPremium, 23 May 20124 Peruvian miners brace for tax news, Financial Times, 25 August 2011 The business risk report Mining and metals 2012–2013 13
  14. 14. (same as 2011)Skills shortage 02Identifying, attracting and retaining critical operational and 3. Global mobility — the current labor shortage within the miningconstruction skills remains a top priority for the mining and and metals sector necessitates a global approach to mitigate themetals sector in 2012. Continued sector growth with 136 new risk as there are often insufficient numbers and/or skills availableprojects planned or announced in the 2012 calendar year1 once in the local market. Therefore, being able to attract and mobilizeagain magnifies and escalates the problem. However, the outlook key talent globally in a cost effective and efficient way, whilston investment is cautious, with companies prioritizing and ensuring compliance with local immigration and tax regulations,sequencing investment in projects, thus impacting skills demand- becomes a critical requirement. This, however, does not alwaysand-supply dynamics. The scaling back or shelving of several receive local community and government support, and in somelarge projects during the year may provide some temporary relief cases government policies and requirements may in fact restrictfrom the skills shortage. However, in this volatile environment, the ability to access and move talent globally.it is increasingly difficult to forecast and plan future workforce 4. Increasing labor costs — competition for scarce labor increasesrequirements, and this is why skills shortage remains the second employment costs and erodes production margins. In addition tomost critical risk in the mining and metals sector. varying commodity prices, companies now have to contend withThe risks associated with skills shortages are significant: an increasing cost base. According to Jac Nasser, Chairman of BHP Billiton, the cost of doing business in Australia is increasing1. Impact to production output — there is a risk that insufficient due largely to higher wages in the country. The resource projects skills may limit current and/or planned output. According to BHP in Australia cost around 40% more than the cost of a similar Billiton, Australia’s resources industry needs an extra 170,000 project in the US Gulf Coast.6 workers in the next five years.2 In Canada, the Mining Industry Human Resources Council’s 2010 National Employer Survey Companies that are able to plan ahead are using a number of reported that 40% of the Canadian mining workforce will be strategies to deal with skills shortages; both short and long term. eligible for retirement by 2014, taking with them an average of Some of the more innovative approaches we are observing are 21 years of mining sector experience each, and driving the need as follows: for skilled workers to 60,000–90,000 by 2017.3 1. Differentiated employee value propositions2. Delay, downsizing or cancellation of projects — the shortages in In this competitive labor market, talented employees have both skilled and unskilled labor contribute to project delays, the choices, and therefore companies must differentiate themselves impact of which is felt by both mining and metals companies and from their competitors by developing compelling offers to attract contractors. Meeting contractual obligations will be difficult, and and retain the best talent. Ernst & Young’s work developing the viability of projects will also be impacted as there is not employee value propositions for mining and metals companies enough labor to successfully implement the number of planned clearly shows that remuneration and career opportunity are projects. In Canada alone, operations in 32 Canadian mines were rated as equally important by employees and that there are a either suspended or shelved during 2009–2011.4 Even the range of other factors that influence their employment decision. larger mining and metals companies are experiencing the impact of the skills shortage, e.g., rising skills costs was one of the contributing factors that led to Newmont Mining writing off the Hope Bay gold project.51 Raw Material Group 6 Nasser’s defence is all-out attack, The Age, 17 May 2012, via Factiva © 2012 Copyright John2 Australian mining giant BHP Billiton estimates that the industry will need a further..., Federal Fairfax Holdings LimitedGovernment Broadcast Alerts, 3 October 2011, via Factiva © 2011 Media Monitors Australia Pty Ltd.3 http://magazine.mining.com/issues/1005/PDFWeb.pdf4 Canadian Mining Industry Employment and Hiring Forecasts, 20115 Newmont puts Hope Bay gold project on hold, http://www.cbc.ca/news/canada/north/story/2012/02/01/north-newmont-hope-bay.html, accessed 17 May 2012; Newmont Mining posts4Q loss on project writedown, http://finance.yahoo.com/news/Newmont-Mining-posts-4Q-loss-apf-4285689275.html, accessed 17 May 201214 The business risk report Mining and metals 2012–2013
  15. 15. Louise Rolland Executive Director, Advisory, Ernst & Young “There is no easy fix to the skills shortage issue, but being creative and flexible in your approach can open up new pools of talent.” Companies need to understand what is important to their have evolved over recent years from 2 weeks on 1 week off to targeted workforce and be creative in providing not only an 9 days on 5 days off, to 8 days on 6 days off, and now to a attractive compensation but also a range of additional employee 8/6/7/7 rotating roster. 8 In addition, companies are also benefits. In order to retain employees, companies need to providing additional flexibility such as career breaks, working engage with them at multiple levels7 and clearly communicate from home, the ability to work part-time and parenting leave the full range of benefits of employment with their company. options as a means of attracting and retaining talented employees. Other benefits that are typically being offered a. Attractive compensation include relocation assistance, in-house and online education Companies are becoming increasingly focused on employee alternatives for career development, and free or subsidized related costs. Remuneration arrangements are being childcare facilities. reviewed and rebalanced to ensure they are fair and c. Individually tailored employee experiences competitive for the individual, while being affordable and sustainable for the organization. In addition to taking a more In addition, mining and metals companies are tailoring their targeted approach to compensation design and provision, attraction and retention strategy so that they are aligned to companies are focusing on enhancing their employees’ employees’ geographic location, nationality and life stage who understanding of the remuneration arrangements on offer, may have different needs and expectations. Greater and the purpose for which each remuneration element is sophistication in profiling the market will better enable being provided. Human Resource Directors to respond to the threat that labor shortages pose to their company’s competiveness. Leading b. Non-financial benefits organizations are utilizing predictive modeling techniques to Companies are also employing a range of non-financial tailor their offerings to target different labor segments and benefits and arrangements to assist with workforce better match job roles with candidate preferences. A key recruitment, engagement and retention. One of these is trend emerging is the increased importance both candidates flexible work schedules to enable employees to have a and employees place on career development and progression positive work-life balance while ensuring operational as a driver of attraction and retention. Nowhere is this more requirements are achieved. This is especially prevalent in the pertinent than in the mining and metals sector where a lack of development of FIFO/DIDO rosters. To provide greater clear career pathway and opportunities are often cited as a balance of time in home location with time on site, rosters reason for leaving.9 a. Attractive compensation b. Non-financial benef ts i (includes remuneration, (includes flexibility, c. Individually tailored incentives, benefits, allowances) career development) Set remuneration at competitive Understand what is important Understand what is different but not inflationary levels across workforce segments7 Attracting workers to the mines and retaining them, Ernst & Young, 2008 8 8/6;7/7: Example of rotating roster where working 8 days on/6 days off and 7 nights on/7 nights off 9 Career and life survey, Ernst & Young The business risk report Mining and metals 2012–2013 15
  16. 16. Five things that leading companies do well when attracting and retaining staff 1. Get the employment offer right and effectively communicate 4. Understand employee needs and the markets in which they and reinforce it reside for effective workforce planning 2. Develop effective career pathways and well-aligned employee 5. Execute well across attraction and recruitment, and development programs development and progression 3. Build internal capability to effectively manage people2. Accessing non-traditional and under-represented labor pools remote locations of mines, family responsibilities and the extended problems of working in a male-dominated environment. Women and indigenous workers are two significant talent pools In many countries, formal programs are now in place to increase that are not yet fully leveraged by the sector. Further, there are the national participation of women. For example, the Federal skills and experience in other sectors which could be effectively Government of Australia’s policy to increase female participation leveraged into mining and metals organizations. With policies in mining includes tax deductibility of work-related child care and practices catered to address the needs and requirements of expenses, fringe benefits tax removed from employer sponsored these specific groups, the sector could potentially increase the childcare, and education programs aimed at employers to inform available talent pool. on gender equity, amongst others.13 Indigenous engagement is crucial since indigenous communities 3. Sourcing workers from other sectors represent a large source of labor close to mining and metals operations, and are often one of the fastest-growing The shortage of mining and metals skills has prompted some employment pools in the country. To utilize this resource pool, companies to consider resources in other sectors with similar many companies have set a minimum target to employ and/or complementary skills, such as oil and gas, engineering, indigenous workforce at mine sites, and governments are construction and manufacturing. Targeting resources in these implementing incentive programs for these communities to gain sectors has created a widening resource pool of both technical the appropriate skills to enter mining-related employment, e.g., (e.g., electrical trades, fitters and turners) and professional (e.g., the Canadian Indigenous Skills and Employment Partnership.10 civil and mechanical engineers) skills. Further, the relative growth This benefits not only the indigenous communities, but also of mining and metals versus other sectors may also provide more contributes to the companies’ social license to operate. immediate access to resources due to slowing down and contraction within these other sectors. For example, in August The effective participation of women in the sector is currently 2011, BHP Billiton established an online portal to take low — in Australia, women represent only 18% of the workforce in applications from the 800 workers affected by a company’s mining, as opposed to 45% of the total workforce,11 and in decision to cut jobs in Illawarra, Australia. In the wake of the Canada, 14% of the mining labor force, as opposed to the US$9.5b capital expenditure plan, BHP Biliiton is hiring from country’s average participation rate of 47%.12 The participation allied sectors for its operations in Illawarra, Queensland and of women in the sector is often limited due to issues such as the Western Australia.14 lack of part-time work in the sector, a culture of long hours, Steps companies can take to respond to this risk: mining and metals companies can take to respond to this risk: • Source skills from aligned sectors and a broader demographic • Implement early labor scheduling and sourcing within mine • Account for demographic and diversity factors when making planning investment decisions • Develop sustainable skills development programs to fill • Initiate programs that encourage semi-skilled and retired these gaps workers to re-enter the work-force • Develop strategic alliances with institutions and communities • Target initiatives to retain critical skills held by older workers • Target initiatives to optimize productivity close to retirement • Substitute capital for labor through innovation • Create employment packages focused on career development opportunities10 Attracting workers to the mines and retaining them, Ernst & Young, 2008 13 Gender pay equity and associated issues for women in mining — Survey Report, The AusIMM,11 Attracting workers to the mines and retaining them, Ernst & Young, 2008 http://www.ausimm.com.au/content/docs/gender_pay_equity_wim_report.pdf,12 Canadian Mining Industry Employment and Hiring Forecasts 2010, Mining Industry Human accessed 24 May 2012Resource Council 14 Sacked steel workers wanted in WA, Australian Broadcasting Corporation (ABC) News, 24 August 2011, via Factiva © 2011 Dow Jones & Company, Inc.16 The business risk report Mining and metals 2012–2013
  17. 17. (same as 2011) Infrastructure access 03While prices have moderated over the past year, they remain The old paradigm was that governments tended to fund largerabove historical averages driven by economic growth in the logistics networks and then develop regulated tariff structures onrapidly developing economies. This continues to challenge the an open access basis. However, the current poorer condition ofmining and metals sector with its supply response. The need government finances globally means that direct investment into expand existing production or develop stranded deposits mining and metals related infrastructure is of lower priority than itis keeping infrastructure access in the top three sector risks. has been in the past. Those organizations without the balance sheetIndeed, global mining capital expenditure is expected to grow 14% strength or available financial resources are therefore faced within calendar year 2012. This is being driven by a range of mining two options:development projects in developed economies like Australia • Collaborate with similar sized competitors or larger off-takeand emerging markets of China, and Africa.1 Resources sector customers to jointly develop the required infrastructure. Forinvestors from countries like China, Japan, Korea and India have example, Sundance Resources, which is developing the Mbalamemerged as new infrastructure sector investors in the last few iron ore project in West Africa, is collaborating with regional ironyears, in addition to traditional funding from OECD countries. ore developers Core Mining and Equatorial Resources to developFor example, Japanese firm Mitsubishi Corp is championing the the infrastructure, and is also the subject of a takeover offer byOakajee Port and Rail development in Australia2 and Chalco Hanlong Mining, a Chinese company4and Rio Tinto are developing the Simandou iron ore project inGuinea, Africa.3 • Where competition regimes exist, seek access to the existing privately developed networks (the Pilbara iron ore rail networkOne of the clear impacts of the long running minerals boom has access dispute between iron ore miners in Western Australia is anbeen that resource deposits long classed as marginal or example of this process)5uneconomical have gradually become more viable. Typically thesedeposits have been of lower quality or remote from existing supply A key issue in structuring transactions for pivotal supply chainchains and thus the lack of sufficient infrastructure, either logistics infrastructure is control: control over the operational protocols andor secondary processing, has been the primary obstacle to rapid expansion profile gives an organization a significant advantage overdevelopment of these resources. Speed is seen as essential in its competitors in setting the speed with which product is delivereddeveloping these deposits as there are only so many of these to the market. Negotiations over joint development agreementsstandard assets that will be developed. Remoteness naturally brings and third party access terms are typically long and complex as theadditional challenges in terms of cost, risk and scale of development control issue is dealt with. Anketell Port in Western Australia andof the required transport, utilities and supporting infrastructure. We the Wiggins Island Rail expansion in Queenland, Australia are bothsee a real divide in the approaches of individual organizations: examples where negotiations on control have been extensive and have delayed the finalization of project delivery. Our view is that a• The tier one mining and metals organizations have the balance significant portion of the synergistic value that would be generated sheet strength to proceed with integrated mine/logistics in a more cooperative approach is being lost. developments but are under shareholder pressure to restrict new capital expenditure• The smaller mining and metals oganizations struggle to fund large sole use infrastructure developments1 The global mining machinery handbook, 14 March 2012, Morgan Stanley 4 Sundance Resources regulatory filings to Australian Stock Exchange in 2011 and 20122 http://www.opandr.com/, accessed on 20 June 2012 5 Rio Tinto completes formation of Simandou joint venture with Chalco, Rio Tinto press3 Chinalco sets up consortium to develop Simandou iron ore project, release, 25 April 2012Xinhuanet.com, 29 November 2011 The business risk report Mining and metals 2012–2013 17
  18. 18. We expect the key influences on the financing of infrastructure projects, and biases against resource developments without solidto be: logistics infrastructure or sponsored by tier one organizations. Mining and metals companies are increasingly looking at1. The changing role of government partnerships to provide additional funding sources. Whilst theseThe role government plays in infrastructure development continues models can introduce a broad range of additional risks, increase theto evolve. We are seeing three trends emerge: complexity of the process and include additional development challenges, in some cases they can provide a viable alternative.• Reduction of direct government funding allocated to the development of supporting infrastructure driven by global 4. Financing market challenges and ongoing volatility pressure on government budgetary positions The global financial crisis of 2008 resulted in increased debt• Increased pro-activity from governments in the planning and pricing, tightening of lending covenants, reduced lending tenors approval processes to both enhance the efficient development of and a significant contraction amount of bank debt available to the necessary infrastructure (avoiding wasteful duplication of finance infrastructure projects. There has been a consequent supply chains), and to preserve effective competition for valuable adjustment in the banks participating in the infrastructure project rail and port rights. In the developing nations, the focus is financing market. The impact of the departure of a number of well typically on the first of these issues known European banks from this market has been partially offset• Provision of incentives for the private sector to finance and by increased participation from Asian and Canadian based lenders. provide necessary infrastructure either through tax incentives, However, for a robust project with an appropriate commercial orderly risk transfer, or project approvals structure, debt funding remains a viable funding option as shown in the Wiggins Island Port project in Queensland, Australia. The2. Increasing influence of foreign customers current volatility in financial markets and also the upcomingWe are observing a continued influence of Chinese, Indian and introduction of Basel III means the current challenges for non-Korean investors in infrastructure development. These companies recourse project finance structures to secure funding are likelytend to have government backing (in terms of funding and strategy) to continue.and tend to deal directly with local governments. They look topartner with junior mining and metals companies and local 5. Increased focus on corporate governancegovernment in developing projects and it is common for them seek Boards are placing greater scrutiny on where their investmentpit to port control and off-take commitments in return for otherwise dollars are spent. This is being driven to some degree by the poorunavailable debt and equity funding. Junior mining and metals condition of the global funding markets and the consequentorganizations, while apprehensive over surrendering logistics limitations on the terms, availability and pricing of capital. This hascontrol, typically have few other viable funding options and thus triggered further internal competition for investment capitalthere is substantial financial pressure to agree to accept those between business units. Boards are thus focusing on projects withterms and conditions. lower risk and capital usage profiles. Projects with substantial infrastructure development tasks have higher capital requirements3. New sources of infrastructure funding from institutional and tend to face lower overall returns. This means, in someinvestors instances, projects are being delayed in order to ensure morePension, sovereign wealth and infrastructure funds have emerged robust analysis, justification and scope rationalization prior toas a new source of funding, with a preference to fund projects receiving approval. In addition, we are seeing significant changes inwhere there is limited un-pooled commodity risk. Pension investors the relative cost of developing projects — reduced productivity,are extremely reluctant to take raw usage risk. These investors will changing sovereign risk profiles and the level of competition fortypically require material greenfield or brownfield expansions to be skilled labor and materials are all impacting on the viability andsupported by take or pay contracts from a bankable mix of mining priority of projects across the globe. The Minerals Council ofand metals organizations to be attractive. We note that third party Australia recently cited that “low productivity growth and risingfinancial investors do not benefit directly from the synergies that cost structures in Australia have contributed to deterioratingaccrue to producers for control of the supply chain and thus may international competitiveness over recent years.”6require a yield premium. This further reduces the viability of 6 Boom under threat from higher costs, Australian Financial Review, 30 May 201218 The business risk report Mining and metals 2012–2013
  19. 19. Neal Johnston Partner, Infrastructure Advisory, Ernst & Young Oceania “Changing market conditions will force resource producers to amend infrastructure development plans. Given the softening commodity prices, the cost curve will play a more critical role in determining which projects will proceed and most importantly when they will be developed. ”OutlookInfrastructure blockages remain prevalent in rail and port With governments less able to fund supply chain infrastructure as itinfrastructure supply chains and are increasingly impacting mine has in the past, a new paradigm has formed whereby the privatesupporting infrastructure and power and utilities networks due to sector needs to play this role. This necessitates changes to thethe remote development locations. procurement processes and risk allocation between government, users, developers and funders. For this to be effective, traditionalThe current uncertainty over global financial markets has added views around construction risk, residual value, revenue/pricing risk,additional risk to the process of pit to port mine development. A capacity, operational control, credit risk and tax need to bedownward trend in resource prices would force an immediate re-assessed. Unless the commercial risks can be adequatelyreassessment of marginally economic deposits, so the need for addressed and the take or pay contracts bankable, thenrapid development while the price environment remains benign is a development of infrastructure will continue to be slower and morekey concern for all mining and metals organizations. The task then complicated than would appear necessary.is unlocking the value of co-ordination and collaboration betweenorganizations so that the full infrastructure cost profile is efficientlyallocated and funded. Steps mining and metals companies can take to respond to this risk: • Consider the extent to which infrastructure deficits may impact • Investigate partnerships with other potential stakeholders in on enterprise value expanded infrastructure to innovate financial arrangements • Understand the return on all capital expenditure, including including off-take infrastructure, and consider appropriate financing • Improve mine planning to assist in assurance over optimal levels • Look for other stakeholders to co-develop a solution with shared of take-or-pay commitments benefits The business risk report Mining and metals 2012–2013 19
  20. 20. (Up from 8 in 2011)Cost inflation* 04Over the past decade as the sector and its suppliers have Companies revisit robust capital expenditure plansstruggled to increase supply, cost inflation has re-emerged The period of record-high commodity prices extended from 2H10 toas a major risk for mining and metals companies globally. It is 1H11, masking the real impact of rising costs, as the mining andestimated that the sector experienced cost inflation of between metals sector enjoyed large profits. During this period, mining and10% and 15% in 2011, with overall cost inflation averaging metals organizations implemented significant capital investmentroughly 5–7% in the last 10 years (this equates to a doubling plans and also increased production to cash in on the period ofof costs every 10–14 years).1 Cost inflation in the industry is premium pricing. As a result, the supply of raw material, labor andexpected to intensify over the next several years due to a number equipment to the industry has tightened considerably, pushing upof factors, including labor, energy, ore grades, and taxes. operating and capital costs alike.Subdued demand and low commodity prices, while costs In early May 2012, AngloGold Ashanti approved capital investmentcontinue to rise for the Kibali gold mine in the Democratic Republic of Congo (DRC),According to Rio Tinto CEO Tom Albanese, softening commodity which it is developing with project partner Randgold Resources.prices, higher input costs, and soaring Australian and Canadian Total capital expenditure for the project (including contingencies)dollars are pressuring margins.2 Corroborating this view, several has increased to US$2.2b versus the 2010 feasibility studymining and metals organizations have cited the twin evils of rising estimate of US$1.4b. Though Kibali’s mine design and minecosts and lower commodity prices as the main causes for recent schedule has been optimized since the original 2010 feasibilitydeclines in profits. Take for example aluminium and nickel study, this 55% increase in capital expenditure highlights rampantproducers — these commodities have witnessed the most significant capital cost inflation across the mining and metals sector.7drop in prices since August 2011, and given their nature, are Capital cost inflation without a concurrent increase in underlyingknown to incur very high operating costs: commodity prices is forcing industry players to revise their capital• UC Rusal reported a 91.7% drop in net profit for 2011 due to expenditure targets. Large and small scale players, irrespective of rising costs and lower prices, with aluminium trading near its commodity, are succumbing to capital cost pressures and this is marginal cost production3 likely to result in delays to new supply across all sectors within the industry. This slowing of the supply response may help sustain• Alcoa recorded a loss from continuing operations of US$193m in above average pricing and thereby attract more development. 4Q11. In 1Q12, the aluminium producer reported a 70% y-o-y drop in income from continuing operations to US$94m4 Crude oil prices, wage inflation and increasing complexity• BHP Billiton’s Stainless Steel Materials (nickel) business reported drive operating costs a 99.7% y-o-y drop in earnings before interest and taxes for the Operating costs continue to increase on the back of high crude oil half year ended 31 December 2011,5 partially a reflection of a prices and wage inflation. The cost of mining consumables and 35% drop in nickel prices through 2011 transport is closely linked to the price of oil, which has been on the• In 1Q12, Vale’s nickel unit reported a 29% y-o-y decline in rise since 2010. Oil prices continue to trade at around US$100/ operating revenue due to low nickel prices6 barrel, and rising tensions between Iran and the Western economies, together with supply concerns in Africa, present major risks to oil prices in the medium term. Wage inflation is also rife across the sector, as employees seek to share the profits. Several mines across the world were hit by labor strikes for higher pay in 2011, triggered by the record-high commodity prices and near-record profits that sector players experienced between 2H10 and 1H11.* Renamed from ‘Cost management’ in 2011 as it better reflects the inflationary environment 7 AngloGold Ashanti Q1 Earnings Double to US$429m; Approves US$1.9bn Growth Projects,1 Cost inflation is major theme for metals production: Deutche Bank, Commodity Marketwire, 10 May 2012Online, 16 April 20122 Commodity prices spark Rio Tinto warning, Australian Broadcasting Corporation (ABC)News, 28 November 2011 via Factiva (c) 2011 Australian Broadcasting Corporation3 More pain looms for aluminium, The Australian Financial Review, 13 January 20124 1st Quarter Earnings Conference, Alcoa Quarterly Earnings Presentations, 10 April 20125 BHP Billiton Results for the Half Year Ended 31 December, BHP Billiton pressrelease, 8 February 20126 Performance of Vale in 1Q12, Vale financial performance, 25 April 201220 The business risk report Mining and metals 2012–2013
  21. 21. Paul Mitchell Global Mining & Metals Advisory Leader, Ernst & Young “Cost inflation is a risk that keeps growing, and continues to threaten profit margins and the viability of projects.”Operating environments for mining and metals companies are The increasing costs and falling revenues of remotely-locatedbecoming more complex, posing both physical challenges (deeper projects are threatening to make them unviable. For example, aunderground mining, remote locations etc.) and political challenges significant number of upcoming and operating gold projects in(safety concerns, regime instability etc.). More complex operations Canada’s Far North region have been written-down partially orgenerally mean more costly operations. While physical challenges shelved altogether for this reason. Growth strategies arecan be addressed by investing in expensive new technology and increasingly shunning the additional cost burdens of developinginfrastructure, political challenges bring with them increased and greenfield projects in favor of brownfield expansions at exiting sitesconstantly changing safety and environmental reporting, causing a where manpower, resources and infrastructure are already in place.substantial increase in compliance costs. The currency impactDeclining ore grades and consequently higher production costs are Industry-wide cost inflation is being compounded by stronga reality that several existing mines are struggling with globally. currencies in most resource-rich countries. Since late 2008, theSimilarly, miners are going deeper underground as higher prices Australian dollar has strengthened by over 60% against the USallow — a costly affair in comparison to traditional open pit mining. dollar; the currency global commodities tend to be priced in. TheSo although the profits are there, the same margin is not being Canadian dollar, Chilean peso, Brazilian real and South African randrealized. have all moved similarly. This has pushed up the relative cost ofMining and metals companies are increasingly investing in new wages, power and other local goods in these countries.regions as desirable mining projects become harder to find.However, much of this potential new supply is located in remote How is the industry responding?areas — a physical challenge that translates into even higher costs Cost inflation, in a period of softer commodity prices, is forcingthan the general levels the industry is facing: mining and metals companies to either re-evaluate, shutdown or• Consumables — due to the lack of access to national power grids, divest high cost and non-core business units. Several companies are many remotely-located projects are forced to rely on diesel reviewing their portfolios to identify underperforming assets. generators to power their operations. Agnico-Eagle Mines’ Energy-intensive aluminium is already witnessing multiple Meadowbank mine in Nunavut (Canada) uses up to 60m liters of shutdowns and closures in the industry. A number of companies are diesel annually, making energy one of its biggest cost pressures8 opting to divest their downstream aluminium assets where China has excess capacity, while retaining upstream assets where• Labor — mines located in remote areas struggle to hire and retain demand, particularly from China, is expected to remain strong. skilled staff, with labor often cited by CEOs as a top cost pressure. Aluminium major Alcoa has closed substantial volumes of smelter In order to attract and retain skilled labor to remote locations, capacity, while Rio Tinto is divesting parts of its aluminium companies are forced to pay increasingly competitive salaries and business.9 There has also been re-evaluation in the nickel sector, rely on fly-in fly-out labor pools. with BHP Billiton cutting production and Kagara Mining entering• Lack of infrastructure — the lack of roads, rail, power, water and voluntary administration.10 other infrastructure adds to the development costs of mine projects in remote areas. Additionally, costs specific to social infrastructure are increasing8 Canada’s Nunavut awaits its day in the sun, Reuters News, 2 April 2012 9 Rio Tinto to divest US$8bn of aluminium assets, The Financial Times, 17 October 2011; Alcoa Sees Aluminum Cuts as Production Gains: Commodities, Bloomberg, 10 April 2012 10 Western Areas buys Kagara nickel mine, The Australian, 2 March 2012; BHP to make first job cuts since GFC as nickel dives, The Australian, 2 February 2012 The business risk report Mining and metals 2012–2013 21

×