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Miners urged to take greater risks amid new geopolitics, volatility concerns

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Miners urged to take greater risks amid new geopolitics, volatility concerns

Mining companies anticipate increased geopolitical risk and impacts from COVID-19 in 2021, which could also present additional opportunities for bolder investment decisions, according to Ernst & Young's latest survey on mining business risks.

The "license to operate" risk remained in the top spot while "high-impact risks" jumped five places to second place and "productivity and rising costs" shot up from the 10th to third rank, according to the EY survey that canvassed more than 250 global mining executives and was released Sept. 30.

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While the pandemic has heightened stakeholder expectations around how companies prepare for, manage and monitor all high-impact risk exposures, EY also said "bolder investment decisions and increasing risk will enable greater returns in the mid term and long term."

"Approaches to achieve this may be radically different from those deployed in the past," EY wrote. "Mining companies will need to evaluate their appetite for risk and approach to capital allocation to ensure they do not miss out on new opportunities."

COVID-19 impacts

The "workforce" factor dropped from being miners' second-biggest risk in EY's previous survey to seventh. The decreased risk is related to mining companies' increased confidence in being able to manage the issue, according to EY, which also noted changes in corporate culture related to the COVID-19 crisis. Nearly 80% of the mining executives surveyed said they expect their companies to become more open to change due to the pandemic.

Newcrest Mining Ltd. recently flagged ongoing logistical challenges due to COVID-19 and estimated a related impact of $41 million on fiscal 2020 cash flow, and Newmont Corp. removed 10,000 staff from sites and offices due to the pandemic.

Newmont CEO Tom Palmer said during an online conference in early September that most of the staff have not returned to those workplaces, which demonstrates that the company can sustainably work differently through technology, workforce and workflow adaptations.

This was reflected in the survey, with the "digital and data" risk dropping from being the third highest risk in 2020 to ninth in the 2021 survey, which EY said reflected the fact that many issues related to the digital factor have become "business as usual" for the larger miners. The "innovation" risk also moved down one place to the 10th rank.

Though COVID-19 has highlighted the importance of preparing for "company-destroying risks," EY said the virus also illustrated the benefits of technologies like automation, artificial intelligence and blockchain to help ensure business continuity.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Volatility a new risk

"Volatility," a new business risk added to the 2021 survey to reflect the impact of COVID-19 on commodity markets, came in at number eight. "Miners need to be able to make sustainable, long-term decisions as they deal with the return of severe commodity price volatility, the threat of substitution and changing customer demand," EY said.

"Geopolitics" was another new addition to the top 10 risks, with mining leaders expecting impacts in 2021 from the changing role of the U.S. in the international system, the country's relations with China, and European Union stability.

EY noted that COVID-19 has significantly disrupted supply chains in the short term. Meanwhile, BDO corporate finance partner Adam Myers said opaque, non-exchange-traded specialty commodities previously considered too difficult could become more attractive given their importance amid geopolitical tensions.

Myers said that, while "there's some brinkmanship in countries trying to improve their position in global trade," it was notable that China had not placed tariffs on Australian iron ore as it had done with a luxury good like wine, as commodities such as the steelmaking ingredient are needed for infrastructure that will be key to economic recovery.

EY's report also warned that "a trend toward economic protectionism to favor domestic producers and ensure host countries receive their fair share of resource wealth will emerge in many jurisdictions."

Some governments have already moved to impose tariffs or export bans to protect domestic producers, and 56% of the EY survey respondents anticipate increases in royalties and taxes as governments seek to boost revenue in the aftermath of the global health crisis, EY's Global Mining and Metals Leader Paul Mitchell said in a Sept. 30 statement.

St Barbara Ltd. CEO Craig Jetson blasted Papua New Guinea's proposed mining law changes in May. The company had sought longevity assurances from the government before authorizing its planned Simberi sulfide project after a feud regarding Barrick Gold Corp.'s Porgera gold joint venture took a turn for the worse.

The "decarbonization and green agenda" risk remained in the fourth spot, while EY believes the COVID-19 pandemic has presented a reset opportunity.

"Companies that increase their focus on environment, safety and governance issues can strengthen their license to operate and gain a competitive edge in the fight for capital," EY's report said.