Northern mining risks

August 19, 2013

Accounting firm Ernst and Young Global Limited has published a list of the top ten business risks in mining and metals 2013-2014 for companies worldwide. The list and accompanying explanations are thoughtful and accurate. There are a few suggested differences for the territory ‘north of 56’.

The top ten global risks according to Ernst and Young are :

• 1.Capital management and capital access. Volatility in the market has seen access to capital and its allocation catapulted to the number one risk ranking.
• 2.Margin protection and productivity improvement. Softening commodity prices in an environment of high costs are continuing to squeeze margins.
• 3. Resource nationalism. While still high on the risk radar, and metals companies have become more adept at managing resource nationalism.
• 4.Social license to operate. 
• 5.Skills shortage. While the urgency of the availability of skilled talent has been slightly reduced by a number of mine closures and the cancellation of new projects, the long-term challenge remains.
• 6.Price and currency volatility. Unprecedented price and currency volatility will continue to test mining and metals companies for the next few years.
• 7.Capital project execution. Capital investment management and project delivery principles are increasingly important.
• 8.Sharing the benefits. This risk is characterized by a push and pull: more vocal stakeholders with increased demands versus falling commodity prices and higher costs.
• 9. Infrastructure access.
• 10.Threat of substitution (eg natural gas for coal). For single commodity organizations, or organizations where one commodity dominates the product mix/profit share, substitution is a very credible and looming threat.

Commentary

The northern 1/3 of North America is different than the ‘rest of the globe’, so a recast of the E&Y list is offered, with a few words of explanation by your humble scribe. The ones removed: #3 Resource nationalism is not really a factor in the north. The Province of Quebec has taken moves to re-jig their royalty rates, but for the most part companies do not worry about arbitrary government actions.  #6.Price and currency volatility. The currency volatility does not really affect northern operations, but commodity prices do. #10. Threat of substitution. This is not really a factor in the north. The only area that mines coal is in Alaska.

• 1.Capital access. Volatility in the market has seen access to capital and its allocation catapulted to the number one risk ranking. This applies to the north as elsewhere in the globe. Capital is scarce for even the largest players. Small mining companies find it extremely difficult to raise capital for projects-exploration or development.
• 2.Commodity Prices. Softening commodity prices squeeze margins. Applies to the north. Several mines are on hold due to lack of capital.
• 3.Infrastructure access. The lack of infrastructure is a substantial hurdle in the north. Roads and energy are most important.
• 4.Social license to operate. This factor is very big in the north. 
• 5.Skills shortage. This factor is also very important in the the north. One Yukon mine can only find 25% of its workforce from northerners, and this is not uncommon.
• 6.First Nation and aboriginal support. Mines are developed on traditional territories of aboriginal peoples, so if the aboriginal people do not support a development this may become a show-stopper.
• 7.Capital project execution. Very important in the north, as in the south.
• 8.Sharing the benefits. Companies must map out a plan to share benefits and still earn a fair return.
• 9.Environmental regulation. There are varying regulatory rules from governments. Yukon has a single approval process called YESAB, while if you want to build a mine in Alaska, expect a dozen approvals from different regulators.
• 10.Foreign investors. Increasingly, mining projects in the north have needed investors with deep pockets to proceed. The importance of Chinese investors are critical for some large projects, while Nunavut’s Mary River project relied on European and US investors.

 

Sources

• a)http://www.ey.com/GL/en/Industries/Mining---Metals/Business-risks-in-mining-and-metals-2013-2014---The-top-10-risks