24 August 2009: Costs, consolidation and capital head the top 10 list of risks facing players in the mining and metals sector, Ernst & Young said in their annual Strategic Business Risk Report 2009.
Ernst & Young's head of EMEIA mining and metals, Michael Lynch-Bell, says the drop in metal prices and the capital drought caused by the global financial crisis have put pressure on mining and metals businesses.
"In 2008, capacity constraint issues such as skilled labour shortages and infrastructure bottlenecks dominated the top 10 list of strategic business risks, but this year it is all about funding and cash flow," says Lynch-Bell.
"Boom-time 'production at any cost' attitudes have left an unsustainable level of costs for mining and metals companies, and with the fall in commodity prices, cost containment is now the biggest strategic challenge for the sector."
Industry consolidation kept its number two rank on the top 10 list, by way of greater vertical integration, with Asian mining and metals companies at the forefront of cash-rich investors looking to make strategic acquisitions.
In the wake of the global financial crisis, access to capital is a new but major strategic business risk for the sector, jumping in at number three.
"Funding of new projects and refinancing of maturing arrangements can be challenging and is of particular concern in a sector that relies on a constant stream of risk capital," says Lynch-Bell.
Ernst & Young's Strategic Business Risk Report 2009 ranks the sector's top 10 strategic business risks as follows (with 2008 ranking in brackets).
- Cost containment (6)
- Industry consolidation (2)
- Access to capital (new)
- Maintaining a social license to operate (4)
- Climate change concerns (5)
- Skills shortage (1)
- Infrastructure access (3)
- Access to secure energy (9)
- Resource nationalism (8)
- Pipeline shrinkage (10)
Lynch-Bell says supply-side capacity related risks are likely to re-emerge to again dominate the top strategic business risks in the sector.
"Skilled labour shortages, infrastructure bottlenecks, lack of investment in exploration and secure energy supplies are major issues for increasing supply and the underlying causes have not been addressed," he says.
"Demand is not going to be a big issue going forward. What will be more significant is the ability of miners to capitalize on any upswing in demand given the supply capacity issues and given that the sector has shut down mines and scaled back production."
Lynch-Bell says record debt-to-equity levels in the sector will only compound supply issues.
"Historically, the debt-to-equity level has been about 30% but by the end of last year that had gone up to 58%," he says.
"The debt load combined with post-financial crisis reticence of lenders, means that businesses won't be able to borrow as much to fund expansion."
Holding their place in the top 10 strategic business risks are climate change and maintaining a social license to operate.
"These issues are only going to become more significant for the sector as community support for future mining and metals projects becomes even more critical."
