spRING 2011 GlobAl MARKETs INTERNATIoNAl - Willis

InterVIew on m&a and rIsk management
Tom: “So with the worst of the financial crisis seemingly behind
us, and confidence returning to the sector, what are the key risks
on the radar of the mining companies?”
Lachy: “Good question. Mining companies are focusing on critical
non-financial risks to a greater extent than we have seen in the past,
whilst maintaining the traditional focus on financial risks. This is a
movement being driven by the Board (and the audit and risk management
committee) and/or Senior Management who are seeking a more
sophisticated approach to enterprise risk management. The timeliness
and depth of risk reporting, notably how risk is being identified, assessed
and mitigated across the portfolio, has become paramount.
For example, events in the Gulf of Mexico have highlighted the impact of
catastrophic risk and the scale and speed of response required. Likewise,
the rescue of the Chilean miners and subsequent deaths at Pike River
in New Zealand highlighted once again the ever present occupational
health and safety issues that go hand in hand with mining operations.
With expansion into emerging and frontier markets has come a greater
focus on country or sovereign risk, notably security of tenure and
changes in mining, tax and royalty regimes. The landscape has changed
significantly in the past twelve months in this regard. Growth plans can
be derailed if licenses are revoked or assets reclaimed, and reputational
damage can occur quickly if disputes with a host Government arise.
The existence of and access to infrastructure (notably port and rail) in
emerging markets can also be a major stumbling block for the development,
financing and/or operation of upstream projects. To capitalise on higher
commodity prices, miners need an unfettered ability to deliver product
to market. Conversely in developed markets, issues can arise where
Governments seek to privatise infrastructure on which mining companies
rely, with the State of Queensland decision to privatise Queensland Rail
a recent example. Issues can also arise when third parties are able to
seek access to pre-existing infrastructure of national significance, as has
happened in the Pilbara iron ore region of Western Australia.
Access to secure and sustainable energy supplies is currently a critical
matter for management, with some jurisdictions more afflicted
than others. Disruptions as a result of aging and insufficient energy
infrastructure have the potential to create both financial and non-financial
risks. The availability and cost of power is critical to the success of energy
intensive downstream production facilities. This reason alone explains the
significant reduction in aluminium production in China during 2010, to
the extent the country may become a net importer during 2011.
| Willis | Mining Market Review 2011
Given concerns about securing sustainable
energy supplies, mining companies are assessing
renewable energy options more closely. This
involves an evaluation of the possible risks
to, and opportunities for, their business. The
application of renewable energy to their
operations as they seek low cost, renewable
base load power is at the forefront. There are
potential cost savings, possible reductions in
continuity risk and the creation of valuable
carbon assets. Resources are also being directed
to technology enhancements to reduce fugitive
emissions (steel manufacturers use of flash
furnaces), reduce greenhouse gas emissions
(aluminium smelters introducing gas-fired cogeneration
capacity and improving recycling
technology and coal producers trying to
harness coal seam methane) and assessing
nuclear energy options. Developing stranded
hydro power remains a difficult goal but a key
focus, especially for the most energy intensive
processes, such as aluminium smelting.
Senior management are also trying to navigate
in a world in which some of their major
customers, notably China, are also competing
for natural resources. We would expect some
thoughtful responses with respect to how
this situation is managed, whether it is on a
case by case, or company by company, basis.
For example, we have already seen Rio Tinto
announce an exploration joint venture with
Chinalco to explore mainland China for world
class mineral deposits. This follows their
collaboration on the Simandou iron ore project
in Guinea.