spRING 2011 GlobAl MARKETs INTERNATIoNAl - Willis

Tom: “And moving on from the risks themselves to their prevention
and/or mitigation, what actions should senior management take to
address the various risks you have highlighted?”
Lachy: “From an enterprise risk management perspective, companies
should be reviewing their current risk management processes and
assessing whether they are still ‘fit for purpose’, given the changes that
have been wrought on the sector over the past three years.
Many mining companies undertake some form of risk assessment, but
these are often conducted on an infrequent basis. Such assessments need
to be institutionalised as a regular (at least annual) part of the strategic
planning process. It is important that the assessment identifies key risks
and weights the likelihood of the risk materialising, with a view on the
impact on the broader business. Inter-relationships between the various
risks should also be considered.
For the major risks identified, management should test various
scenarios, and develop a number of operational responses. In the current
environment, such scenarios should test against wide ranging potential
market outcomes, including volatile commodity prices and foreign
exchange rates, and address adequacy of liquidity arrangements under
the various outcomes.
The company’s ability to manage the risks that are identified must be
evaluated to ensure that the risk management processes are linked to
the risks the business actually faces. Adequate monitoring and control
processes should also be maintained to provide early warning, and to
improve timeliness of response. It is important that risk management
is seen as a critical aspect of operations, and responsibility and
accountability extend from Head Office to product groups and asset sites.
From a transactions perspective, highly effective due diligence processes
should be used to identify the broad transaction risk areas, thereby
enabling management to assess their tolerance for the risk, and then,
if necessary, build decisive remedial action into a post-deal integration
plan. The post-deal integration plan should include a detailed followthrough
on any unresolved transaction issues identified pre-acquisition
and to explore any areas that were abbreviated due to time pressure or
other constraints.
With the emphasis on expansion into emerging
markets, there are a number of critical diligence
issues which might not be relevant in more
developed markets. These include, but are not
limited to, settlement agreements, outstanding
tax liabilities, tax arrangements with the
incumbent Government, ratification of mining
documents with the appropriate parliamentary
body ( for example, the National Assembly in
Guinea), procure to pay processes and security
of tenure, particularly if an existing project
has been delayed by civil war or lack of finance
for example and is not producing the expected
economic benefit for the host country.
It is important that any individual project or
transaction is tested against a range of possible
outcomes and be evaluated in the context
of that which will most enhance the overall
portfolio value (versus standalone value). This
is important to ensure there is a balance of
investment across commodity or product groups.
Understanding the capital formation process
is critical to mitigating financing risks.
Management need to understand the alternative
sources of finance, especially as capital markets
continue to disintermediate, and how to access
those pools of capital at short notice. This
requires a dialogue to be opened with potential
capital providers well ahead of the need for
capital, so a mutual trust and understanding of
each other’s business is developed away from the
pressures of a financing.”
Willis | Mining Market Review 2011 | 87