Capital allocation and access to investments have rocketed to the top of the business risk list for mining and metals companies globally, up from number eight in 2012, shows Ernst & Young’s annual Business risks facing mining and metals 2013–14 report, released Thursday.
The document also sees a new risk enter the list this year: the threat of substitutes. For single commodity companies, or organizations where one commodity dominates the product mix/profit share, this has become a looming threat.
What’s more interesting, say experts at Ernst & Young, that risk’s ramifications are being felt most acutely across North America.
“Capital dilemmas are at the forefront of mining and metals executives’ minds,” says Bruce Sprague, Ernst & Young’s Canadian mining and metals leader. “Weaker metal prices, labour unrest and cost inflation have put pressure on companies’ earnings. At the same time, high levels of capital expenditure have squeezed margins and challenged the expected rates of return on growth projects.”
These challenges are threatening companies throughout the entire industry — both the majors’ long-term growth prospects and the short-term survival of cash-strapped juniors, adds Sprague.
“Majors now face the challenge of how best to allocate capital amid a new class of yield-hungry shareholders while juniors are attempting to navigate a capital desert — caused by the pullback of investors from riskier investments — not seen in more than a decade,” explains Sprague.
Companies are already reacting to these risks by focusing on greater capital discipline, increasing transparency around capital decisions and committing to maximizing returns and credit rating quality.
A pipeline of divestments is also building as companies seek to optimize their portfolios and recycle capital away from high-cost assets and into high-performing ones. Underperforming, high-cost or high-risk assets are also being marked for disposal as companies seek to remove costs and reallocate capital, as shows a separate study released on Wednesday.
“Today’s miners face the profound risk that their decisions could damage growth prospects, destroying shareholder value over the longer term,” concludes Sprague. “Those with a disciplined approach to capital allocation decisions and a broad knowledge of available funding options and providers — at both ends of the market — will be best positioned for success.”
The report also says junior miners, small firms exploring for mineral deposits worldwide, will continue to be cash strapped for at least another year, as the global mining industry slows down.
Top 10 strategic business risks in the global mining and metals sector in 2013:
1. Capital dilemma – allocation and access (8 in 2012)
2. Margin protection and profitability improvement (4)
3. Resource nationalism (1)
4. Social licence to operate (6)
5. Skills shortage (2)
6. Price and currency volatility (7)
7. Capital project execution (5)
8. Sharing the benefits (9)
9. Infrastructure access (3)
10. Threat of substitutes (new)
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