GLOBE-Net, October 17, 2012 - Resource nationalism remains the number one risk for mining and metals companies around the world, according to Ernst & Young.  

In its annual  Business risks facing mining and metals 2012-2013 report, released earlier this year, the company notes that at a time when the risks facing the sector have become increasingly complex and critical, resource nationalism is a bigger challenge now more than ever. 

Notes the report, on the surface, the top ten risks don't look all that different from earlier years, but below the surface an absolute shift that has made them significantly different. The risks facing the sector have become more extreme and more complex due in part to: 

1. Softening commodity prices which have seen mining and metals companies taking on more risk relative to the short term returns; and

2. Capacity changes in terms of skills and infrastructure which have affected organizations' short term commitment to capital projects with life of mine of at least 10 years

Mining executives must be particularly careful in assessing and managing these risks and in understanding changing risk/reward equations, warns Ernst & Young. 

"The uncertainty and destruction of value caused by sudden changes in policy by the governments of resource-rich nations cannot be understated." Ernst & Young Global Mining & Metals Leader Mike Elliott.

"Resource nationalism retains the number one risk ranking with many governments around the world going beyond taxation in seeking a greater take from the sector, with a wave of requirements introduced around mandated beneficiation such as bans on the export of unprocessed raw materials, as well as export levies and limits on foreign ownership," says Ernst & Young Global Mining & Metals Leader Mike Elliott. 

"There is no doubt projects around the world have been deferred and delayed, and in some cases investment withdrawn altogether because of the degraded risk/reward equation," he added.

"Miners must continue to engage with governments to foster a greater understanding of the value a project brings to the host government, country and community, and be better able to negotiate appropriate trade-offs that preserve the value to miners, governments and other stakeholders," says Elliot.

Risks now more complex, more critical

According to Ernst & Young, almost all of the top 10 risks are more complex and more critical for miners now than they were even 12 months ago and while the demand outlook remains strong for the longer term, miners are no longer able to rely on increasing prices to balance increased risk. 

In order of priority, the company lists the 2012 top strategic business risks in the sector are as follows:

1. Resource nationalism  
2. Skills shortage
3. Infrastructure access
4. Cost inflation
5. Capital project execution
6. Social licence to operate
7. Price and currency volatility
8. Capital management and access
9. Sharing the benefits
10. Fraud and corruption

Global skills shortage and infrastructure access stand second and third in this year's ranking as more and more countries experience these constraints. Rapidly escalating costs have pushed cost inflation up from number eight to four.

Skills shortage

Elliott says the acute skills shortage seen in Australia and Canada has spread to more places during the past year, with projects in countries such as Indonesia, Mongolia, Brazil, Chile, Peru and Mozambique all plagued by this challenge.

"Strong commodity prices and confidence in the long-term sector fundamentals have created a record level of new developments and mine expansions."  This level of investment is driving demand for skilled workers around the world and drawing on the same global pool of talent to build and operate these projects.

Sharing the benefits

The relative prosperity of the mining and metals sector at a time when many other sectors in the global economy are struggling has seen a new risk for miners - sharing the benefits, notes the report.  "Stakeholders ranging from governments, to workers, investor, local communities and suppliers feel they are entitled to a greater proportion of the value created by mining and metals companies."

"Mining and metals companies are forced to balance the expectations and needs of their many stakeholders. When they fail to meet expectations or fully understand needs, it can result in strikes, supply disruptions, shareholder activism, community unrest and governments using their power through resource nationalism."

"While the demand outlook remains strong, the price peaks have passed and so there is a much greater imperative for mining and metals companies to remain nimble and sure-footed in how they manage these fast-changing risks," concludes Ernst & Young.

The full report  "Business risks facing mining and metals 2012 - 2013" is available for download here.