Resource nationalism seen as top risk for miners – E&Y
Resource nationalism is now the main business risk facing the mining industry, Ernst & Young (E&Y) said in its yearly business risk report, released on Monday. Resource nationalism jumped from number-four spot in the 2010 rankings to the top position, while the global skills shortage remained the second biggest risk and capital allocation dropped back from the main risk in 2010 to number seven this year.Ernst & Young global mining & metals leader Mike Elliott said that at least 25 countries have increased or announced intentions to change their government take through taxes or royalties over the past 12 to 18 months.
“Resource nationalism is taking other forms as well, including greater controls on foreign participation, mandated beneficiation, use it or lose it demands and mandated government participation,” said Elliott.
But he said that it was supply capacity constraints that continued to dominate the risk list, accounting for 6 of the top 10 risks, including the global skills shortage, capital allocation, infrastructure access, capital project execution, cost management and interruptions to supply.
“The market is probably excessively optimistic about how much and how quickly new production is going to come on. All these supply capacity risks mean companies are unlikely to be able to capture the premium pricing as quickly. It also impacts the cost profile of projects, so there will need to be a higher rate of return to attract new investment and as a result commodity prices will need to be higher.”
“The companies that better manage these risks will deliver superior returns and have a competitive advantage in attracting new investment.”
The top ten business risks also include social licence to operate, price and currency volatility, as well as fraud and corruption.
Elliott noted that resource nationalism was one of a number of the top 10 risks that reflected changes in the expectations and attitudes of stakeholders for companies in the sector.
“Resource nationalism reflects the expectation among governments that the sector should be contributing more for the right to exploit natural resources. Similarly, with regard to their social licence to operate, community expectations around factors such as the environment, safety performance, and sustainable community investment are changing at such a rate that it is making it difficult for companies around the world to stay ahead of the game.”
Elliott said that in regard to fraud and corruption, investors and the wider community expected companies that were based in developed markets to be at the forefront of eliminating corruption.
“The quest for growth to meet strong demand continues to encourage faster expansion into frontier markets where the risk of fraud and corruption is higher, and at the same time companies are being held more accountable for how they deal with it.”
He noted that while the myriad of strategic business risks facing mining companies had arguably never been greater, those that manage these risks better could drive superior returns.
“Done well, working through scenarios and impact analysis can deliver opportunities to preserve shareholder value, tighten processes and controls and even enhance shareholder value.”
Edited by: Mariaan Webb
“Resource nationalism is taking other forms as well, including greater controls on foreign participation, mandated beneficiation, use it or lose it demands and mandated government participation,” said Elliott.
But he said that it was supply capacity constraints that continued to dominate the risk list, accounting for 6 of the top 10 risks, including the global skills shortage, capital allocation, infrastructure access, capital project execution, cost management and interruptions to supply.
“The market is probably excessively optimistic about how much and how quickly new production is going to come on. All these supply capacity risks mean companies are unlikely to be able to capture the premium pricing as quickly. It also impacts the cost profile of projects, so there will need to be a higher rate of return to attract new investment and as a result commodity prices will need to be higher.”
“The companies that better manage these risks will deliver superior returns and have a competitive advantage in attracting new investment.”
The top ten business risks also include social licence to operate, price and currency volatility, as well as fraud and corruption.
Elliott noted that resource nationalism was one of a number of the top 10 risks that reflected changes in the expectations and attitudes of stakeholders for companies in the sector.
“Resource nationalism reflects the expectation among governments that the sector should be contributing more for the right to exploit natural resources. Similarly, with regard to their social licence to operate, community expectations around factors such as the environment, safety performance, and sustainable community investment are changing at such a rate that it is making it difficult for companies around the world to stay ahead of the game.”
Elliott said that in regard to fraud and corruption, investors and the wider community expected companies that were based in developed markets to be at the forefront of eliminating corruption.
“The quest for growth to meet strong demand continues to encourage faster expansion into frontier markets where the risk of fraud and corruption is higher, and at the same time companies are being held more accountable for how they deal with it.”
He noted that while the myriad of strategic business risks facing mining companies had arguably never been greater, those that manage these risks better could drive superior returns.
“Done well, working through scenarios and impact analysis can deliver opportunities to preserve shareholder value, tighten processes and controls and even enhance shareholder value.”
Edited by: Mariaan Webb
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