Expansion has to happen
What to do with all that cash, and how to makes mines more digital the business risks in 2018
Tuesday 24 October 2017
Deciding how much money is allocated to new projects is a significant business risk confronting mining companies according to accounting firm Ernst & Young.
Based on discussions with mining companies (number not known), EY has put together a list of what they think are the top 10 business risks facing mining and metals.
At number two on the list is a risk defined as: “competitive shareholder returns” which EY says is a problem not seen for a while.
”Due to significant project overruns and poorly timed M&A, there have been significant impairments across the industry, and management remains cautious about allocating cash for expansion projects,” EY says.
“But simply returning cash to shareholders is not a long-term strategy, ultimately, good projects executed effectively will offer better returns for shareholders in the long run…. exercising good judgment in investment opportunities are crucial actions toward offering shareholders a unique value proposition.”
In a similar vein two other risks titled “Cash optimisation” and “resource replacement” came in at number six and eight respectively.
“A recovery in commodity prices and the relentless cost-cutting exercises have resulted in higher margins and improved cash generation,” EY said.
“However, new risks are emerging as the industry switches to growth and while there will be relatively less cash commitments for debt reduction purposes, mining and metals companies have signalled intentions to return cash to shareholders.
“Over the last five years, CapEx spent on resource replacement has declined by 66% from US$20.5b to US$6.8b due to lower commodity prices and returns.
“ Now that growth is back on the agenda, mining and metals companies are allocating more sustaining or growth capital to get the most out of current projects…. we have yet to see a significant increase in exploration CapEx.”
Notably, skills shortages and infrastructure access risks have dropped out of the top 10 altogether despite being at the top of the list in 2008's boom times, and perhaps surprisingly EY says digital readiness is now the number one risk to mining businesses surveyed.
According to EY companies are scrambling to get efficiencies out of their businesses by applying digital technology to areas like how they buy and maintain machinery, how they respond to their customers, and of course automation and machine learning.
“Digital goes beyond adopting technology though — it needs to be solving a business issue and is key to resolving the sector’s number one operational challenge: improving productivity across the value chain,” EY said.
As a consequence, cybersecurity is now considered a significant risk to mining companies coming in at number three in the report.
The risks around the social licence to operate, regulatory environment and the price of energy, remain perennial business risks sitting in the top 10 for more than a decade.