Here are links to two e-books on the issues of risks and mining in 2013. Both required reading if you are investing in mining:
- Business risks facing mining and metal 2012-2013 . From Ernst & Young
- Mining Market Review. Spring 2013. From Willis
There is a vast amount of insight and valuable advice in both. I could never do either justice in a blog posting, so I do not try. Instead I simply quote a few paragraphs that caught my attention. I am sure you will find plenty to catch your attention, help in understanding mining, and making smarter investment decisions.
From the Ernst & Young report, this telling new trend in mining:
Sharing the benefits makes its debut at number nine this year. The relative prosperity of the mining and metals sector at a time when many other sectors in the global economy are struggling has seen this new risk emerge for mining and metals companies. Stakeholders ranging from the government to employees, the local community and suppliers, feel they are entitled to a greater proportion of value created by mining and metals companies. This has forced companies to balance the expectations and the needs of their many stakeholders. When they fail to do so, it results in strikes, supply disruptions, shareholder activism and governments using their power to achieve their portion through resource nationalism. Miners are willing to yield some returns on the appropriate transfer of risk to stakeholders. However, many of the stakeholders, who want an increased share of the mining and metals profits, are not taking on additional risk for their increased return, leaving the mining and metals companies to carry all of the risk.
They say more on the older issue of resource nationalism of which this trend is a close relative:
Resource nationalism is not a new phenomenon but has risen to prominence during the latest so-called commodity ‘super cycle’. We have witnessed a domino effect as country after country has sought to extract a fairer share of the rewards from depletion of its mineral endowment. Resource nationalism is regarded as the top risk of doing business in metals and mining whether that is in developed or developing economies.
Followed by this sobering reflection:
Although the wealth generated from resource endowments is increasingly shared with the countries, the risk remains with the mining companies. Authentic engagement between host governments and mining companies is required to ensure the mining company risk / return balance is understood. “Mining companies can select where they wish to operate once the geological parameters of a deposit are understood. The decision to invest further and commit fully to developing a project is only undertaken on high quality assets with long life potential in stable political jurisdictions. “If the parameters are not met, or if the goal posts are shifted (or are perceived as likely to shift), the companies have the choice of whether to invest or not. Similarly, investors also have choices and they may choose not to invest in resource companies if risk adjusted returns from those companies lag other sectors.
Some key remarks from the Willis report:
Staff were standing outside London headquarters handing out flyers attracting much-needed drives. For example, while as recession hit hard in the Eurozone, Irish workers in their thousands migrated to the minefields of Australia where there was a surfeit of well-paid work. How times have changed. Roll on to 2012, and likely into 2013, and commodity prices have fallen back dramatically. These same in-demand employees are no longer quite so needed and suddenly are being laid off in their thousands – in December 2012, R2Mining reported that Australian operations had reduced overheads by A$2bn through cutting 10,000 jobs in the previous two months alone.
Contrast that gloomy assessment with this upbeat note:
While the number of employees needed on site may wax and wane with commodity prices, the demand for skilled workers never appears to diminish. Highly skilled people remain in demand whether or not there is a downturn in production. When profit margins are being squeezed, having the right staff on site can make all the difference between success and failure. Not only should these professionals be able to spot opportunities to reduce overheads, they are essential in maintaining health and safety standards as well as mechanical operations. Mine operators may look for ways to automate the process and so reduce the head count; however, the need for skilled workers remains. Mine managers and engineers are among the most sought-after professionals and mine operators provide high wages and a range of additional benefits to attract them.
On tailings, my favorite topic, they note:
Pollution is one of the highest liability risks facing a mining operation. In recent times, there have been a number of incidents involving pollution from tailings dams, for example. When these dams burst the volume of water can destroy nearby villages and businesses. Not only is this extremely dangerous and potentially life-threatening for the local population, it can cause massive disruption for the mine operation and also threaten the continuing licence to operate thanks to more vehement opposition from the local population and government.
And finally the one that I suspect will be the cause of more issues, unrest, fouled investments, and fights:
With a growing population, and further climate change, pressure on water supplies is set to continue, especially in developing markets. This poses a signifi cant threat to the mining and metals sector, as it potentially faces more stringent regulation, higher costs and reduced water allocation. The scarcity of fresh water, and non-market based competition for it with other productive sectors such as agriculture and manufacturing, has led mining and metals companies to look at alternatives. With limited water availability, technological responses to the water scarcity issues are increasingly sophisticated, and national and international engineering companies are working intensively to fi nd new solutions, such as the use of seawater via desalination, water recirculation and innovative waste disposal solutions.
Good reading and better investing in 2013.