The FINANCIAL — Capital allocation and access to capital have rocketed to the top of the business risk list for mining and metals companies globally, up from number eight in 2012, in Ernst & Young’s annual Business risks facing mining and metals 2013-2014 report.
Ernst & Young’s Global Mining and Metals Leader Mike Elliott says these “capital dilemmas” threaten the long-term growth prospects of the larger miners at one end of the sector, and the short-term survival of cash-strapped juniors at the other end.
Margin protection and productivity improvement (two, up from number four) and resource nationalism (three, down from one) round out the top three risks, while the threat of substitutes is a new entry in the rankings at number 10.
“The rising business risks that are top of mind with mining and metals CEOs and Boards today are being driven by the need to protect returns and manage the interests of varied and often competing stakeholders. This is in stark contrast to just 12-18 months ago when fast-tracking production was still top of the agenda and capacity constraints defined the key business risks,” says Elliott.
For larger miners, the rapid decline in commodity prices in 2012, rampant cost inflation and falling returns have created a mismatch between miners’ long-term investment horizons and the short-term return horizon of new yield-hungry shareholders in the sector, according to Ernst & Young.
“Many years of high growth in earnings, cash flows and capital appreciation has attracted a different group of investors to mining, investors with short-term investment horizons who are not as comfortable with the sector’s longer-term, and often counter-cyclical, development, investment and return horizon,” he says.
“Shareholders with very short-term investment horizons do not seem to understand that every shovelful of dirt miners pull out the ground is a shovelful closer to not having a business – investing in growth is fundamental for the sector.”
“This raises the question of how to balance the demands of short-term shareholders with those investing for longer-term returns. There is concern that the pendulum may swing too far, raising the possibility of another period of endemic underinvestment in new supply and resulting in future price volatility.”
“There is a profound risk that the decisions taken by mining and metals companies today could damage their growth prospects, destroying shareholder value over the longer-term.”
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