The FINANCIAL — Lloyd's writes that by their nature, mineral deposits are frequently located in remote, inaccessible and even hostile parts of the world.
The tectonic earth movements which originally pushed these deposits closer to the earth’s surface also mean mines can be located in earthquake-prone areas, as last year’s Chile earthquake demonstrated.
But other natural disasters can also threaten production and distribution. The December and January floods in Queensland forced several mines in Australia’s Bowen Basin to suspend operations and invoke force majeure.
According to the web-site, While not linked to natural perils, the saga of the trapped miners in San Jose, Chile, and tragic loss of 29 workers in New Zealand’s Pike River Mine, have also served as reminders of the real liabilities involved in digging below ground.
In both the Chile earthquake and Australia floods the export of coal was severely hampered as a result of damage to infrastructure. This can have severe supply chain ramifications, with commodity prices rising as a result of the drop in supply, writes Lloyd's.
“Transport infrastructure is critical to miners and this is because essentially mining goes on in remote areas,” says Richard Field, a mining practice leader at Lockton. “As a consequence, every time you have a catastrophe loss that cuts the chain so to speak you will have significant business interruption implications from that. That won’t change – the mineral deposits or coal deposits are where they are.”
Mine operators typically look to insure this exposure by purchasing contingent business interruption covers or supply chain insurance, such as trade disruption cover. While some of the risk is transferred, large mining companies typically retain a large proportion of the risk through substantial deductibles or self-insurance.
“Unless you are very small, a medium to large mine will have contingent business interruption cover in place and it is this that triggers for damage to transport and infrastructure,” says Field.
While last year’s magnitude 8.8 Chile Earthquake did not directly impact the mines, it damaged many of the country’s large ports and the infrastructure feeding into the ports. Production halted at two of the country’s oil refineries and two major copper mines as a result.
“What you saw in the Chile earthquake was the infrastructure of most of the country’s industry was damaged and it had a huge affect on their economy as a whole because of the spread of the damage from the earthquake,” says Rupert Sawyer, a supply chain expert at Miller. “A lot of the ports were damaged and a lot of the infrastructure feeding the ports was damaged creating huge challenges for moving anything anywhere within Chile.”
Mines in Queensland faced a similar issue. While many were back in business within days of the floods, damage to railway lines and roads hampered access to the ports.
Better risk management
Nevertheless, lessons had been learned from earlier floods in 2007 and 2008, which meant the industry was better prepared this time around.
Water management procedures had been put in place. Dams were strengthened, canals built, culverts created and storm drains increased substantially. The general consensus is that rail operator QR National reacted quickly to fix damaged stretches of the line.
“A lot of things were done post the events of 2007/08 to mitigate the known implications of flood and substantial rain so when the latest floods occurred the impact was not as it could have been,” says Steve Higginson, Willis Mining Practice Leader. “Had the 2010 events occurred before the water management measures were taken, the loss costs would have been greater.”
“The rain that fell was a reasonably similar volume – it was over a slightly wider area so it wasn’t as acute – but in relative terms the loss cost is going to be lower because there was better water management both at QR National level and at mine level,” he adds.
While it is still too early to note any “fundamental and significant change” the area of contingent business interruption is likely to be considered in more detail in future as a result of the recent catastrophes, notes Higginson. “The issue is redefining how insurance works for the complicated mining space with its own particular characteristics, such as you don’t lose your product – you just can’t get to it, and where business interruption is such a critical ingredient to the loss cost that you can sustain.”
Policy definitions may undergo some scrutiny and the “flight to quality” is an ongoing trend, with underwriters favouring mining operators that have sophisticated risk management procedures and a good track record.
“To me in a very complicated risk business like mining the flight to quality is critical,” says Higginson. “That’s where the enterprise-wide risk management protocols are embedded through the organisation and its people – essentially instilling a culture which supports and drives a best-in-class approach to running their business the best way they possibly can.”