The FINANCIAL — Pro-cyclical behavior and short-term focused shareholders have pushed “switch to growth” to the top of EY’s annual ranking of business risks in mining and metals companies globally.
Need to cement productivity gains still top three issue
Leverage concerns for mid-tiers and juniors puts access to capital as key risk
Cybersecurity and innovation risks increase
EY’s Business risks in mining and metals 2015-2016 report, released on June 29, finds that the lack of investment by miners is shrinking supply pipelines and reducing sustainability of production volumes, which also limits future growth options.
The top 10 business risks for mining and metals companies today, compared to the top 10 in EY’s 2008 report at the peak of the super-cycle, provides a stark contrast to the issues faced now and then, and underlines the cyclical nature of the sector. Just three of the top 10 risks from 2008 rank in the top 10 this year.
EY Global Mining & Metals Leader Mike Elliott says:
“Growth today is undoubtedly fraught with risk and tension, but standing still is not an option. Growth is essential in an industry that diminishes with every tonne or ounce it produces, where value is ultimately destroyed if the pipeline is not replenished.”
The inevitable upturn in the cycle for most commodities is expected in the next few years because of emerging constraints in new supply from lack of exploration and development in recent years, the removal of high-cost supply and the expected continued growth in demand.
However, Elliott says: “Many mining companies risk missing future growth prospects because they are hostage to highly risk-averse investors and, as a result, are focused on short-term cost-cutting and maximizing current returns to shareholders.”
Adding to the threat, new competition is emerging from private capital investors and commodity traders, who may be in stronger strategic and financial positions to make long-term countercyclical investments without the resistance of risk-averse public shareholders.
“Unless mining companies reinvest, they are essentially liquidating their asset base,” says Elliott. “The switch to growth is looming, and assets are now still relatively cheap. Given the long lead time to develop new supply, decisions to invest for future growth have to be made now or long-term returns will be lowered.”
Productivity and access to capital both maintained a top three ranking on the risk list, at number two and three, respectively, each down one spot from last year. New entrants to the top 10 risk list include cybersecurity and innovation.