JOHANNESBURG (miningweekly.com) – Procyclical behaviour and short-term-focused shareholders have pushed the “switch to growth” to the top of EY’s ranking of business risks facing mining and metals companies globally, the professional services firm revealed in a report released on Monday.

The ‘Business risks in mining and metals 2015-2016’ report found that a lack of investment by miners was shrinking supply pipelines and reducing sustainability of production volumes, which also limited future growth options.

The top ten business risks for mining and metals companies today, compared with the top ten risks identified by the survey in 2008 – at the peak of the economic supercycle – provided a stark contrast to the issues faced now and then, and underlined the cyclical nature of the sector.

Just three of the top ten risks from 2008 ranked in the top ten this year, while
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 ten risk list included cybersecurity and innovation, while businesses were further aware of business risks emerging in the form of skills shortages, productivity, access to capital, resource nationalism, the social licence to operate, price and currency volatility, capital projects and access to energy.

“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 ton or ounce it produces, where value is ultimately destroyed if the pipeline is not replenished,” commented EY global mining and metals leader Mike Elliott.

He added that the “inevitable” upturn in the cycle for most commodities was expected in the next few years owing to 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, 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 maximising current returns to shareholders,” he averred.

Adding to the threat, new competition was 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.

Elliott believed that, unless mining companies reinvested, they would essentially be liquidating their asset base.

“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,” he noted.

Observing that productivity remained a key focus for CEOs, Elliott outlined that productivity in the sector fell to its lowest level in 30 years during the mining supercycle; and, while most miners moved from outright cost-cutting to productivity improvement measures in 2014, the need for sustainable, enduring productivity improvements was a two-to three-year transformation.

He believed that company boards and CEOs recognised that regaining lost productivity was critical for long-term return on capital employed – but cautioned that there was still a long way to go in cementing productivity measures in most mining operations.

Access to capital was a further area of shareholder concern, with capital raised by the mining industry falling 15% year-on-year in 2014 – in part a reflection of the lower appetite for spending by producers, but also a reflection of the challenging market conditions.

The bulk of this debt raised in 2014 went into refinancing, with very little new debt or equity going into the sector.

“Producers are focused on restoring stretched balance sheets and improving profitability through asset sales and capital expenditure reductions; distressed midtiers are restructuring debt; and juniors are struggling to access the equity needed to sustain their activities,” said Elliott.

Moreover, equity raised by junior minors had fallen year-on-year since 2012, with more than half of the issues by junior companies in 2014 raising less than $1-million and about a third of those companies returning to the market more than once to raise additional funds.

According to Elliot, leverage remained a key concern for juniors, particularly in the iron-ore and coal sectors, with little prospect of near-term turnaround for smaller, higher-cost producers, and a cumulative $14-billion of debt maturing in the next three years in the relatively small US high-yield sector alone.

“Conditions are arguably ripe in certain sectors of the industry for distressed debt hedge funds looking to take advantage of ‘buy to own’ opportunities.

“While companies with funding issues often faced limited choices, they need to carefully consider the ramifications on future earnings, true cost, control and future financing to properly understand the true funding costs,” he advised.

Meanwhile, the business risks to mining companies from cyber hacking and a lack of innovation had increased to such an extent as to push both issues into the top ten for the first time.

Cyberhacking in the mining sector had become more widespread and sophisticated, with 65% of mining and metals companies indicating that they had experienced an increase in cyberthreats over the past year.

Integration of information technology and operations technology had also made miners more vulnerable to cyberhacking, with mining companies more reliant on integrated IT systems as a result of the drive to improve productivity and reduce costs.

“Cyber attacks are an issue across the mining sector regardless of the size or scale of the business. Mining businesses need to increase their efforts to deal with cybersecurity and it needs to be a board- and CEO-level priority,” Elliott said.

The focus on regaining lost productivity has also brought to the fore the almost “complete lack” of innovation in the sector, pushing it onto the risk rankings this year.

“It is widely accepted that, compared with most other industries, there has been minimal transformational innovation in the mining sector. The first automated truck was seen 20 years ago and, yet, there is still not a complete fleet in existence at a mine anywhere,” he remarked.

Relative to revenue, the mining and metals sector spends 90% less on technology and innovation than the petroleum sector.

The oil and gas sector recognised innovation as the single most important driver of productivity improvement, highlighted by recent innovations in shale and coal seam gas, and floating liquified natural gas platforms, all of which had enabled reserves of oil and gas to last longer than predicted.

“Innovation will be vital to protecting and sustaining margins in the long term, and will be key to maximising revenues in the future,” concluded Elliott.