Climate change and price risk are in the forefront of the minds of Australian miners, according to the recently released KPMG Mining Risk Forecast 2020/21 report.
Caron Sugars, KPMG Partner and Mining Risk specialist said the report indicates that mining companies will increasingly look to insulate themselves from potential downside risk of price by focusing on the basics – operational efficiency, productivity and cost containment – in the coming year.
“Price and currency hedging, together with cash flow management practices, will be a critical business risk management mechanism to curb downside risk of price volatility,” she said.
Ms Sugars noted that when KPMG conducted its 2020 Global Mining Risk Survey in January this year, the coronavirus (COVID–19) had not been broadly recognised.
“Profound change has occurred since then and responding to the challenges of a global pandemic has driven the mining sector’s immediate planning, decision making, and risk mitigation actions,” said Ms Sugars.
“The risks created by the global COVID-19 pandemic have been broad and varied. For Australia, our Mining Risk Forecast shows that most obviously there has been the impact on the physical and mental health of the mining workforce and mining communities. There have also been challenges in managing mining sector supplier and liquidity risk.”
She also emphasised the need to ensure cyber risk was more closely addressed and managed given the increasing numbers of people working remotely.
In addition, these factors have been cast against a background of global recessionary risk to commodity prices and ongoing market volatility.
“A key theme of this year’s Australian Mining Risk Forecast is transition: the Australian mining sector now finds itself at a transition point,” said Ms Sugars.
“Miners must closely monitor and manage the ongoing health crisis presented by COVID-19 but mining executives must also continue their focus on the medium to long term,” she advised.
COVID-19 lens: global and local – March to July 2020
Looking back to March 2020 in the global context, managing critical risks – in particular managing commodity price risk and macroeconomic risks – were top of mind for global mining executives as detailed in KPMG’s Global Mining Risk Report 2020.
Four months, and a different world, later, Trevor Hart, KPMG’s Global and Australian mining sector leader says that increased price risk and volatility, digital transformation, new ways of working, and a doubling down on Social Value and the ESG agenda, are taking centre stage as a ‘new reality’ emerges – both in Australia and globally.
He said that by now, many companies have established a ‘COVID Rhythm’ and leaders are increasingly looking forward.
Mr Hart emphasised the point that the mining sector is very experienced at adopting new ways of working, and this included attracting the right talent.
“In addition, we believe commodity prices will be volatile for the foreseeable future as COVID and Geopolitical impacts reverberate through global commodity demand and supply,” he shared.
“COVID-19 has demonstrated the value of operational agility and accurate real time information for leaders. This is also about addressing supply chain risk to ensure security of supply. We have seen that ability in the quick response of miners in managing potential choke points and building optionality across the chain.”
COVID-19 has highlighted the criticality of people to the mining industry.
Mr Hart says that companies with strong safety and COVID response plans have demonstrated resiliency in maintaining operations. He adds that all stakeholders are accelerating their demands of miners on environmental, social and corporate governance (ESG) and the industry is challenged to have clear, measurable strategies to execute against.
Top risks in 2020/21, according to the miners surveyed
“COVID-19 rightly demanded immediate risk management priority. However, we emphasise that other risks will continue to persist and even amplify in the medium to long term,” said Ms Sugars.
In 2019, macro-financial risks came in first place with 60 per cent of respondents naming this as their key mining sector risk for the following year. In 2020, as mining executives looked ahead, the two top risks named were:
- Climate change and natural disasters (named by 46 per cent of respondents)
- Commodity price risk (also named by 46 per cent of respondents)
These concerns were followed by:
- Price risk – Global trade war (named by 38 per cent of respondents)
- Price Risk – Economic downturn (named by 35 per cent of respondents)
- Regulation – Regulatory and compliance change burden (named by 35 per cent of respondents)
Technology disruption as an opportunity – not a threat
One of the strongest messages from the survey was that only 12 per cent of respondents saw technology disruption as a threat.
Innovation was ranked 19 as a risk and 85 per cent of respondents indicated that they viewed technological disruption as more of an opportunity than a threat, ranking it the second most important growth strategy after organic growth and before strategic alliances, mergers and acquisitions and attracting and retaining talent.
Regulatory risk
Moreover, while regulatory change is always an uncertainty that organisations pay close attention to, the KPMG report highlighted an upcoming milestone that could aid regulatory risk management.
“The Commission’s Resources Sector Regulation draft report (issued March 2020) considers how to streamline project approvals and launch new resource projects more efficiently while continuing to focus on managing risks to the environment and communities,” said Ms Sugars.
Australian mining risk outlook 2021
Looking ahead to the next 12 months for the risk landscape in Australian mining, Ms Sugars said that in spite of the challenges of COVID-19, climate change risks and the significance of ESG and social licence must not be forgotten.
She suggested that addressing climate change risk was likely to see some commodities, such as copper and battery minerals, increase in demand whilst others, such as coal, decline, and that all miners needed to prepare for the uncertainty that climate change represents.
Mining companies are increasingly recognising that taking advantage of opportunities to differentiate, or to have a competitive advantage, relies on attracting and retaining high potential skilled individuals. Whilst not yet in the top 10 risks (it moved from 17th place to 12th), it was noted as one of the top two strategies for growth in the short term (after organic growth and together with strategic alliances, mergers and acquisitions).
Ms Sugars concluded: “Fortunately, at the same time that ESG and other non-financial risks are attracting more focus, technology is rising to the challenge to support organisations and boards in understanding these risks proactively. This must remain true throughout the period of COVID challenges and beyond.”
KPMG’s Australian Mining Risk Forecast 2020/2021 report can be found online here.