Managing critical risks – in particular commodity price risk and macroeconomic risks – are top of mind for global mining executives in 2020, according to KPMG’s latest global mining risk report.
The KPMG report, KPMG Risks and Opportunities for Mining – Global Mining Risk Report 2020, provides an in-depth sounding of risk outlook in the sector from more than 140 mining executives across the globe.
The 2020 report finds that, as in the previous year’s report, commodity price risk, and permitting risk came in at number one and number two in the top 10 global risks for miners.
Trevor Hart, Global and Australian Mining Industry Lead at KPMG, said there is pressure on global growth driving some uncertainty with commodity pricing. This is keeping mining executives awake at night at the moment – and KPMG has seen a stronger focus on financial risk management because of that.
“While we recognise the current presence and impacts of the COVID-19 virus outbreak we also see resilience: the mining sector is accustomed to dealing with commodity price volatility whilst risk management is at the core of mining industry operations,” Mr Hart said.
In this year’s survey, macro-financial factors, such as commodity prices, credit risk and currency risk, were the global risks cited the most by respondents with regard to their company (55 per cent) and the industry as a whole (66 per cent).
Mr Hart highlighted that in more uncertain times the industry would see a focus on going back to basics such as increasing productivity and managing costs.
“We can also expect to see an intensified focus on rate of return across the mining sector globally and in Australia,” he stated.
“That means tangible actions such as reprioritising technology spend – for example more judicious spend on automation – and a much stronger focus on capital spend. In other words, planning must deliver productivity and achieve a result that is lower down the cost curve.”
Mr Hart predicted that cash management would also become very important – namely CAPEX and OPEX – and would continue to be managed closely in 2020 planning, including achieving growth through organic activity and focused R&D spend.
Top mining risks in 2020, according to the miners surveyed
Access to capital and liquidity risk came in at third place this year (up one place from 2019), whilst community relations and social licence to operate dropped back to fourth place (was third in 2019).
Mr Hart noted that 75 per cent of mining survey respondents said the industry needed to redefine success using a more holistic group of measures that includes shareholder and broad stakeholder values.
“In the past, capital flows to the industry were primarily influenced by commodity prices. This remains true but investors increasingly rethink where they deploy capital and how companies use capital in terms of ESG measures,” he said.
Environmental risks jumped three spots from number 10 to number 7, and tailing management made a debut in the top 10 risks.
At the same time, financial risks such as controlling capital and operating costs declined in relative ranking as compared to previous years.
The race is on to decarbonise mining
Mr Hart said the other driver in the local and international mining sector was carbon.
“The race is on to decarbonise mining. It’s not a fad – it’s here to stay,” he said.
“The world’s two largest miners have announced significant funding for projects over the next five years designed to take carbon out of their operations with aims to be carbon neutral by 2050.”
Mr Hart said the significance of this investment spend and the targets being set reflected a new and intensified focus on the value of mining.
“They are being driven by ESG and shareholder demand – and will address the broader stakeholder concern question around ‘who is performing best’ in decarbonisation.”
“It is not just about what’s produced but also about protecting the environment – a big part of that is reducing carbon footprint. Miners look at new development and new assets in terms of how to achieve carbon neutrality over the life of the mine. That is part of new mining development work that we didn’t see in feasibility studies a few years ago,” he shared.
Australian mining sector risk focus
Caron Sugars, National Board Advisory Services Lead Partner and Mining Risk specialist with KPMG said that whilst decarbonisation and climate change were not new, they had now jumped into the top 10 mining risks.
This was potentially due to recent events in Australia, changes to reporting requirements, and the increase in climate change-related activism.
“This risk considers both the climate change impact on assets and operations (significant weather events, asset degradation) as well as the uncertainty surrounding society and government’s response to climate change.”
“Whilst in previous years environmental risk has been captured in social licence to operate risk, the survey outcomes indicate that addressing climate change risk is now viewed, by Australian based miners, as a far broader imperative,” Ms Sugars said.
She suggested that addressing climate change risk is likely to see some commodities, such as copper and battery minerals, increase in demand whilst others, like coal, decline however all miners will need to prepare for the uncertainty that climate change represents.
Ms Sugars said: “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.”
“Data and analytics are helping organisations understand not just what risks are being managed, but also providing signals into how they are managed including factors like culture. This is enhancing the already strong management of health and safety and extending to broader non-financial risks,” she said. “It is a significant evolution.”
Top 10 risks to the global mining industry for 2020, according to the report:
- Commodity price risk
- Permitting risk
- Access to capital, including liquidity
- Community relations and social license to operate
- Political Instability
- Economic downturn/uncertainty
- Regulatory and compliance changes, and Environmental risks, including new regulations
- Global trade war – new
- Ability to access and replace reserves
- Tailings management – new
KPMG Risks and Opportunities for Mining – Global Mining Risk Report 2020 can be found online here.