Ernst & Young (EY) believe the risks facing the mining and metals sector in 2019-2020 reflect a new era of disruption – from within and outside the industry.
In surveying over 250 participants from around the world, ‘licence to operate’ and ‘disruption’ were consistent risks in EY’s 11th annual Top 10 business risks facing mining and metals in 2019-2020 report.
The report found that mining companies must increasingly deal with many new and variable factors, ranging from societal expectations, digital transformation, and unique challenges to portfolio and capital investment decisions. Below are the top five risks which EY believe the industry is facing.
- Licence to operate
Up from number seven, this year over half of all respondents nominated ‘licence to operate’ as the largest risk facing their mining/metals organisation. This notable response could be attributed to a changing stakeholder landscape. Right now, there is more information, bigger platforms and more at stake than ever before. EY states that the sector needs to redefine its image as a sustainable and responsible source of the world’s minerals, in order to change this.
- Digital effectiveness
Digital effectiveness remains key to gaining competitive advantage, however, in a recent poll of over 600 mining and metals executives, it was revealed that 37 per cent of management have little or no knowledge of the digital landscape.
Paul Mitchell, EY Global Mining and Metals Advisory Leader said that the stark reality is that digital is the key to achieving sustainable productivity and margin improvement for mining businesses.
“It is, therefore, not the time to stand still in an age of turbocharged business transformation that is largely driven by digital. To respond to disruption across the sector, businesses need to adopt an end-to-end digital program,” he commented.
- Maximising portfolio returns
In the wake of higher commodity prices and rising cash flow, the report found that mining and metals companies are assessing where they should allocate capital to ensure higher future capital returns. As always, a balanced approach to the portfolio is key.
In addition to building or acquiring new mines, companies also need to consider how much capital they should be investing in innovation and transformative technologies.
Over 70 per cent of respondents said they are investing 5 per cent or less of their budgets in digital, yet EY states if this was increased by roughly 20 per cent, they could be transforming their operations substantially and gain real competitive advantage.
- Cyber
In EY’s recent Global Information Security Survey, a substantial 54 per cent of mining and metals companies reported that they had a ‘significant cybersecurity incident’ in the last year.
Due to the increasing size of the threat, mining and minerals organisations are spending more on cybersecurity, devoting additional resources to improving their defences and working harder to embed security-by-design.
As the digital transformation agenda forces organisations to embrace emerging technologies and new business models, often at pace, cybersecurity needs to be a key enabler of growth.
- Rising costs
The question on the industry’s mind: how can you cut costs and remain competitive?
Cost inputs in the sector are highly susceptible to inflationary pressures. While global inflation is not expected to rise as rapidly as it has in previous cycles, the report found that there will be a steady increase from around 2.7 per cent in 2016 to 3.5 per cent in 2019.
However, during periods of higher commodity prices, mining input costs, such as wages, consumables, diesel and energy, often increase at a higher rate than general inflation.
There are several ways in which organisations can respond to rising costs, some include: focusing on sustainable-cost reduction programs, carefully managing general expenses and sourcing from low-cost countries.
Mr Mitchell said that this is an era of constant disruption, and it is coming from unexpected places. Instead of seeing it as a threat, mining businesses should see it as a great opportunity to innovate, collaborate, evolve and thrive.
“If dominant players respond slowly or ineffectively to sector and external changes, market leadership could be lost as newer participants such as technology companies and sovereign states make inroads,” he commented.
The Top 10 Business Risks were identified as:
- Licence to operate
- Digital effectiveness
- Maximising portfolio returns
- Cyber
- Rising costs
- Energy mix
- Future workforce
- Disruption
- Fraud
- New world commodities
EY’s full report can be found here.