Fraud and Corruption Enters Top 10 Mining Risks, with Resource Nationalism at No. 1

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The 2012 report "Business Risks Facing Mining and Metals" from Ernst & Young (E&Y) says that while capital allocation remains a significant business risk, it is mostly because of returns matching risk appetites. As a result, its No. 1 position in top business risks has been overtaken by the increasing threat posed by resource nationalism. Resource nationalism has become the top risk for mining and metals companies, as governments globally continue to create demand in order to increase their slice of the profit pie.

In 2010, capital allocation was No. 1 in what was a more uncertain economic environment, combined with a number of other factors, such as volatility of prices, limited cash flow, and limited availability of debt capital. These made the decisions on how to allocate capital in 2010 more complex than ever.

Interestingly, climate change, which was at No. 10 on the list last year, is no longer on the radar. This possibly is due to increased confidence that any action that will impose real costs on mining and metals is still a long way off.

By contrast, says E&Y, maintaining a social license to operate does not appear to have been impacted much by change in either economic terms or priorities from clients. In the 2010 report, it was ranked No. 5. In 2011 and beyond, it remains a significant risk, sitting at No. 4 on the list.

"Fraud and corruption," which was just off the top 10 radar last year at 14, has now moved up to No. 10, given recent regulatory developments. "Interruptions to supply" is new to the top 10 in 2012, at No. 9.

2012 top 10 risk list:
1. Resource nationalism
2. Skills shortage
3. Infratructure access
4. Cost inflation
5. Capital project execution
6. Social license to operate
7. Price and currency volatility
8. Capital management and access
9. Sharing the benefits
10. Fraud and corruption

Projects around the world had been deferred and delayed--and in some cases investments were withdrawn altogether--due to the degraded risk/reward equation, said Mike Elliot, E&Y global mining and metals leader. "The uncertainty and destruction of value caused by sudden changes in policy by the governments of resource-rich nations cannot be understated," he said.

Global mining capital expenditure was expected to grow 14% in 2012. This was being driven by a range of mining development projects in developed economies like Australia and the emerging markets of China and Africa, said the report.

Elliot said that all the top risks are more complex and more critical for miners now than they were 12 months ago. "The imperative for miners to manage these risks and understand the changing risk/reward equations has arguably never been higher," he said. He added that new business risks might appear in 2013/14, including energy issues.

For related information, see August 9, 2011, article - Resource Nationalism Tops Mining and Metals Sector Business Risks.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.