Resource Nationalism Tops Mining and Metals Sector Business Risks

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--In the past 12 to 18 months, at least 25 countries have increased or announced intentions to increase their government take from mining and metals companies via taxes or royalties, according Ernst & Young global mining and metals leader Mike Elliott in the company's recently release report, "Business risks facing mining & metals 2011-2012."

Resource nationalism is the primary business risk for mining and metals companies around the world. The concern has jumped from number four in the 2010 rankings to the top spot this year. Global skills shortages remain in the second spot, while capital allocation has dropped from the top spot in 2010 to No. 7 this year, according to the report.

"Resource nationalism is taking other forms as well, including greater controls on foreign participation, mandated beneficiation, use it or lose it demands and mandated government participation," reports Elliott.

Dominating the risk list and accounting for six of the top 10 concerns, is the myriad of supply capacity constraints. These include the global skills shortage, capital allocation, infrastructure access, capital project execution, cost management and interruptions to supply.

Elliott said that the market is probably excessively optimistic about how much and how quickly new production is going to come online. "All of these supply capacity risks mean that companies are unlikely to be able to capture the premium pricing as quickly. It also impacts the cost profile of projects, so there will need to be a higher rate of return to attract new investment, and as a result commodity prices will need to be higher. The companies that better manage these risks will deliver superior returns and have a competitive advantage in attracting new investment," he said.

Resource nationalism reflects the expectation among governments that the sector should be contributing more for the right to exploit natural resources. Similarly, with regard to their social license to operate, community expectations around such factors as the environment, safety performance and sustainable community investment are changing at such a rate that it is making it difficult for companies around the world to stay ahead of the game.

Regarding fraud and corruption, investors and the wider community expect companies that are based in developed markets to be at the forefront of eliminating corruption. "The quest for growth to meet strong demand continues to encourage faster expansion into frontier markets where the risk of fraud and corruption is higher and at the same time companies are being held more accountable for how they deal with it," he said.

While the myriad of strategic business risks facing mining companies has arguably never been greater, those that manage these risks better can drive superior returns. Managing the risks well, working through scenarios and impact analysis can deliver opportunities to preserve shareholder value, tighten processes and controls and even enhance shareholder value, Elliott concludes.

The top 10 strategic business risks in 2011 in the metals and mining sector according to the report are:

1. Resource nationalism (No. 4 in 2010)
2. Skills shortage (2)
3. Infrastructure access (6)
4. Social license to operate (5)
5. Capital project execution (new)
6. Price and currency volatility
7. Capital allocation (1)
8. Cost management (3)
9. Interruptions to supply (new)
10. Fraud and corruption (new)

For further information on this topic, see August 4, 2011, article - Xstrata CEO Slams Retrospective Mining Legislation as 'Not Fair.'

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR'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.