EY Business Risks Facing Mining and Metals 2014-2015

Business risks facing
mining and met als

20142015
Contents
Risk radar for mining and met als 1
Execut ive summary 2
The t op 10 business risks 4
1. Product ivit y improvement 9
2. Capit al dilemmas 12
3. Social license t o operat e 16
4. Resource nat ionalism 19
5. Capit al project s 22
6. Price and currency volat ilit y 26
7. Infrast ruct ure access 30
8. Sharing t he benet s 34
9. Balancing t alent requirement s 37
10. Access t o wat er and energy 41
Top risks for commodit ies 46
Under t he radar risks 48
1 Business risks facing mining and metals 20142015
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Risk radar for m ining and m etals
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ct ivity

Under the radar business risks
Business risks facing mining and metals 20142015 2
The need to address the decade-long
decline in productivity due to the sectors
quest for grow th during the supercycle has
pushed productivity to the top of EYs risk
ranking. The effects of extrem ely w eakened
productivity across the business are now
m ost obvious as com m odity prices continue
to soften, m argins have been cut and there
is now here else to look for pro tability.
The supercycle altered the DN A of m ining
com panies to adapt the processes,
perform ance m easures and culture solely
tow ard grow th. The transform ation has
occurred by stealth and the counter-
transform ation w ill need to be far m ore
radical. Boards and CEO s are now realizing
that regaining lost productivity and gaining
new ground is critical for long-term
pro tability and achieving an adequate
return on capital em ployed, and requires a
w hole-of-business response. This broad
transform ational approach is essential and
is yet to be applied effectively by any one
sector participant. This huge step change is
w hy this risk is top of the ranking.
A lthough the top risks have shifted around
in the ranking, there has not been a
substantial shift in priorities. The risks
them selves have evolved greatly over the
year w ith the prolonged com m odity price
dips w hich have throw n up m any issues for
the m iners. M oving up into the top 10 this
year is access to w ater and energy, w hich is
becom ing an increasing issue as dem and
rises, costs increase and availability
dim inishes.
Social licence to operate engaging
powerful communities
This risk has clim bed the ladder to third
position because the grow ing in uence of
com m unities to stop or slow projects, no
m atter how exem plary a com panys track
record is w ith social engagem ent. The
frequency and num ber of projects being
delayed or stopped due to com m unity and
environm ental activists continues to rise.
O rganizations cannot rest on their laurels
nor assum e that acceptance provided by
the com m unity and its stakeholders w ill
alw ays be m aintained. They should be
integrating the activities required to obtain
and m aintain a social licence into the
Capital allocation and access
diverging and unique challenges
The capital allocation dilem m as have fallen
from last years top spot, re ecting
progress m ade during the year in
addressing this challenge. Steady progress
has been m ade by the m ajors on capital
m anagem ent and optim ization follow ing a
spate of asset w rite-dow ns in 2013. Capital
discipline is expected to continue, but the
question now facing com panies is w hat
form the next phase of investm ent w ill take,
and w hen stakeholders w ill begin pushing
for this. H ow ever, little has changed in the
past 12 m onths for m any juniors and
explorers and they rem ain cash-starved and
focused on survival.
Execut ive summary

Top 10 risks
2014
01 Productivity im provem ent
02 Capital dilem m as allocation and
access
03 Social license to operate (SLTO )
04 Resource nationalism
05 Capital projects
06 Price and currency volatility
07 Infrastructure access
08 Sharing the bene ts
09 Balancing talent needs
10 A ccess to w ater and energy
(new to top 10)
01 Skills shortage (now balancing
talent needs)
02 Industry consolidation
03 Infrastructure access
04 Social license to operate
05 Clim ate change concerns
06 Rising costs
07 Pipeline shrinkage
08 Resource nationalism
09 A ccess to secure energy
10 Increased regulation
2008 (peak of supercycle)
Over 7 years
Rem ained on the risk radar over seven years
m arkets still do not have an appetite for
investm ent in new supply, m ining and
m etals com panies are beginning to quietly
prepare for the inevitable investm ent as
reserves need replacing and the cycle
changes. M ining com panies do not w ant to
m ake the sam e m istakes they m ade during
the supercycle, and boards w ill be
dem anding m uch m ore robust capital
project m anagem ent to avoid the failures of
the past. In addition, w ith softening
com m odity prices, m any com panies are
looking to extract m ore for less through
increased productivity. A s supply shortages
for m any com m odities start to reappear in
the next few years and investm ents get the
green light, this risk w ill be high on CEO and
board agendas.
New entrant Access to water
and energy
A ccessing affordable w ater and energy is an
essential part of operations for m ining and
m etals com panies and has becom e
increasingly dif cult, especially in countries
in South A m erica and A frica. Burgeoning
energy costs and com peting w ater dem ands
in m any m ining regions around the w orld
are starting to have a bigger im pact on
costs and the ability to operate. W ith global
dem and for energy expected to increase
36% by 2025, and w ith falling ore grades,
this risk is com pounding year by year, w ith
the sector facing higher energy prices and
volatility. Sim ilarly, w ater scarcity is an
issue dem anding a strategic and practical
response. The criticality of this issue in
m any countries has raised this risk into
the top 10.
broader strategic plan of a m ore sustainable
business.
Resource nationalism both
retreating and advancing
M aintaining its spot in the top ve risks,
there rem ain w aves of resource nationalism
by countries keen to gain a greater share of
shrinking returns from the sector. O n the
one hand, som e countries have changed
m ining tax policies to becom e m ore
attractive to m ining investm ent in a low er
investm ent environm ent. A t the sam e tim e,
other countries have introduced m andated
bene ciation, invoked use-it-or-lose-it and
increased state ow nership. Resource
nationalism is very popular w ith the
population of producer nations, and in
m any countries an increase in m oves to
instil m andated bene ciation has com e in
the sam e year as m ajor elections. Em otive
argum ents prom oting resource nationalism
can only be overcom e w ith m eticulous and
transparent revelation of the facts.
Capital projects a conservative
approach
This risk has m oved into the top ve due to
the long trail of m ega projects com m enced
during the boom that still need to be fully
delivered, and w ith a view to the next
cyclical upsw ing, m ining and m etals
com panies are beginning to plan the next
w ave of projects. W hile the public capital
Im proving productivity is undoubtedly the best and m ost strategic
w ay for organizations to boost ef ciency and pro tability in an
environm ent of m uted pricing. And its not a sim ple x for a few
projects. It is transform ational and takes a lateral and broad-thinking
m anagem ent to pull it off successfully.
Mike Elliott
Global M ining & M etals Leader
Megat rends
The top 10 business risks are the
1-2 year priorities of the m ining and
m etals sector as in uenced by the
global m egatrends that are im pacting
business, society, culture and the
econom y. These include:
Digital transform ation
Changes in the w ay w e w ork
The global m arketplace
The urban w orld and its dem ands
on infrastructure
A resourceful planet allocating
scarce resources
H ealth re-im agined to m eet
grow ing needs
The m egatrends by their nature are
m edium to long term in relevance.
The top 10 business risks
Productivity a case for broad transformation 01
The signi cant decline in productivity over the
last 10 years w as a by-product of a choice by
industry participants to pursue volum e grow th
at alm ost any cost during an unprecedented
boom in com m odity prices. M any com panies
have been attem pting to deal w ith the
resulting drop-off in productivity through a
series of cost-cutting exercises or point
solutions. H ow ever, the problem is too large
for point solutions to solve on their ow n as
they often sim ply m ove the problem further
dow n the supply chain.
The need to boost productivity is threefold - to
regain ground lost over the supercycle, to
continue to innovate to recover lost
com petitive advantage and to counteract
rising real w ages. To put the issue into context,
labor productivity in A ustralia has declined by
roughly 50% since 2001 and in the U S coal
sector, labor productivity declined by nearly
30% from 2009 to 2012. The sam e is being
seen globally, in both developed and em erging
m arkets, and the issue has been escalated to
the CEO agenda of m ining com panies.
The size of the entrenched nature of the
problem is too large for conventional
solutions, such as cost cutting, to deliver the
sustainable im provem ents required. Real
productivity gains w ill only com e from a
w hole-of-business, end-to-end transform ation.
Real and sustainable productivity
im provem ents m ay require signi cant
adjustm ents including changes to m ine plans,
reassessm ent of m ining m ethods, changes to
equipm ent eet and con guration, and
increasing autom ation. M ost of these have
been untouched by cost-reduction exercises.
The quest needs to be long term and requires
a change in attitude across the organization
from the boardroom to the pit.
Capital dilemmas allocation and access 02
Social license to operate walking the talk with
your stakeholders
03
The tw in dilem m as of capital access and
capital allocation encapsulate the diverging
fortunes of the industrys m ajor producers and
juniors in 2014.
Capit al allocat ion: The m ajors have show n
trem endous com m itm ent to capital discipline
over the last 12 m onths, positioning them w ell
for future grow th. Effective capital allocation
is not a once-in-tim e reaction to changed
m arket conditions, but a continuous cycle of
review and action that inform s strategy and
im pacts all areas of the business. A renew ed
focus on return on capital em ployed w ill be
w ith the sector for m any years to com e. W e
see the sector now at various junctures along
a path of capital transform ation, one that can
broadly be divided into capital m anagem ent,
capital optim ization and capital grow th. M ost
im portantly, the capital discipline lessons
learned over the last couple of years need to
stay front of m ind and continue to be
em bedded in robust investm ent appraisal
processes, regardless of w here w e sit in
the cycle.
Capit al access: A ccess to capital rem ains a
critical challenge for junior m iners. For m any
juniors and explorers, little has changed
over the last 12 m onths, and they rem ain
cash-starved and focused on survival. The
juniors are still subject to w idespread investor
risk aversion w hich is im peding their ability to
raise equity. Consequently, cost and capital
m anagem ent rem ains essential. M &A w ill
continue to play an im portant role in nancing
the junior sector, albeit on a selective basis.
A cquisitions (m inority or full takeover) or
consolidation to pool resources m ay be the
only realistic grow th or exit option for m any.
For m any early-stage com panies, the only
available scenario is to halt exploration, lay off
staff, close prem ises and m aintain only
skeletal operations a form of corporate-
induced com a.
Losing a social license to operate (SLTO ) is a
very real and potentially very expensive risk to
a business. Research show s that com m unity
con icts over environm ental and social
concerns can incur costs up to U S$20m a
w eek in lost value for large-scale operating
m ines.
1
The challenge for operators is balancing
im m ediate stakeholder dem ands and the
inherent value in being a socially and
environm entally reliable operator w ith
1. Cost of Com pany-Com m unity Con ict n the
Extractives,H arvard Kennedy School, 2014.
for mining and metals
The new w orld of resource nationalism is a
balancing act betw een prom oting investm ent
and m axim izing in-country bene ts. W ith
shrinking investm ent, som e governm ents have
begun to prom ote initiatives to attract m ining
investm ent into their jurisdictions. A t the
sam e tim e, despite declining com m odity
prices, w e are still seeing w aves of resource
nationalism by countries keen to gain a
greater share of shrinking returns from the
m ining and m etals sector. The m ost dram atic
exam ple of recent resource nationalism
activity has been m andated bene ciation and
state ow nership. M andated bene ciation is
very popular politically as governm ents seek
to extract greater value from their resources
by m andating that m inerals are processed
in-country prior to export. H ow ever, the
long-term fallout of this policy is unclear, and it
Resource nationalism advancing and retreating 04
can sw ing either w ay: signi cant investm ent
can occur in dow nstream investm ent if the
country invests to create com petitive
advantage or m ining m oves elsew here.
Greater state ow nership com es from the
desire to take direct equity exposure to m ining
investm ent developm ent and production.
M ining and m etals com panies need to
continue to educate governm ents on the
im pact of resource nationalism on investm ent
decisions, w hether that is taxes, use-it-ot-lose-
it or in-country processing requirem ents.
Com panies need to continue to dem onstrate
effectively the bene ts of m ining and m etals
to the broader com m unity and enhance the
understanding that raising the cost of doing
business m ay scare aw ay investm ent and
jeopardize those bene ts for the governm ent
and the com m unity.
controling costs, lost production tim e,
reputational dam age and over ow im pacts to
other operations.
A n additional challenge to an operators ability
to gain acceptance is the increasing volum e
and variety of stakeholders plus a broadening
de nition of w hat it m eans to have a social
license to operate now that the concept has
entered popular psyche. W ith grow ing public
understanding of the w ider im pacts of
extractive industries plus im proved ability to
access and dissem inate inform ation through
technology, m iners need to address criticism s
and concerns about their operations on m ore
fronts than in the past.
O f course there rem ains an obvious w ider
econom ic bene t in accepting these
challenges. M iners have the opportunity to
help create opportunities for social and
econom ic grow th through their investm ent
into infrastructure, pow er and utilities, support
for local businesses and contributions to
schools, hospital and related social services.
This is a very pow erful w in-w in opportunity to
help sustain the com m unity long after the
m ine is closed, in addition to being a fair
recom pense for the value the com pany derives
from being in the com m unity. Com panies w ith
the foresight to pre-em pt, acknow ledge and
address com m unity concerns stand in better
stead than those that w ait for stakeholders to
raise concerns. A fter trust is broken, support
can alm ost never be bought off.
2. E&M Js A nnual Survey of Global M etal-m ining
Investm ent,Engineering and Mining J ournal,
6 January 2014, http://w w w.e-m j.com /features/3674-
e-m j-s-annual-survey-of-global-m etal-m ining-investm ent.
htm l#.U 6A lm Pm Sx1Y, accessed 5 A pril 2014.
Capital projects delivering value in the next wave 05
A s new supply requires increasingly com plex
and large investm ents, the failure to keep
them on tim e and on budget can cost a
com pany their reputation and future ability to
invest. Calls for greater capital discipline and
greater return on capital deployed in the last
tw o years ushered in an era of caution and
restraint in capex. N um erous high-pro le
projects have been scrapped, shelved or sent
back to the draw ing board for replanning.
A lthough total investm ent in the sector m ay
have peaked, it m ust still deliver value on a
large num ber of com m itted projects w orth a
record U S$791b of investm ent, as of
Decem ber 2013.
2
The next w ave of projects are currently being
planned although quietly as the capital
m arkets are highly resistant to new spending
initiatives. Therefore, their success can
provide a com petitive edge and enhance an
organizations enterprise value. Governm ents
and local com m unities have a keen interest in
such projects as they have the potential to
drive a regions econom ic developm ent.
Consequently, high levels of transparency and
assurance w ill be required to ensure that these
projects can be delivered on tim e and on
budget. Shareholders, capital providers and
other stakeholders w ill all dem and it. W ith a
new understanding of better practices around
these projects and know ledge of the
consequences of bad m anagem ent, it w ill be
tim e for m anagem ent to start putting these
practices in place.
Price and currency volatility diving for cover or
riding the wave
06
Com panies are now experiencing a tim e of
extrem e volatility created as the m arket tries
to return to equilibrium follow ing years of
price stim ulus w hich encouraged new supply.
M ining and m etals com panies now realize that
they cant sit on the sidelines and w ait for the
volatility to pass as it w ill continue for a
num ber of years. W orking in volatility is the
new norm al and com panies need to adapt.
Prim arily they need to place m ore em phasis
on volatility risk m anagem ent. The rise in
volatility has also been accom panied by the
increase in availability of derivatives that can
be used to m anage these risks.
A s the sector becom es m ore custom er-
focused, they are responding to custom ers
w ho w ant to avoid this volatility. Changes in
custom er buying preferences have im pacted
the w ay in w hich this volatility has been
tolerated by com panies, w ith m any custom ers
seeking suppliers that can provide greater
price certainty. A s such, they are either
directly or indirectly entering the derivatives
m arkets to hedge those inputs. M any
com panies can appropriately incorporate
physical and derivative trading into their core
operations. Som e of the larger producers are
referring to this as a revenue enhancem ent
strategy as they seek to extract som e of the
option value created by volatility and their
naturally long position. This m irrors the
convergence of traders that are increasing
their exposure to com m odity production.
W e expect continued volatility in the sector in
the m edium term because of increased
regulation, divergent central bank policies,
geopolitical risk, provision of credit to traders
and the w ithdraw al of banks from com m odity
m arkets. Living w ith volatility for long periods
of tim e requires m ining and m etals com panies
to build in coping m echanism s that guard
against the negatives of volatility, w hile taking
advantages of the opportunities that only
present them selves during this tim e, such as
exibility in varying levels of production.
Infrastructure access A new world of ownership
and nancing
07
Current stakeholder attitude around
infrastructure nancing, ow nership and access
is leading to m ore fragm entation of the
interest they have and the roles they m ay play
in future infrastructure projects. In som e
cases, the cost of developing the
infrastructure is alm ost 75% of the total
project cost. Developing large infrastructure
projects requires coordination am ong a
num ber of stakeholders, such as users
(m iners, com m unities), governm ent(s) and
capital providers ( nancial institutions,
custom ers). The divergent priorities of these
stakeholders m ake it dif cult:
M ining and m etals com panies w ant
integrated m ining and infrastructure
w hich ensures control of infrastructure but
does not low er their return on capital
em ployed (RO CE) by using their ow n capital
Governm ents prefer infrastructure to be
developed on a shared-use basis to ensure
m axim um econom ic bene t
Capital providers w ant com m ensurate
returns from risk taken in the project
but avoid com m odity price risk and
construction risk
The trend is tow ard shared access and
shared value.
W e see innovation in nancing, and a change
in the ow nership m odel and the operation of
infrastructure, as a large num ber of future
projects w ill consist of a cluster of m ines
rather than just a single large-scale m ine.
Com panies should view infrastructure
developm ent from a sustainability perspective
in that it provides social and econom ic bene t
to local com m unities and businesses.
Infrastructure developm ent leads to
m onetization of otherw ise stranded deposits
and has a m ultiplier effect on the region.
Carving up bene ts of m ining and m etals is
the reality, ensuring all stakeholders see it
sim ilarly based on relative contributions is the
challenge. Recently, som e stakeholder
dem ands, such as those of suppliers and
governm ents, have largely rebalanced as it
has becom e clear that com panies are
grappling w ith reduced pro tability. H ow ever,
other stakeholder dem ands lag econom ic
reality. Com panies that do not effectively
m anage the com peting needs of stakeholders
(governm ents, com m unities and em ployees)
run the risk of dam aging their corporate
reputation, enduring project approval delays,
Sharing the benets managing expectations
through the commodity price cycle
08
runaw ay costs and being subject to protests or
violent opposition, and accelerating the m ove
aw ay from a m ineral rights ow nership m odel.
M anaging m ultiple stakeholders can be done
through em bracing a m ulti-stakeholder m odel,
com m unicating a broad view of shared value
and bene ts, and ow ning transparency and
accountability. A s com m odity prices recover,
m ining and m etals com panies need to w ork to
build credibility and trust w ith all stakeholders
now to m anage how these increased bene ts
are best shared. Transparency initiatives w ill
be part of this and are being enacted in the
EU, the U S and elsew here.
The nature of the risk has changed and is
focused m ore on skilled than unskilled
w orkers. W ith the increased focus on
im proving productivity and a m ove tow ard
autom ation, m echanization, data analytics
and contract negotiation, there is an
increasing level of sophistication in the
operations of m ining and m etals projects and
the skills required. In addition, there has been
a m ore proactive approach tow ard stakeholder
m anagem ent that has seen the introduction of
roles, such as governm ent relations and
com m unity engagem ent. Finding the right
people to ll these roles is com pounded by the
high rates of em ployee turnover in the sector
and the tim e it takes to ll jobs at m iddle and
senior m anagem ent.
Balancing talent needs a two-needs economy
Access to water and energy competing or
depleting
09
10
The skills shortage risk has becom e m ore
com plex and is no longer a universal concept
across the sector. It is now a m atter of
balancing the needs of an advancing industry
against the skills that exist and investing in
those of the future to avoid it becom ing acute
in the next cycle. A solution to the issue is
beyond the control of an individual com pany,
and it requires industry participants to think
w hole-of-sector w hen investing in future skills
pipelines. The key is to learn from the last
upsw ing and plan ahead, using a m ore holistic
fram ew ork that involves all stakeholders.
A ccessing w ater and energy is an essential
part of operations for m ining and m etals
projects, and is becom ing increasingly
dif cult. Com panies are up against unreliable
pow er supply from the grid and rising energy
costs. In em erging and frontier countries, the
risk is am pli ed as com panies com pete w ith
both governm ents and com m unities for these
scarce resources, w ith failure to m anage a
m ines use of w ater and energy likely to
jeopardize the industrys SLTO .
M anaging costs sustainably is a priority. A s
the cost of renew able energy declines and
conventional energy increases, the m ining
and m etals industry w ill increase its reliance
on renew ables. The shift tow ard a resource-
ef cient and low -carbon operation can ensure
com m unity acceptance, but this w ill com e as
the econom ics are proven. W ater scarcity is an
issue that dem ands a strategic and practical
response from businesses to develop and
im plem ent solutions to bene t all
stakeholders. This m eans assessing
dependence on w ater and future supplies, and
developing plans to cope w ith increased prices
and possible shortages.
The top 10
business risks
A case for broad
t ransformat ion
Productivity has been declining
signicantly in the mining industry
over the past decade. This was
a conscious choice by industry
participants to pursue volume at
any cost during an unprecedented
boom in commodity prices. Mines
were developed to get product out as
quickly as possible, not as efciently
as possible. Many companies have
been dealing with this substantial
drop-off in productivity through a
series of cost-cutting exercises or
point solutions. However, the size
of the problem is too large for point
solutions to solve on their own as
they often have the effect of simply
moving the problem further down
the supply chain. We believe that real
and sustainable productivity gains
will only come from broader business
transformation.
Why the need to boost
productivity?
To regain ground lost over t he
supercycle: To rem ain com petitive now
that supply exceeds dem and for m any
m inerals, m iners need to readdress
inef cient practices that crept in during
the last grow th cycle. Behavioral change
w ill be a large com ponent of this, given
m any m ine m anagers, engineers and
operations supervisors have never
operated in a m argin-constrained
environm ent.
To cont inue t o innovat e t o recover lost
compet it ive advant age: M any m iners
recognize that during the supercycle very
little investm ent w as m ade in research
and developm ent and now that
com m odity prices are at all-tim e low s,
there is a realization that investm ent in
innovation is key. W e are already
beginning to see signs of this. For
exam ple, A ngloGold A shantis new boring
technology w hich CEO Srinivasan
Venkatakrishnan says is a gam e changer,
or a paradigm shift. If w e do nothing, the
gold industry is in term inal decline.A lso,
m any m ining econom ies (such as
A ustralia, Chile and South A frica) have
relied on currency m ovem ents to retain
com parative advantage. Exchange rates
have generally been positively correlated
to m etals and m ineral prices; how ever the
m assive quantitative easing that central
banks have used to reboot econom ies has
upset this relationship. W ith low er prices
and stubbornly sticky exchange rates,
producer countries have begun to lose
their com parative advantage, and hence
producers in these countries need to
innovate to becom e m ore com petitive and
to reach new levels of productivity.
To count eract rising real wages: In the
developing m arkets, low -cost labor gave
m iners a com parative advantage in the
past. W ith both the strengthening of
unions, and the skills shortage of the past
decade, increases in real w ages have
signi cantly exceeded the rate of in ation
in these m arkets, and w ithout signi cant
productivity gains, m ine plans of m any
operations w ill no longer be sustainable in
these m arkets.
Whats the size of the
problem?
Productivity is often ill-de ned as m ore
output for xed input, or the sam e output
for less input. In our opinion, productivity
gain should be m easured as a form of
optim ization, i.e., the highest ratio of output
to input, w hich could in fact m ean achieving
higher productivity and hence pro tability
w ith low er input.
(2 in 2013)
The size of the problem is too large for conventional
solutions to w ork. Real productivity gains w ill only com e from
a w hole-of-business, end-to-end transform ation. A narrow
focus on point solutions or continuous im provem ent w ont
solve the problem and could even be counterproductive.
Key thought
9
. B
a
la
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in
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t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
d currency volat ility
5
. C
a
p
ita
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
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to
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a
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8
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h
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t h
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benet s
im
provem
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n
t
1
. P
roduct ivity

01
Product ivity
improvement
O ver the broad spectrum of different m ining
operations, it is dif cult to de ne the size
of the productivity problem . To overcom e
this, econom ists typically m easure
productivity across a range of factors
referred to as m ultifactor productivity
(M FP). The A ustralian Bureau of Statistics
m easures M FP as output per unit of
com bined inputs of capital and labor in
conjunction w ith other technological and
organizational factors, w hich show m ining
productivity (in A ustralia) has declined by
roughly 50% since 2001.
W hat m akes m atters w orse is that this
decline has been over a period w hen w e
have seen:
Great im provem ents in equipm ent
technical ef ciency and reliability
Investm ent in the sector by original
equipm ent m anufacturers (O EM s)
Engineering advancem ents in the sector
Labor productivity has been declining in
both developed and em erging m arkets.
Som e of this decline can be attributed to
the inadequate skills m ix brought on by the
skills shortage in the boom tim e, but also by
the real w age increases w hich have
exceeded in ation rates in m any m arkets.
Capital productivity is clearly im pacted by
the long lead tim es betw een investm ent and
production, but has also been affected by
factors such as ineffective portfolio
m anagem ent, issues w ith capital allocation
decisions, poor training and skilling of
operators, and poor project execution
causing schedule delays and cost overruns.
The burning platform a need
for broader transformation
Given the cyclical nature of the m ining
industry, econom ists w ill say that the
decline in productivity w ill correct itself. A t
a m acroeconom ic level, this m ay be correct
as m acro factors w ill assist, particularly as
com m odity prices norm alize and as new
capacity and projects com e on line w ith
greater technology. H ow ever, individual
producers in the sector cannot afford to
w ait ultim ately, those w ho cannot keep up
w ill go out of business.
A s efforts to im prove productivity have
failed to get the right results, the
productivity issue has rightly been
escalated to the CEO s agenda. The
supercycle lasted for so long it had the
im pact of altering the DN A of m ining
com panies to adapt the processes,
perform ance m easures and culture solely
tow ard grow th. The size and scale of the
problem is too large for conventional single
point solutions to w ork. To attain the
im provem ents needed for sustainable
productivity gains at pro table grow th
levels requires broad business
transform ation.
Mining labor product ivit y in Aust ralia declined by roughly 50%since 2001
Capit al product ivit y also in a dramat ic decline over t he same period
1
9
9
4
-
9
5
1
9
9
5
-
9
6
1
9
9
6
-
9
7
1
9
9
7
-
9
8
1
9
9
8
-
9
9
1
9
9
9
-
0
0
2
0
0
0
-
0
1
2
0
0
1
-
0
2
2
0
0
2
-
0
3
2
0
0
3
-
0
4
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
2
0
1
2
-
1
3
250
200
150
100
50
0
M ining A ll sectors
200
180
160
140
120
100
80
60
40
20
0
1
9
9
4
-
9
5
1
9
9
5
-
9
6
1
9
9
6
-
9
7
1
9
9
7
-
9
8
1
9
9
8
-
9
9
1
9
9
9
-
0
0
2
0
0
0
-
0
1
2
0
0
1
-
0
2
2
0
0
2
-
0
3
2
0
0
3
-
0
4
2
0
0
4
-
0
5
2
0
0
5
-
0
6
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
2
0
1
2
-
1
3
M ining A ll sectors
Source: A ustralian Bureau of Statistics
What does broad
transformation mean?
N ew w ays of thinking need to be considered
to analyze and assess the level of
im provem ents the industry needs. This
involves having one view of the w orld:
A clear strategy based on a broad set of
value drivers
A n operating m odel that is aligned w ith
the strategy
Integration and alignm ent across the
value chain through process integration
Standardization of w ork procedures
A ligned planning, budgeting and
perform ance m easurem ent
Real and sustainable productivity gains
require a holistic, top dow n approach that
aligns productivity activities to their
strategic value and contribution, and they
need to be planned and executed in a
coordinated w ay across the value chain. It is
critical that all the system s, processes,
interfaces and interlinks are w ell understood
so inform ed decisions can be m ade. There is
a need for a focus on longer-term
initiatives, w hich, w hile harder to execute,
w ill have m ore im pact on im proving overall
productivity as show n below :
The m ost successful com panies in
addressing the productivity challenge have
the follow ing traits:
A re bold and not increm ental
H ave a long-term vision and plan
Take an end-to-end view
Look for broad solutions
Elim inate silos
A lign objectives to strategy
Set consistent perform ance m easures for
productivity that create value
A ddress the behavioral and cultural
settings necessary for sustainability
Learn from history, but be open to
innovation
A re deliberate in planning and executing
their initiatives
W e believe that to really address the
productivity issue requires a w hole of
business or end-to-end focus. This w ill drive
a m ultifunctional response to problem s,
break dow n silos and ultim ately deliver
unprecedented productivity im provem ents.
Its about the system s and processes, its
taking a holistic view of the different parts
and how they t together. This isnt as easy
as it sounds. Typically, the inform ation and
data needed to bring about this
understanding is spread across the
organization and differs greatly in term s of:
Volum e how m uch data
Variety the type of data
Veracity how m uch it can be believed
Velocity how quickly it is generated
M any organizations are struggling w ith
each of these m easures, and in particular
lack the m eans to cope w ith the sheer scale
of data ow ing into the business and w ith
the diverse nature of structured and
unstructured data.
Considerations
A re you im proving or transform ing?
A re your initiatives adding to the
long-term bottom line or just m oving
the problem ?
A re you thinking about the problem
conventionally or w ith a value chain view ?
If you are considering achieving higher
productivity w ith low er input, do not
forget to consider the im pact on cash ow
and pro t. Reducing output m ay boost
certain productivity m easures but m ay
negatively im pact, e.g., RO CE.
Need for a long-t erm focus
S
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Ease of execut ion
H
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7
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6
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5
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4
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3
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2
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8
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provem
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1
. P
roduct ivity

Capital dilemmas
02
(1 in 2013)
Diverging and unique
challenges
The twin dilemmas of capital access
and capital allocation encapsulate the
diverging fortunes of the industrys
producers and juniors in 2014. Much
like the economies of many developed
nations today, the wealth gap appears
to be widening, and in turn, the nature
and severity of the prevailing risks.
Capital allocation is fundamental to
the majors throughout the cycle, but
steady progress has been made along
a journey of capital management
and optimization following a spate of
asset write-downs in 2013. However,
for many juniors and explorers,
little has changed over the last 12
months, and they remain cash-starved
and focused on survival. Many are
existing in the corporate equivalent
of suspended animation. This has
provided opportunity for the funds
forming around the sector, however,
their challenge is not necessarily the
access and availability of capital,
but the strategy around deploying
this capital.
Dilemma A: Capit al
allocat ion
The capital allocation dilem m as have fallen
from last years top spot, re ecting
progress m ade during the year in
addressing this challenge. Com panies have
begun to em bed im proved processes and
m ethodologies into strategy and risk
m anagem ent; con dence is tentatively
being restored and results are being
delivered. H ow ever, this is not to underm ine
the enduring criticality of the challenge.
Effective capital allocation should not be a
singular reaction to changed m arket
conditions, but a continuous cycle of review
and action that inform s strategy and
im pacts all areas of the business. A renew ed
focus on RO CE w ill be w ith the sector for
m any years to com e.
Capital transformation
W e see the sector now at various junctures
along a path of capital transform ation, one
that can broadly be divided into three
stages: capital m anagem ent, capital
optim ization and capital grow th.
Progression along this path is sequential
but dependent on sustained success at each
stage. Each stage increases optionality. So,
how far have w e com e?
In the w ake of w eaker prices and shrinking
m argins, the industry has refocused its
im m ediate attention on capital
m anagem ent and discipline increasing
nancial strength and exibility through
deleveraging and m argin im provem ent.
This has been achieved to a large degree
through:
Closing high-cost operations
Grow ing productivity-led volum e w ith a
focus on higher-m argin operations
Reducing cost base through cutting of
opex budgets and offshoring/outsourcing
Re nancing existing debt to push out
m aturities and reduce cost of capital
Rebasing budgets for sustaining or
m aintenance capital expenditure
A com parison of FY 2013 and FY 2012
balance sheets indicates the extent to w hich
they have been restored to relative health in
the last 12 m onths. Gearing am ong the
m ajor diversi eds has decreased, w hile
cash ow coverage appears to have
im proved for both m ajor and m id-tier
producers.
Collectively, the m ajors have show n trem endous
com m itm ent to capital discipline over the last 12 m onths,
positioning them w ell for future grow th. W hile this discipline
is expected to continue, the questions they now face are
w hat form the next phase of investm ent w ill take and
w hen shareholders w ill begin agitating for m anagem ent to
execute on it.
Key thought Dilemma A
Stage one:
Capital management
In a further sign of im proving nancial
health in the industry, the num ber of
Standard & Poors (S&P) credit rating
dow ngrades in the sector has reversed its
course, w ith tw o consecutive quarters of
decline from a 4Q 2013 peak. W hile
w idespread upgrades are unlikely, S&P has
assigned 70% of its rated m ining and m etals
universe a stable outlook im plying lim ited
likelihood of im m inent ratings dow ngrades
in the absence of m ajor price shocks or
unanticipated surges in capital spending.
H ow ever, despite this, continued price
w eakness, such as w e are seeing in iron ore
in 2014, could threaten credit m etrics and
cause investor con dence to dim inish in
tandem w ith the scope for m ajor capital
returns. N ot surprisingly, the m ost
signi cant progress m ade in balance sheet
repair has been achieved by the m ajor
diversi eds, w hich are now largely focusing
their attention on stage tw o, capital
optim ization.
(divestm ents of non-core assets, increased
returns) and in truly em bedding a best-in-
class approach to portfolio review that:
Em beds consistency of reporting,
forecasts and KPIs across business
units and delivers outputs in a w ay that
em pow ers quality decision m aking
Is undertaken regularly, to ensure that
portfolio perform ance and objectives are
aligned w ith strategy and exible to
changes in m arket conditions
A ssesses investm ent options on an
unbiased, like-for-like, holistic basis,
recognizing interdependent risks,
im pact and opportunity costs across
business units
Recognizes and m easures the value
in optionality
A chieves ef ciency in portfolio
com position
1. BofA M L 2014 Global M etals, M ining & Steel conference,
13 M ay 2014,A nglo A m erican, 2014.
portfolio of existing and future investm ents.
Such an approach is essential to earning
back the trust of shareholders, w ho have
been vocal in their criticism of capital
discipline through the m ost recent
com m odity cycle.
The m ajority of com panies have undertaken
portfolio review s, identifying opportunities
to release cash, reduce capex and raise
average returns across the portfolio.
Sim pli cation elim inating com plexity
has becom e todays m antra: BH P Billiton
points to its four pillars (plus one), w hile
A nglo A m erican has highlighted the scale of
the challenge ahead, w ith 31 of its 69
assets delivering only 2% of EBIT.
1
M ore
than U S$6b of divestm ents w ere com pleted
by the top- ve m iners in 2013 (in a dif cult
transactions environm ent), w ith m ore to
com e in 2014 and beyond. H ow ever, w ith
balance sheets being stronger on the back
of focused capital m anagem ent, the
burning platform for such divestm ents has
gone aw ay and m anagem ent can afford to
focus on achieving the optim al exit for
assets deem ed to be outside of the core
portfolio. Despite the progress, w e believe
there is m uch left to do here, both in term s
of achieving im m ediate desired outcom es
Stage two:
Capital optimization
Stage three:
Capital growth
Few com panies are publicly discussing
m ajor grow th am bitions in 2014. H ow ever,
responsible m anagem ent m ust protect and
preserve the incredible option value
contained in the undeveloped projects of
the sector. Grow th is being pursued of
course, but in a disciplined w ay, w hich does
not threaten credit rating quality or
em erging free cash ow yields. This
includes low -risk acquisitions, increm ental
capex design, debottlenecking investm ents,
volum e grow th through productivity gains
and a tightening of investm ent appraisal to
m eet only the strictest investm ent criteria.
Indeed, com panies pursuing expansionary
grow th at full pace, w ith the full backing of
nanciers and shareholders, are relatively
few and far betw een. They are typically
privately funded, entrepreneurial pioneers
Capital optim ization rem ains the core focus
of the m ajor diversi eds in 2014, via a
disciplined, returns-focused approach to the
Source: EY, S&P Capital IQ
Major diversieds Midt iers
2012 2013 2012 2013
EBITDA U S$b 66.3 75.7 14% 12.8 11.7 -9%
N et debt U S$b 80.8 83.8 4% 34.3 36.2 6%
Cash from operations U S$b 49.5 61.2 24% 10.0 10.9 9%
Capex U S$b 61.4 52.1 -15% 19.4 12.2 -37
Dividents U S$b 11.5 11.4 -2% 1.2 0.9 -25%
N et debt/EBITDA 1.22 1.11 2.7 3.1
Cash from operations/capex 0.81 1.17 0.5 0.9
Cash from operations/dividends 4.29 5.39 8.2 12.0
of prom ising developm ent-stage assets,
pushing ahead to production and attracting
the interest of strategic and yield-seeking
investors w ith higher risk thresholds and
longer-term investm ent horizons.
Consensus forecasts anticipate that
returns on capital em ployed by the large
producers w ill not signi cantly recover
until after 2016, w hile dividend yields w ill
recover m ore rapidly. But, for how long w ill
short-term yield continue to be delivered at
the expense of longer-term capital
appreciation? The m ining and m etals
sector w ill alw ays be cyclical, and
responsible com panies w ill seek to invest in
grow th to m eet the next cyclical upsw ing.
Earning back investor con dence w ill be
crucial to m oving ahead in the capital
journey. Com panies are publicly jostling to
present a unique value proposition in an
increasingly com petitive m arket from
Glencores diversi cation and integration, to
BH P Billitons productivity gains and
portfolio sim pli cation, to Rio Tintos M ine
of the Future
TM
innovation. The com m on
thread is value-focused capital discipline.
Looking ahead: Preparing for
growth and identifying the
opportunity cost
Regardless of w here w e are in the cycle,
capital allocation is critical to the success of
the m ining and m etals industry, and
especially those w ith m ultiple assets in
varying stages of developm ent.
Recent criticism of capital discipline w ill
gradually be forgotten as higher returns are
generated, prices rise to encourage new
supply and balance sheets go from strength
to strength. W hile m anagem ent team s
already have an eye on the next stage of
grow th, w e expect external stakeholders to
be pushing this agenda perhaps as early
as next year, but certainly as w e m ove into
2016 and beyond.
The success, or otherw ise, of private capital
being deployed across the sector w ill
in uence how quickly the w inds of change
blow. These buyers arguably have a
com petitive head start on those constrained
by the short-term ism of public capital
m arkets, able to bypass stages one and tw o
in this capital journey.
2
A handful of bold
acquisitions w ill certainly bring greater
attention to the grow th agenda, and a
pro table exit by one of these funds w ill
surely highlight that value can be found
through the right acquisition. H ow ever, a
pro table exit is m ore likely to be achieved
if the strategy of the fund is adapted to
investing in the m ining and m etals sector as
distinct from the m ore typical private equity
(PE) entry and exit. This adaptation w ill
require an understanding of how to build a
business in the sector, rather than sim ply
opportunistically acquiring single assets and
getting the tim ing right.
The m ajor challenge for the funds that are
form ing around the sector is not necessarily
the access and availability of capital, but the
strategy around deploying this capital.
M ost im portantly, the capital discipline
lessons learned over the last year or tw o
need to stay front of m ind and continue to
be em bedded in robust investm ent
appraisal processes, surviving changes of
CEO or senior m anagem ent, regardless of
w here the industry sits in the cycle.
2. For m ore of our view s on this topic, read our Spotlight
the w indow of opportunityin Mergers, acquisitions and capital
raising in mining and metals, 2014 outlook, 2013 in review at
w w w.ey.com /m iningandm etals.
0
20
40
60
80
100
120
140
0
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
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2
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1
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1
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2
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3
2
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4
f
2
0
1
5
f
2
0
1
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f
200
400
600
800
1,000
1,200
1,400
1,600
1,800
D
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d
/
F
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F

%
D
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n
d

U
S
$
m
Dividends Dividends/lree cash low
Dividends summary hist oric and forecast
0
5
10
15
20
25
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
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1
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R
O
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E
ROCE
Hist oric and forecast ret urn on capit al employed
Source: S&P Capital IQ ; based on a peer group of top-14 geographically diversi ed m ining com panies
Dilemma B: Access
t o capit al
While the major diversieds continue
to enjoy the benet of strong demand
in the corporate bond markets and
a marginal re-rating in the equity
markets, the juniors are still subject
to widespread risk aversion which is
impeding their ability to raise equity.
Our two junior Mining Eye indices for
Londons AIM and Toronto remain
down 76%and 60%, respectively, on
their 2011 highs.
3
Financial health still hangs in the balance
for the single project/single com m odity
developers and sm all producers w ho have
signi cant price risk exposure (for exam ple,
iron ore developers). These groups typically
sit higher up the cost curve, and the
uncertain near-term price outlook and
undim inishing supply is providing little
com fort to either investors or ratings
agencies. M itigating future price and credit
risk requires an approach that im proves
their ability to respond to rapidly changing
m arket conditions that spread nancing
risk. Such an approach should include:
U nderstanding and m itigating exposure
under a range of scenarios
Reducing capex through increm ental
project design
Exploring all nancing options (including
innovative structures such as stream ing
and Standby Equity Distribution
A greem ents (SEDA s))
Considering strategic partnerships and
joint ventures
It is a different picture again for the
exploration sector, w here lim ited cash
balances are rapidly burned up.
Miners lag the broader
recovery
Global IPO m arkets got off to a strong start
in Q 1 2014, w ith the highest volum e and
proceeds raised since 2011. But this
recovery has yet to extend to the m ining
and m etals sector, w ith only three IPO s over
the equivalent period, raising just
U S$715m . M oreover, the uncertain m etals
price outlook rem ains a drag on the speed
of the sectors turnaround, particularly at
the m ore speculative end of the m arket.
Perhaps, even m ore concerning is the
continuing decline in secondary equity
funding. Volum e and proceeds raised by
juniors in 1Q 2014 declined 14% and 10%,
respectively, from an already subdued 4Q
2013. A verage proceeds raised w ere just
U S$2.4m , w ith over half of the ca.500
issues raising less than U S$1m . The
inevitable response by explorers is to scale
back exploration activity: The M etals
Econom ic Group reports that the num ber of
prospects reporting drilling results w as at
just 56% of last years equivalent, on top of
an even greater decline (62%) on 1Q 2012.
4

Com bined w ith the w idespread exits from
exploration by the m ajors, the long-term
future supply pipeline looks increasingly
under threat.
Looking ahead: Back to basics
Despite the im proving sentim ent tow ard
producers w ith the prospect of increasing
free cash ow yields in sight, w e see little
likelihood of a broad-based recovery in
junior m ining share prices or capital
availability as 2014 closes out. Price
dow nside should be lim ited, w ith m any
com m odities trading close to or below cost
levels, but w ithout the support of a
sustained price im provem ent, investors w ill
see little incentive to take on additional risk.
Consequently, cost and capital m anagem ent
rem ain essential.
Sm aller com panies also have an
opportunity to exploit their innate exibility
by seeking innovative m eans of gaining
com petitive advantage and curbing high
capital costs for exam ple, through
partnerships w ith providers of em erging
technologies that address the unique
technical challenges faced w hen operating
in geographically and logistically rem ote
locations.
Consideration: Tactical
partners and strategic buyers
M &A w ill continue to play an im portant role
in nancing the junior sector, albeit on a
selective basis. But w ith m any of the m ajors
turning their attention from exploration to
production ef ciencies, traditional partners
m ay be harder to com e by, and non-
traditionalstate-backed partners
potentially m ore com plex to w ork w ith.
Juniors w ill be reluctant to sell w hile share
prices rem ain depressed, but acquisitions
(m inority or full takeover) or consolidation
to pool resources m ay be the only realistic
grow th or exit option for m any.
For m any early-stage com panies, the only
available scenario is to halt exploration, lay
off staff (w ho m ay never return to the
sector), close prem ises and effectively go
into care and m aintenance m ode to
preserve the project option value. Just
enough dilutive capital is being raised to
provide life support (as little as U S$50,000
is not uncom m on). W hat they are hoping
for is that prices w ill recover, encouraging
risk capital back to the m arket. But this vital
injection of capital is unlikely to occur
during the rem ainder of 2014.
3. A s of 20 June 2014.
4. State of the m arket: m ining and nance report,
SNL Financial, Edition 2, 2014.
A ccess to capital rem ains a critical challenge for junior
m iners. Given the lim ited likelihood of near-term sustained
price recovery, the return of risk capital to the sector
rem ains out of sight, w ith severe im plications for cash-
starved explorers.
Key thought Dilemma B
9
. B
a
la
n
c
in
g
t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
5
. C
a
p
it a
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
c
e
s
s
to
w
a
ter and energy
8
. S
h
a
rin
g
t h
e benet s
im
provem
e
n
t
1
. P
roduct ivity

03
(4 in 2013)
Social license to
operate
1. Turkish tensions are as m ine rescue hopes ebb,
The Wall Street J ournal, 15 M ay 2014.
2. M aules Creek protest at Kooragang Island,Newcastle Herald,
11 M ay 2014.
3. Cost of Com pany-Com m unity Con ict n the Extractives,
H arvard Kennedy School, 2014.
4. Corporate Social Responsibility The Social Licence
to O perate a M ine,International Resource J ournal,
N ovem ber 2012.
5. W hat gives you a social license? A n exploration of the social
licence to operate in the A ustralian m ining industry,Resources,
January 2014.
There is a signi cant opportunity that exists for
organizations to m ake a positive contribution to the broader
society by integrating the activities required to obtain/
m aintain a social license into the strategic plan of a m ore
sustainable business.
Key thought
Walking t he t alk wit h
your st akeholders
An organization cannot rest on its
laurels, nor assume that acceptance
provided by the community and
its stakeholders will always be
maintained. Even those that have
a relatively high SLTO are not
guaranteed that it will cross over
to new operations or into other
regions. Such is the recent experience
of Barrick Gold at Pascua Lama
and Newmonts Conga project, for
example, where community protests
have caused indenite delays to
multibillion dollar projects.
The risk of losing a license to operate m ust
be constantly assessed, ensuring the right
controls are in place. A failure of the
controls can quickly put an organization
into crisis, w ith signi cant nancial and
reputational im pacts to the business. M ore
im portantly, it can also take a long tim e to
restore the credibility required to regain
acceptance by stakeholders, resulting in
further delays and im pacts.
A s part of providing acceptance, local
com m unities and broader stakeholders
expect that an operator w ill act responsibly,
deliver on their com m itm ents and provide
an equitable share of the bene ts that the
operation generates. O perators need to
acknow ledge concerns such as equitable
land access, environm ental dam age and the
ongoing im pact of large m ultinational
com panies on local econom ies. Sim ilarly,
they m ust continually address em ployee
concerns about health and safety, w ages
and bene t, job security, im ported labor
and m echanization.
Protests, negative m edia coverage,
violence, sabotage and other direct attacks
on the business and its em ployees are all
signs that a com pany is not an accepted
part of the com m unity. W e have seen in the
afterm ath of the tragic Turkish m ining
accident, w here 282 lives w ere lost, how
questions over m ine safety and consequent
com m unity outrage quickly dam aged the
reputation of host governm ents, m ine
operators and m ore broadly the sector in
Turkey.
1
Recently too, the com m unity and
environm ental activists blocked trains
accessing the M aules Creek coal project in
N ew South W ales, A ustralia, attem pting to
stop developm ent because of alleged
threats to the local bushland and allegations
of corruption in the approval process.
2

N ot having a SLTO is a very real and
potentially very expensive risk to a
business. Research show s that com m unity
con icts over environm ental and social
concerns can incur costs up to U S$20m a
w eek in operating expense for large-scale
operating m ines.
3
The challenge for
operators is balancing im m ediate
stakeholder dem ands and the inherent
value in being a socially and
environm entally reliable operator.
Complication: Impacts of SLTO
being adopted outside the
extractive industry
Social license to operate or SLTO is a term
coined by Jim Cooney w ith speci c
reference to the m ining industry.
4
A n
em erging issue for m ining and m etals
com panies trying to obtain or m aintain an
SLTO is the evolution of the de nition and
the stakeholder base, as industries outside
of extractives adopt the term . Com panies
are now obtaining and m aintaining their
social licensein an increasingly broad
variety of w ays, creating differing levels of
understanding of w hat stakeholders should
expect to receive in order to gain their
acceptance.
5
A s the concept is now rm ly
established in the general public and
business psyche, a grow ing num ber of
stakeholders beyond local com m unities and
their unique interests are dem anding
attention.
In uential groups not considered to be
traditionally part of the local com m unity are
m ounting concerns over unsustainable
m ining practices, dw indling resources
(particularly w ater) and clim ate change.
This has resulted in vocal anti-m ining
sentim ent, particularly tow ard large
m ultinational m iners. Ethical investing is on
the rise, w ith socially conscious buyers
considering a com panys social and
environm ental im pact w hile taking an
investm ent decision. Disclosure of upstream
business relationships (particularly relating
to con ict m inerals) is increasingly being
dem anded as buyers seek to distance
them selves from any associated hum an
rights abuses. Likew ise, custom ers are
increasingly dem anding to know that
products are ethically and sustainably
sourced and refusing products w ithout clear
provenance.
The risks in not obtaining acceptance by
anyone of these stakeholder groups include
lost potential investm ent stream s, supply
chain and custom er base challenges, and of
course, reputational dam age. This places an
even greater obligation on com pany leaders
to be proactive and concentrate on the big
picture w hile developing their ow n policies
and practices and m anaging the
expectations of this w ider set of interests.
Complication: Developing
communication strategies
for effective stakeholder
engagement
The m ethods for engaging w ith
stakeholders continue to expand at a rapid
pace, thanks to technology. Com m unities in
developed regions rely m ore than ever on
electronic and social m edia content to form
their opinions. Social investors and supply
chain stakeholders are highly sensitive to
press scrutiny and rely heavily on the
strength of a com panys non- nancial
corporate social responsibility reporting to
determ ine buy-ins. A dditionally, these
stakeholders have access to a grow ing bank
of global know ledge on econom ic and
environm ental im pacts w ith the m eans to
test com pany-produced inform ation.
A lthough this has increased the num ber of
forum s that need to be m onitored and
responded to, proactive com panies now
have the opportunity to consider these new
channels as ef cient and m eaningful w ays
of engaging w ith the com m unity.
There is also renew ed attention on the
challenges faced in trying to obtain free,
prior and inform ed consent (FPIC) w ithin
traditional com m unities. There is greater
aw areness of culturally speci c m ethods for
w hat constitutes respectful engagem ent,
class and gender structures that m ay not
enable the breadth of consultation assum ed
in other regions. This creates a very
com plicated environm ent to achieve a social
license, and it increasingly requires active
engagem ent w ith hum an rights-based
non-governm ent organizations and other
advocacy organizations to bridge the
cultural gap. Early, ongoing and open dialog
(i.e., on-site, in local language) w ith
com m unity groups is increasingly im portant
to establish and m aintain credibility, and
avoid accusations of inadequate
consultation w ith local stakeholders.
Complication: Maintaining good
and equal governance across
different environments
A s m ining and m etals com panies
increasingly look into frontier and em erging
econom ies for investm ent opportunities,
there is a risk of not obtaining or losing
their SLTO by their perceived association
w ith poor governance in politically and
socially unstable econom ies. W hile
developed nations enjoy varying degrees of
legislative and com pliance requirem ents to
offer basic assurances that com m unity
im pacts are being considered, in m any
regions, com m unities are not w ell
represented by governm ents, particularly
those that have not established
sophisticated hum an rights, environm ental
and econom ic fram ew orks. M iners can
quickly get em broiled in accusations of
corruption, bribery and hum an rights
abuses w hen operating in countries w ith
less stringent controls.
Increasingly too, illegal or unlicensed m ining
in som e countries is im pacting the social
license of legitim ate businesses. There are
regular reports from Colom bia of m ajor
accidents and loss of life in sm all-scale,
artisanal m ines. In M exico, there are also
reports that drug cartels and organized
crim es are affecting legal m ining activities,
through theft, threats, extortion and the
intim idation of em ployee and local
com m unities. This m akes it even harder for
legal com panies to m aintain a social license
because locals often dont m ake a
distinction betw een the activities of
legitim ate and illegitim ate m ining.
6

This places pressure on global industry
leaders to be self-driven in m anaging both
positive and negative com m unity im pacts in
gaining com m unity acceptance. Lack of
com parable local legislation does not
negate the need to be vigilant, especially
for large foreign com panies w hose
reputation abroad is also a key factor in
obtaining or m aintaining their social license.
Outlook
A s the SLTO concept continues to evolve,
the dialog betw een com panies and the
w idening range of stakeholders w ill need to
becom e m ore robust. Expectations on
m ining and m etal com panies w ill continue
to increase, and their responses w ill need to
becom e m ore sophisticated, including
im proved m onitoring of im pacts and
dem onstration of shared value.
W e expect to see increased activity from
governm ents trying to bridge the gap
betw een com m unity expectations and
com pany practices, potentially m erging
features of the inform al license w ith m ore
form al ones. Lease agreem ents, for
exam ple, w ill likely include expectations for
local services and infrastructure,
com m itm ents to indigenous em ploym ent,
utilization of local suppliers, resource
self-suf ciency and labor regionalization.
W e are already seeing evidence of this in
requirem ents for w ater access and w aste
m anagem ent. O f course, there is also the
risk that once these new needs are m et,
expectations m ay be raised even further.
Consideration: Wider economic
benet
W hile the nancial value of a SLTO has been
m ade abundantly clear, it is also im portant
to consider the obvious w ider econom ic
bene t. M iners have the opportunity to help
create opportunities for social and
econom ic grow th through their investm ent
into infrastructure, pow er and utilities,
support for local businesses and
contributions to schools, hospitals and
related social services. This is a very
pow erful w in-w in opportunity to help
sustain the com m unity long after the m ine
is closed, in addition to being a fair
recom pense for the value a com pany
derives from being in the com m unity.
Consideration: Proactive and
leadership
The m ore enthusiastic com panies are in
pursuing a positive social license going
forw ard, the m ore credibility they w ill obtain
w ith stakeholders. Proactive contribution to
developm ent in global guiding principles w ill
also stand resource com panies in the best
stead to m ake increm ental changes to their
ow n policies and practice as w ell as
strengthen their reputation am ong
stakeholders. Sim ilarly, com panies that
actively navigate through this issue on an
ongoing basis w ill be seen as dynam ic
industry leaders. They w ill attract a higher
caliber of socially innovative recruits and
sophisticated investors, not to m ention
becom e an operator of choice w ithin a
com m unity.
W hile there are no set guidelines on w hat
steps a com pany need to take in order to
obtain or m aintain its SLTO , it is
increasingly clear that very early
engagem ent in em ploying a collaborative,
trust-based m odel that includes effective
engagem ent w ith stakeholders w ill achieve
a greater level of credibility, a stronger
sense of legitim acy and acceptance, and a
healthier legacy than anything a form al
license can offer. This early engagem ent
can also include lim ited support activities
directed at local needs, dem onstrating
com m itm ent to the local com m unity.
6. Cartel culture M exicos w ar against illegal m ining,
Mining Technology, 27 M ay 2014.
Cost of communit y conict
M issed sales
Dam age to reputation as a reliable
supplier
A bsorption of senior
m anagem ents tim e
Lost productivity
Dam ages
Increased security costs
Costs of settlem ent
Dif culties in recruiting talent
9
. B
a
la
n
c
in
g
t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
5
. C
a
p
it a
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
c
e
s
s
to
w
a
t er and energy
8
. S
h
a
rin
g
t h
e
benet s
im
provem
e
n
t
1
. P
roduct ivity

04
(3 in 2013)
Resource
nat ionalism
The new w orld of resource nationalism is a balancing act
betw een prom oting investm ent and m axim izing in-country
bene ts.
Key thought
Advancing and
ret reat ing
Resource nationalism over the past
year has brought with it a mixed bag
of good and bad news for mining and
metals companies. Despite declining
commodity prices, we are still seeing
waves of resource nationalism by
countries keen to gain a greater return
from the mining and metals sector.
At the same time, with shrinking
investment, some governments
have begun to promote initiatives to
attract mining investment into their
jurisdictions. There is also a growing
trend of increased transparency in
the sector.
Retreating resource
nationalism
Current low m argins and high-supply
environm ents m ean m any projects are
being cut and/or operations have been put
on care and m aintenance. W ith few er
expansionary projects advancing,
com petition to attract those that w ill invest
is intensifying. In the rst half of 2014,
m any countries have changed their m ining
tax policies to attract m ining investm ent.
These changes to resource nationalism
include privatizing state-ow ned assets
(Kazakhstan), am ending m ining codes to be
m ore investor friendly (M ongolia and
Kyrgyzstan) and reducing export taxes
(Vietnam ).
Geology w ill alw ays be forem ost in the
decision of w here to invest, but the political
environm ent in a country of investm ent is
also im portant. A ny governm ent prom oting
tax policy stability w ill be favored as m iners
seek low -risk investm ents w ith m inim al
political uncertainty.
Dilemma: Boosting the
economy or scaring away
investment?
Resource nationalism is a balancing act for
governm ents betw een attracting highly
m obile investm ent into the sector and
ensuring their countries get the m axim um
bene t in return. Countries m ay have a
com parative advantage in the extent of
their resources, but w hat else they offer w ill
also m ake them com petitive in attracting
investm ent. M ining and m etals com panies
w ill be assessing the cost of developm ent
and production through their w hole supply
chain. It m ay be that a country w ith sim ilar
resources can provide better infrastructure,
access to energy or skilled labor, and
therefore have the com petitive advantage.
The m ost dram atic exam ple of resource
nationalism activity in 201314 has been
the introduction of m andated bene ciation
and state ow nership. W ith depleted
treasuries, the use-it-or-lose-it policy has
reem erged, w ith governm ents threatening
to revoke licenses of loss-m aking projects
put into care and m aintennace.
Mandated beneciation
Governm ents are seeking to extract greater
value from their resources by m andating
that m inerals are processed in-country prior
to export. In theory, this w ill capture m ore
of the value chain as nished products w ill
achieve higher prices. In order to ensure
in-country bene ciation, governm ents are
im posing new steep export levies or
com plete export bans on unre ned ores.
Indonesia, for exam ple, has proposed a
new export levy of 25% on m ining exports in
1H 2014, increasing every year thereafter.
The Indonesian Governm ent believes that
its proposal w ill help to develop its m ining
industry, create jobs, and m ake it a
producer of higher-value nished goods
from an exporter of raw m aterials. Sim ilar
m easures are also being considered in other
countries, including South A frica, Gabon
(w hich is seeking 100% of m inerals are
processed locally by 2025
1
) and Zim babw e
(w here an export ban on unprocessed
platinum and chrom e w ill take effect w ithin
tw o years).
It is questionable w hether new jobs are
indeed created, given technological
advancem ents in dow nstream processing.
In the U S, for exam ple, there are 395
dow nstream processing m etals com panies
em ploying 19,000 people. O f this, 44% of
the sm elters em ploy less than 20 people,
w ith m ost having an average of 50
em ployees. This is because the nature of
1. SEM is organizing panels discussion during the N YFA ,
Societe Equatoriale des Mines Media Release, 28 M ay 2014.
Mining is st ill a signicant part of value chain
Source: Severstal presentation, Steel Success Strategies, June 2014.
60%
50%
40%
30%
20%
10%
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
f
2
0
1
5
f
2
0
1
6
f
2
0
1
7
f
2
0
1
8
f
2
0
1
9
f
Share of raw m aterials (IO + H CC) in H RC price OLhers cosLs + prolL
The share of raw mat erials in t he global HRC price
the function is highly technical and
m echanized, and requires few er em ployees
w ith higher skill levels.
2
M ining and m etals com panies have to w eigh
up the risk versus rew ard w hen investing in
countries w here dow nstream processing of
m inerals becom es com pulsory. The capital
required in a project w ill increase, and it
also concentrates investm ent risk in a
country w hich by virtue of this policy could
w ell becom e a poorer com petitive
environm ent. The return on investm ent
decreases as it necessitates greater
dow nstream investm ent, w here there are
potentially low er rates of return and greater
risks of losses. A necdotal evidence from a
com pany m ining in Indonesia indicates that
w hile they are happy to com m it U S$500m
to Indonesia for a m ine, they could not
justify a U S$1.5b investm ent for a m ine and
sm elter. The returns w ould not justify that
m uch exposure to the country.
In addition to the high cost of sm elters,
com panies also have to consider the
follow ing potential im pacts on their
risk pro le:
Investors rate m andated bene ciation as
high risk and w ill discount preparedness
to invest accordingly
The need for both low -cost pow er and
infrastructure for bene ciation plants
both of w hich are often in short supply in
m any countries
The need for skilled labor for value-added
processing
Loss of exibility in global supply chain
Concentration of investm ent risk
Relatively higher taxes on value add
Threats to existing business m odels
w here m iners are forced to m ove
dow nstream
Increased processing costs lead to
increased cutoff grades and reduced life
of m ine
The concept of m andated bene ciation is
very popular politically. It is of little surprise
that a num ber of countries w ith active
proposals also have current year elections.
There is a m isconception that m assive value
exists dow nstream . For exam ple, N ew m ont
claim ed in their dispute w ith Indonesia that
95% of the entire value is captured in
copper concentrate.
3
A dditionally, m ost
m etals transform ers are m oving upstream
because that is w here the value is. The
chart show s the raw m aterials value having
the largest share of steel pricing.
The long-term fallout of Indonesias action
is therefore unclear, w hether signi cant
investm ent does occur in dow nstream
investm ent or m ining m oves elsew here.
Freeport-M cM oRan and N ew m ont M ining
are both negotiating w ith the Indonesian
Governm ent to be able to resum e exports.
In June 2014, N ew m ont declared a force
m ajeure on deliveries from its Batu H ijau
copper m ine in Indonesia, w ith 80% of
w orkers put on leave w ith reduced salaries.
The Energy and M ineral Resources
M inister,Jero W acik, has announced that
N ew m ont can resum e shipping its ore
concentrates once it has com pleted a
w ritten declaration and put dow n a
U S$25m deposit to build a sm elter.
4

State ownership
M ineral taxation around the w orld has
increased in som e countries to m ore than
45%, and therefore it is not m uch further
until the m ajority of rents accrue to the
state and hence m ajority governm ent
ow nership. Even in the developed w orld,
pressures on greater state participation
(if not control) have produced plans such
as the abandoned Resources Super Pro ts
Tax in A ustralia, w hich essentially provided
for 40% Governm ent participation in
every m ine.
The desire to achieve security of dom estic
supply has been a m ajor focus of the
3. PTN N T supports governm ent goals on in-country processing:
PTN N T does not export unprocessed ore,PT N ew m ont N usa
Tengarra, 10 Decem ber 2013.
4. Energy M inistry seeks com m itm ent, sm elter deposit before
N ew m ont m ay resum e ore exports,Jakarta Globe,
17 June 2014.
2. SIC 3341: SECO N DA RY SM ELTIN G A N D REFIN IN G O F
N O N FERRO U S M ETA LS,References for Business: Encyclopedia
of Business, 2 Ed, http://w w w.referenceforbusiness.com /
industries/Prim ary-M etals/Secondary-Sm elting-Re ning-
N onferrous-M etals.htm l, accessed 7 July 2014.
governm ents of m any rapidly developing
econom ies, including China, India and
Indonesia, w here they have sought to
achieve this via state ow nership of dom estic
resources and by acquisition of foreign
resources (via state-ow ned m ining and
m etals com panies). Even developed
econom ies concerned w ith security of
supply, such as Japan and Korea, have used
signi cant state participation in the
acquisition of foreign production. The role
of rare earths as scarce technology m etals
m eans w e w ill continue to see state
ow nership in these assets, but it is also
likely that w e w ill see increased governm ent
ow nership of strategic m etals such as
lithium and uranium .
Greater transparency in the
sector driven by globalization
Transfer pricing and tax-ef cient supply
chains rem ain an area of opportunity for
the m ining and m etals sector. The best-in-
class com panies can m ove from being run
as m ultinationals to truly global, integrated
organizations w ith an optim ized taxation
pro le properly aligned w ith the business
operations. Increasingly, there has been
w idespread sophistication of locating assets
in low -tax hubs, e.g., m arketing and trading
operations to Singapore. This has led to the
perception that countries lose substantial
tax revenue because of structures that are
eroding the taxable base or shifting pro ts
to locations w here they are subject to a
m ore favorable tax treatm ent. This process,
called base erosion and pro t shifting
(BEPS), has com e under increased scrutiny
in recent years. W ith support from the G8
and G20 governm ents, the O rganisation for
Econom ic Co-operation and Developm ent
(O ECD) recently published a report on
BEPS, presenting an integrated and holistic
approach to addressing perceived risks to
tax revenues, tax sovereignty and tax
fairness for m any countries. M ajor
developing, non-O ECD countries, including
China and India, are also actively
participating in the BEPS project. The
O ECDs efforts around BEPS re ect the new
reality that even the appearance of failing
to pay a fair am ount of tax poses
reputational risk to m ultinational
enterprises across all industries and
increases the threat of resource nationalism
activity. A s m ost in the sector know
exam ples such as Singaporean trading
hubs exaggerate the advantages over
m any other com m ercial reasons of
operating there.
Country-by-country reporting is a
cornerstone of the O ECDs BEPS action plan
and it represents an im portant global shift
tow ard increased transparency for
businesses operating in the m ining and
m etals sector. The DoddFrank W all Street
Reform and Consum er Protection A ct
enacted by the U S Governm ent, the EU
A m endm ents to Transparency and
A ccounting Directives, the Extractive
Industries Transparency Initiative, and the
O ECDs recom m endations regarding BEPS
have signi cantly raised the bar for tax
disclosure in the sector.
Outlook
Both the retreat of resource nationalism
and the creation of a positive investm ent
environm ent are vital for countries that
w ish to rem ain attractive for continuing
and future investm ent. W e are likely to
see continued retreating resource
nationalism , likely in the form of retraction
or reduction of export taxes, increased
privatization of state-ow ned assets and
reduced red tape for licenses (exploration,
environm ental, etc.).
A s w e have already seen, m andated
bene ciation (and the associated export
bans) can have a signi cant im pact on the
sector. Indonesias actions, for exam ple,
have altered the nickel m arket, w ith prices
having already risen by about 40% since
January 2014, w hen the export ban w as
introduced. Clearly, if a sim ilar policy is
adopted in other countries, w e w ill see an
unnatural in ation of som e com m odity
prices, to the long-term detrim ent of
the sector.
The im pact of BEPS on the m ining and
m etals com panies is less clear. M any
countries seem to be in favor of a BEPS
action plan, as long as the actions do not
harm global trade and investm ent through
convergence of high tax rates or policies
that distort com petition. H ow ever, som e
countries m ay use BEPS to prove that
m ultinationals cannot be trusted the
inform ation provided could be m isused
under the banner of political populism , and
the provision of inform ation could lead to
double taxation w ith governm ents laying
con icting claim s. Com panies should
therefore evaluate the pros and cons of
additional voluntary disclosure, and ensure
that there is m ore proactive engagem ent
w ith scal authorities on their tax position.
Considerations
Becom e involved w ith trade and
industry groups to in uence future
taxation schem es.
Seek value-recovering trade-offs, such
as im provem ents in tim e for project
approvals.
Put forw ard recom m endations to
dem onstrate the im pact of changes to
both taxes and policies affecting m ining
and m etal com panies.
Think proactively and really engage the
governm ent on local and country w ide to
dem onstrate the bene ts of m ining to
the com m unity.
W ith regard to BEPS, com panies should
use a fram ew ork that identi es and
assesses areas in the organization that
have lim ited transparency, consistency
and substance. U ndertaking a holistic
review, w ith full value chain transparency
and w ith focus on the BEPS actions, w ill
identify key risks in relation to BEPS,
enabling a com pany to prioritize the
im pact of these risks and de ne risk
m itigating actions.
9
. B
a
la
n
c
in
g
t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
5
. C
a
p
ita
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
c
e
s
s
to
w
a
t er and energy
8
. S
h
a
rin
g
t h
e
benet s
im
provem
e
n
t
1
. P
roduct ivity

Capital project s:
delivering value in
t he next wave
(7 in 2013)
05
Learning from past
project failures
Calls for greater capital discipline and
greater return on capital deployed
(ROCD) in the last two years ushered
in an era of caution and restraint
in capex by mining and metals
companies. Numerous high-prole
projects have been scrapped, shelved
or sent back to the drawing board
for re-planning. In fact, aggregate
capex cuts since J anuary 2012 have
exceeded US$27b.
1
A lthough total investm ent in the m ining and
m etals sector m ay have peaked, it m ust still
deliver a large num ber of projects w orth a
record U S$791b of investm ent, as of
Decem ber 2013.
2
Even as m ajor m ining
and m etals com panies have avoided new
projects, delivering value on the com m itted
projects rem ains critical for business
survival and success. H ence, tim ely delivery
of these projects w ithin budget continues to
rem ain top of the agenda for m iners. W hile
the public capital m arkets still do not have
an appetite for investm ent in new supply,
m ining and m etals com panies are beginning
to quietly prepare for that inevitability as
reserves need replacing and the cycle
changes. H ow ever, those responsible
for governance (often the board of
directors) are dem anding a m uch m ore
interventionist role this tim e to avoid the
failures of the past.
Given the size and scale, large capital
projects have long payback periods and
com prise a substantial percentage of a
com panys spend. Therefore, their success
can provide a com petitive edge as w ell as
enhance an organizations enterprise value.
Governm ents and local com m unities have a
keen interest in such projects as they have
the potential to drive a regions econom ic
developm ent. Consequently, high levels of
transparency and assurance w ill be required
to ensure that these projects can be
delivered on tim e and on budget.
Shareholders, capital providers and other
stakeholders w ill all dem and it.
Dilemma: The majority of
projects are facing delays and/
or overruns
EY has conducted a study to gain a better
understanding of the issues associated w ith
the delivery of large capital projects in the
m ining and m etals industry. A s part of the
study, EY identi ed 104 projects that w ere
in the pipeline as at January 2014 w ith a
proposed capital investm ent of m ore than
U S$1b in the follow ing com m odities:
copper, iron ore, gold, coal, nickel and
others (consisting of diam onds,
m olybdenum , platinum , uranium , vanadium
and zinc). These 104 projects include those
that have passed the nal investm ent
decision (FID) and are in the construction
phase but still have to go live,as w ell as
others that are being proposed but have yet
to reach FID. These projects involve a
cum ulative investm ent of approxim ately
U S$334.5b and are spread across the
com m odity groups and regions.
Key thought
There is too m uch at stake w ith large projects, as failure
to keep them on tim e and on budget can cost you your
reputation and your social license to operate.
1. Riding The Rising Tide of Global Grow th,Deutsche Bank
Research, 19 February 2014, via Thom son O ne.
2. E&M Js A nnual Survey of Global M etal-m ining Investm ent,
Engineering and Mining J ournal, 6 January 2014, http://
w w w.e-m j.com /features/3674-e-m j-s-annual-survey-of-global-
m etal-m ining-investm ent.htm l#.U 6A lm Pm Sx1Y, accessed
5 A pril 2014.
A s part of the EY study, w e evaluated the
perform ance of large capital projects based
on tw o criteria cost and tim e to gauge
the proportion of projects that have failed
to deliver on budget and tim e. Tw o key
ndings em erged:
1. The m ajority of the projects w ere
delayed and/or overspent w hen
m easured against estim ates m ade during
the initial stages of the project life cycle.
2. The cost and tim e overruns in these
projects w ere not a function of w hether
the project has reached FID or not.
Projects in all the stages w ere vulnerable
to exceeding the initial estim ates.
Unsustainable time and cost
overruns
The increases in com m odity prices in the
past few decades have m asked m any of the
consequences of these overruns, but this
trend seem s unlikely to continue. Therefore,
if the sector is to secure the investm ent and
shareholder con dence it needs to supply
future dem and, it m ust deliver im proved
perform ance in this area.
Geographic dist ribut ion of project s cost ing more t han US$1b
Source: EY research and analysis
Nort h America
Europe
Africa Oceania
Lat in America
Asia
US$47b
US$22b
US$33b
US$130b
US$21b
US$130b
Copper Iron ore Gold Coal N ickel O thers
Source: EY research
69%of t he project s are
facing cost overruns
50%of t he project s are
report ing schedule delays
O ur study identi ed ve fundam ental
causes of overruns and delays, m ost of
w hich are com m on to m any m ining
projects. H ow ever, their im pact and
consequences are m ore profound in large
capital projects, given their scale,
com plexity and the budgets involved.
1. Project management issues
Developm ent of large capital projects
is a com plex and com plicated task
that entails a com bination of leading-
edge technology, new geographies
and m ultiparty governance. The sheer
size and scale m akes the developm ent
process equivalent to setting up a
new m ultibillion dollar organization.
Com pounding this com plexity, the lack
of proper project planning, estim ation
and supervision creates challenges
throughout the project life cycle.
2. Stakeholders conicts
Large capital projects carry high
and unique expectations from all the
stakeholders. M anaging the needs
of all the parties can prove to be a
challenge, consequently increasing the
risk of con icts.
3. Resource constraints
Projects of this size require large-
scale resources in term s of labor,
equipm ent, services and infrastructure.
Developm ent of m ultiple large projects
in a region can put a strain on these
resources, causing com panies to
com pete for access.
4. Regulatory and policy-
related challenges
M any projects in the past have suffered
on account of delays in regulatory
approvals and policy uncertainty. Such
challenges halt the progress of projects
and delay their operations.
5. Unfavorable external
environment
The progress of large capital projects is
also in uenced by external m arket and
political forces. The im pact of any m ajor
change in these forces can be severe
on the overall project econom ics, given
the m ultibillion dollar investm ent that
is at stake. O n certain occasions, w hen
these external factors are so signi cant,
w hen looked at either separately or
cum ulatively, com panies m ay consider
delaying or even canceling projects.
H um an capital
delciL
H ealth Safety
and Environm ent
(H SE) com pliances
G eopolitical and
security issues
Inadequate
planning
Inadequate
supervision
ConlicLs beLween
project operators
and governm ent
ConlicLs amonq
partners
ConlicLs
wiLh Lhe local
com m unity
Equipm ent and
services-related
issues
Com m odity
constraints and
pricing
Inadequate
infrastructure
Regulatory
delays
Exchange rate
lucLuaLions
A ggressive project
tim elines and
optim istic cost
estim ates
Changes in
m arket conditions
1. Project
management
issues
2. St akeholders
conict s
3. Resource
const raint s
4. Regulat ory and
policy-relat ed
challenges
5. Unfavorable
ext ernal
environment
Root causes of cost overruns and delays
Outlook
A s com m odity prices im prove and m ajor
capital projects start to com e back online,
w e see an increased urgency to im prove on
the delivery of projects on tim e and on
budget, especially given the increased
scrutiny by boards and shareholders on
costs. W ith a new understanding of better
practices around these projects and
know ledge of the consequences of bad
m anagem ent, it w ill be tim e for
m anagem ent to start putting these
practices in place. For the new capital
projects that w ill be kicked off as im proved
prices m ake them m ore attractive,
m anagem ent w ill need to put these
practices in place upfront and tightly scope
out and run these projects.
Consideration: Specic actions
that could help mitigate
risks and improve project
performance
Determ ining to w hat extent the factors that
result in cost and tim e overruns are
controllable is critical. Clearly, the external
environm ent and regulatory- and policy-
related changes are less controllable and
less predictable than project m anagem ent
issues, stakeholder con icts and resource
constraints. H ow ever, even issues that are
less controllable and predictable can be
built into the project scenarios and allow ed
for in the contingency plans.
This brings us to the next question to be
considered: Is the root cause of the issue
poor planning, poor project im plem entation
or a com bination of the tw o? W hatever the
answ er, it is clear that the scale and
frequency of the tim e and cost overruns
indicate that there is signi cant room for
im provem ent in the internal processes of
both m ining com panies and contractors.
Better project planning, staf ng,
supervision, and robust contracting and
procurem ent strategy are am ong the
probable solutions. For instance, concerns
around lim ited resources and extensive
custom ization can be resolved through
pooling resources and/or sharing
infrastructure w ith other com peting
projects in a region and adopting a m odular
and standardized construction approach.
Governance arrangem ents in partnerships,
alliances or joint ventures need particular
attention for the better m anagem ent of
stakeholdersinterest.
9
. B
a
la
n
c
in
g
t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
5
. C
a
p
ita
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
c
e
s
s
to
w
a
ter and energy
8
. S
h
a
rin
g
t h
e
benet s
im
provem
e
n
t
1
. P
roduct ivity

Riding out volatility w ithout putting in place som e form of
hedging strategy is no longer an appropriate option.
Price and currency
volat ility
(6 in 2013)
06
Diving for cover or
riding t he wave
Exiting the supercycle was never
going to be easy. Years of price
stimulus had the desired effect in
encouraging new supply. However,
given the lead time required to
produce this supply, price signals
are very ineffective at turning off
supply quickly. As such, we are now
experiencing the extreme volatility
created as the market tries to return
to equilibrium.
Those m etals and m inerals that received
the largest am ount of price stim ulus to
increase supply are generally expected to
have greater volatility for longer until the
supplydem and equilibrium returns. This
im pact outw eighs even the m arket
concentration as dem onstrated in the
com m odity price chart.
Iron ore, once an annually contracted m etal,
has proven to be one of the m ost volatile in
pricing. The pricing has been im pacted by
the level of supply response and also by
variations in funding provided to traders in
China. During tim es of enforced reduction
in credit availability, the lack of nance for
stockpiling has m eant destocking at low ered
spot prices.
0%
5%
10%
15%
20%
25%
30%
Gold Oil Copper Platinum Alum inium Iron ore Nickel
Annualized volat ilit y in commodit y prices (1H 2014)
Source: EY analysis, Thom son Datastream
140
120
100
U
S

d
o
l
l
a
r
s

p
e
r

d
r
y

m
e
t
r
i
c

t
o
n
M
a
y

2
0
1
3
J
u
n

2
0
1
3
J
u
l

2
0
1
3
A
u
g

2
0
1
3
S
e
p

2
0
1
3
O
c
t

2
0
1
3
N
o
v

2
0
1
3
D
e
c

2
0
1
3
J
a
n

2
0
1
4
F
e
b

2
0
1
4
M
a
r

2
0
1
4
A
p
r

2
0
1
4
M
a
y

2
0
1
4
Iron ore price uct uat ions
Source: Thom son Datastream
Key thought
0
5
10
15
20
25
A
p
r

0
9
J
u
l

0
9
O
c
t

0
9
J
a
n

1
0
A
p
r

1
0
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l

1
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t

1
0
J
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n

1
1
A
p
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1
1
J
u
l

1
1
O
c
t

1
1
J
a
n

1
2
A
p
r

1
2
J
u
l

1
2
O
c
t

1
2
J
a
n

1
3
A
p
r

1
3
J
u
l

1
3
O
c
t

1
3
J
a
n

1
4
V
o
l
u
m
e

(
m
i
l
l
i
o
n

t
o
n
n
e
s
)
SGX iron ore sw aps
Iron ore and rebar derivat ive volumes on Shangai and Singapore exchanges
Source: SGX, Thom sonO ne
A
p
r

1
2
50
45
40
35
30
25
20
15
10
5
0
Sw aps Vol Futures Vol O l
M
a
y

1
2
J
u
n

1
2
M
i
l
l
i
o
n
s

M
T
J
u
l

1
2
A
u
g

1
2
S
e
p

1
2
O
c
t

1
2
N
o
v

1
2
D
e
c

1
2
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
20
18
16
14
12
10
8
6
4
2
0
M
i
l
l
i
o
n
s

M
T
S
e
p

1
2
O
c
t

1
2
N
o
v

1
2
D
e
c

1
2
J
u
l

1
3
A
u
g

1
3
S
e
p

1
3
O
c
t

1
3
N
o
v

1
3
D
e
c

1
3
J
a
n

1
3
F
e
b

1
3
M
a
r

1
3
A
p
r

1
3
M
a
y

1
3
J
u
n

1
3
J
a
n

1
4
F
e
b

1
4
M
a
r

1
4
A
p
r

1
4
M
a
y

1
4
Vol O l
Source: M anaging Volatility in the A sian Ferrous M arket,Singapore Stock Exchange presentation, June 2014.
Changes in custom er buying preferences
have also im pacted the w ay in w hich
volatility has been accepted and m anaged.
For exam ple, steel end custom ers are
seeking suppliers that can provide greater
price certainty and in som e instances are
w illing to pay for this certainty. A s such,
they are either directly or indirectly
entering the steel derivatives m arkets to
hedge those inputs. A s steel producers have
been increasingly hedging their sales, they
need to hedge their inputs (iron ore, m et
coal). Industry discussions are also
underw ay for a num ber of new
com m odities regarding the developm ent of
indices to support price-setting
m echanism s.
This has increased the liquidity, depth and
ef ciency of the derivatives m arkets such
that any steel m ill in the w orld could hedge
its purchases w ithout overw helm ing the
m arket, as can be seen below.
Iron ore swaps/ fut ures Iron ore opt ions
A s custom ers and producers seek to adjust
to increased volatility, there is a grow ing
acceptance that this structural change has
provided greater depth to the derivatives
m arkets, and for m any they can
appropriately incorporate physical and
derivative trading into their core operations.
M any of the larger producers are referring
to this as a revenue enhancem ent
strategy as they seek to extract som e of the
option value created by volatility and their
naturally long position. This m irrors the
convergence of traders that are increasing
their exposure to com m odity production.
W hile w hat has been described relates to
iron ore and steel, sim ilar effects though
lesser in m agnitude can be seen for
m etallurgical coal, nickel, alum inium and
copper. In the prior year, the unw inding of
exchange-traded fund (ETF) positions
increased the volatility of precious m etals,
though this has abated som ew hat in 2014.
Natural currency hedge offsets
lower commodity prices in
201314
The effect of declining com m odity prices on
the underlying earnings of large diversi ed
m ining and m etals m ajors in FY13 w as
offset by favorable currency uctuations.
Favorable m ovem ents in exchange rates
cannot, how ever, perm anently hedge the
dow nside risk of com m odity price declines
on earnings. The gains are a one-off and
m ay also have a negative im pact in the long
1. Rio Tinto Gets Boost From Flagging A ussie Dollar,
The Wall Street J ournal, 13 February 2014.
2. Special FX for the m inersearnings,Deutsche Bank,
21 February 2014, via Thom sonO ne.
Currency vs. commodit y price uct uat ions
Time period Average FX offset t o
commodit y price moves
Lat est report ing period (for
which FX offset is calculat ed)
FX offset t o commodit y price
moves in t he lat est report ing
period
A nglo A m erican
2002-2013 9% FY13 100%
BH P Billiton
2001-2013 21% 1H 13 214%
Rio Tinto
1998-2013 11% FY13 78%
Source: Com pany data, Deutsche Bank estim ates
term as prolonged currency w eakness in
the respective country of operation w ill lead
to grow ing dom estic in ation, eventually
am plifying costs as w ell as w ages.
1
A nglo A m erican reported that currency
price uctuations offset 100% of the
earnings im pact of the com m odity prices in
FY13, com pared w ith a 9% offset over the
decade up until 2012.
2
The positive im pact
of currency m ovem ents w as m ainly due to
depreciation in the operating currencies of
m ajor producers, especially across
em erging m arkets, relative to the U S dollar.
This increased the m onetary value of the
export-oriented production.
3. Rusal CEO : M ineral Export Ban W ill Bene t Indonesia,
The Wall Street J ournal, 26 February 2014.
H ow ever, other m acroeconom ic forces such
as quantitative easing in m uch of the
developed w orld have prevented the full
shock-absorbereffect of falling prices in
other cycles. The A ustralian dollar,
Canadian dollar and Chilean peso have not
devalued as signi cantly as w ould be
suggested by previous cyclical dow nturns,
and this has created its ow n set of
challenges for producers in these countries.
They have needed to be innovative in their
practices to provide greater productivity in
order to offset the lack of full natural
hedging protection. The absence of the
anticipated devaluation of their currencies
to restore global com petitiveness has
necessitated m any providers to develop
plans to not only restore productivity but
to innovate to increase productivity as
an offset.
Prolonged period of volatility
Due to the length of the supercycle,
volatility w ill continue for a longer period
than any w e have experienced to date until
w e reach equilibrium . M any m ining and
m etals com panies, intim idated by the
volatility of 2013, have chosen to sit on the
side lines regarding investm ent and setting
strategy. H ow ever, since this volatility is due
to continue for the next few years, standing
back and m aking no investm ents cannot
rem ain an option.
Outlook
W e expect the follow ing factors to create
volatility in the sector in the m edium term :
Increased regulation: The introduction of
a new regulation that could affect supply
can im pact com m odity prices. For
exam ple, the adoption of an export ban
on unprocessed ores and export taxes on
m ineral concentrates in Indonesia created
a supplydem and im balance.
3
N ickel
prices surged by 23.8% in A pril 2014 to
U S$17,422/M T over January 2014.
Divergent central bank policies: The
w inding dow n by the U S Federal Reserve
of quantitative easing m ay lead to an
increase in both com m odity prices as w ell
as currency volatility. The curtailm ent of
quantitative easing w ill subsequently pave
the w ay for increased interest rates. This
m ay in turn depress m arket sentim ent
leading to increasing volatility in
com m odity prices.
Geopolitical risk: Deteriorating relations
betw een Russia and the EU and other
N A TO countries, com pounded by
sanctions on Russia by the EU and the
U S, m ay lead to econom ic volatility.
Provision of credit to traders: Greater
scrutiny of nancing deals in China and
elsew here by regulators creates a risk
that inventories used for this purpose
m ay be liquidated.
Withdrawal of banks from commodity
markets: The possible w ithdraw al of
JPM organ, Goldm an Sachs and Barclays
from com m odity m arkets m ay lead to an
increase in volatility, particularly if large
nancing deals are unw ound and
inventory is released onto the m arket.
4
Considerations
Living w ith volatility for long periods of tim e
requires m ining and m etals com panies to
build in coping m echanism s that guard
against the negatives of volatility w hile
taking advantages of opportunity.
Opportunities
Enhancing revenue by leveraging the
option value of a natural long position
Introducing greater exibility in
operations to vary production in response
to volatility
Extracting prem ium s by providing
custom ers w ith greater price certainty
Challenges
Developing long-term pricing protection
to enable prudent investm ent
Developing perform ance m easures to
properly evaluate m anagem ent
perform ance against a background of
volatility
4. Banks ght back w ith w arning over w ithdraw al from
com m odity m arkets,Metal Bulletin, 13 Septem ber 2013,
via Factiva.
Logist ics rat ing
Low
H igh
9
. B
a
la
n
c
in
g
t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
5
. C
a
p
ita
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
c
e
s
s
to
w
a
ter and energy
8
. S
h
a
rin
g
t h
e benet s
im
provem
e
n
t
1
. P
roduct ivity

The issues around infrastructure nancing, ow nership and
access m ake it a com plex investm ent. H ow ever, the trend is
tow ard shared access and shared value.
07
Infrast ruct ure access
(9 in 2013)
A new world of
ownership and
nancing
Urbanization and a growing middle
class will lead to continued growth in
mineral demand, which will challenge
mining and metals companies to look
for new sources of supply. These new
sources of supply are often located in
remote locations that lack access to
infrastructure.
Developing m ines in rem ote locations is a
com plex exercise, especially w hen you
factor in dif cult terrain, the often less
stable political or regulatory regim e of
these locations and the need to build the
social infrastructure such as villages,
schools and hospitals. These econom ic and
social costs add to the total cost of m ine
developm ent.
Infrastructure developm ent is a signi cant
part of any m ine developm ent and accounts
for the m ajority of m ine developm ent costs.
In som e cases, the cost of developing the
infrastructure has gone up to 75% of the
total project cost.
1
For exam ple, at Rio
Tintos Sim andou iron ore project in Guinea
(A frica), the cost to build infrastructure
(m ultiuser 650km rail and deep w ater
port) is expected to be about U S$13.5b
out of the total project cost of about
U S$20b, w hich also includes a 100m tpa
iron ore m ine.
2
The m ap below show s m ajor
m ining countries and their logistics ratings.
Logistics ratings aim to quantify the
logistics outlook and supply chain
challenges of operating in a speci c
country. It is clear from the m ap that
developed countries such as Germ any and
U S have the highest logistics rating, w hile
A frican countries, m ost of w hich face
severe infrastructure challenges, have the
low est logistics rating.
3
BMI logistics ratings: Major mining countries
2. Sim andou agreem ent signed,UBS Research, 27 M ay 2014
via Thom sonO ne.
3. Data & Forecasts, Business M onitor International, accessed
on 11 July 2014.
1. W here have all the m inerals gone?,Mining Magazine,
28 A ugust 2012.
Key thought
In the current environm ent, nancing of
such large infrastructure projects has
becom e a challenge because of a w eak
com m odity price outlook, shareholder
activism and budgetary constraints. These
factors have delayed the developm ent of
a num ber of large m ineral deposits, despite
the future grow th options created through
infrastructure developm ent.
Developing large infrastructure projects
requires coordination am ong a num ber of
stakeholders, such as users (m iners,
com m unities), governm ent(s) and capital
providers ( nancial institutions, custom ers).
The divergent priorities of these
stakeholders m ake it dif cult to decide the
follow ing:
W ho funds, builds/designs, ow ns and
operates the infrastructure?
W ho w ill access the infrastructure
and how ?
Dilemma: Complexities due to
divergent stakeholder priorities
Mining and met als company: Ideally, a
m ining and m etals com pany w ould w ant
integrated m ining and infrastructure, w hich
ensures com plete control of infrastructure,
even if it m eans higher initial developm ent
costs. This m eans that com panies can
optim ize the design of various com ponents,
such as rail capacity, port capacity and m ine
output, as w ell as give them control over
access rights and usage term s of the
infrastructure. A n integrated m ining m odel
requires large capital investm ents, and w ith
current focus on RO CE, m ining and m etals
com panies nd it hard to allocate capital to
a low er RO CE investm ent such as
infrastructure. N evertheless, m iners are
w illing to partially fund the infrastructure
developm ent costs in partnership w ith
patient capital investors such as pension
funds, or w ith governm ents or agencies
such as the International Finance
Corporation (IFC), the A frican Developm ent
Bank (A fDB) and the European Investm ent
Bank (EIB).
4
Government s: Governm ents are hesitant
and often unable to fund large capital
investm ents. This is especially true for
governm ents in frontier regions, w here
large capital requirem ents for infrastructure
developm ent could be out of proportion
w ith the countrys GDP. H ow ever, this
source of capacity building and derivation of
com petitive advantage is often supported
by the developm ent banks and m ultilateral
agencies.
Increasingly, governm ents dem and that
infrastructure is developed on a shared-use
basis so as to ensure m axim um econom ic
bene t from the infrastructure. These
econom ic bene ts can be in the form of
developm ent of other stranded assets and
non-m ining developm ent along the
infrastructure corridor. Shared use can be
m ultiuser or m ulti-access, depending on
w hether the infrastructure is being used by
m ultiple m ining and m etals com panies or by
other parties for agricultural transport or
passenger use. Governm ents thus w ant a
say in the build and design of the
infrastructure. This includes routing of
transport infrastructure and the option to
offer extra capacity to other industries that
lack the requisite scale. In som e cases,
transportation infrastructure is spread
across m any countries, for exam ple, the
proposed N iger developm ent corridor
covers Senegal, Gam bia, M ali, N iger and
N igeria for iron, alum inium and other
com m odities. Shared usage and shared
tariff revenue is especially preferred by
host governm ents of transnational
infrastructure.
Irrespective of w ho nances the project,
governm ents favor the build-operate-
transfer (BO T) ow nership m odel, so that
asset ow nership is ultim ately transferred
back to the host governm ent after the
contractual period.
5
Capit al providers: Typical capital providers
include developm ent nancial institutions
(DFIs), such as IFC, A fDB, com m ercial
banks, investm ent banks for loans, bonds
and project nance structuring, and
syndication and risk insurance providers.
6

Lenders are m ost interested in
com m ensurate returns from risk taken in
the project. They w ant the project to be
built to schedule w ith m inim al changes to
design or capacity use/allocation at a later
date. A ny such change, if at all, should not
increase the risk of the project.
Som e of these projects, typically in regim es
w ith high sovereign risk prem ium , have
received nancing through non-traditional
routes such as resource for infrastructure
(RFI). U nder this schem e, a loan to nance
an infrastructure project is repaid through
natural resources (such as iron ore). In an
RFI, the lender typically w ants com plete
control from pit to port and offtake
agreem ents. In m any cases, they also w ant
their contractors to build the project.
Divergent priorities of various stakeholders
m ake the setting up of infrastructure
projects a com plex and tim e-consum ing
exercise. The im portance of governm ent
incentives in term s of sovereign guarantees
and policy assurances cannot be
overem phasized. The last thing
stakeholders in the project w ould w ant is
lack of policy clarity leading to a suboptim al
or failed project.
4. M ining infrastructure A re w e on the right track,
Latham &Watkins, 25 June 2013.
5. M ining infrastructure A re w e on the right track,
Latham &Watkins, 25 June 2013
6. Ibid.
Current m ultistakeholder infrastructure
innovation involves m any of the
risks identi ed in the table. Different
stakeholders have a m ajor or m inor
tolerance to each of these risks. The
innovative structures have these risks
tolerated by stakeholders valued (priced)
and transferred betw een the various other
stakeholders. H aving a com m on w ay of
pricing these risks is critical.
Consideration: Financing
models to fund infrastructure
Project s undert aken by t he public sect or:
Governm ents can seek concessional funding
from m ultilateral agencies such the W orld
Bank, A fDB and IFC. W hile in the past,
developed countries have raised capital
from capital m arkets, frontier countries nd
it dif cult to go to capital m arkets, given
their low credit ratings and w eak GDP
com pared to the extent of investm ents
required.
Company as sole developer and user:
A m ining and m etals com pany can raise
capital on its balance sheet for its projects,
giving them com plete control and exibility
to use the infrastructure. H ow ever, in the
current environm ent of rising infrastructure
costs, poor pro tability and increased
shareholder vigilantism , com panies have
preferred not to take debt on their balance
sheet and set up projects through off-
balance-sheet nancing.
Special purpose vehicle (SPV): In off-
balance-sheet nancing, a m ining and
m etals com pany contributes equity to the
project, w ith the rem aining capital provided
by the lender. The infrastructure project
thus w orks as a separate entity (or a SPV).
The project lender relies on cash ow s from
the infrastructure project and has lim ited
recourse to the m ining com panys assets.
Since lenders have lim ited recourse, their
required rate of return is higher than that in
an integrated m ining m odel, w here the
lender has full recourse to the balance
sheet of the m ining com pany.
In an independent SPV, investors or lenders
w ould largely provide the nancing and
thus ow n and control the project. A n SPV
can also take the form of a public-private
partnership (PPP) w here the governm ent is
one of the parties in the fram ew ork.
For exam ple, the Indian Governm ent is
reportedly considering oating an SPV to
develop coal blocks in the country. The SPV
w ould include governm ent-ow ned m iners
and specialized m ine developers and
operators (M DO s).
7

Third-part y operat or: A group of
m ining and m etals com panies com e
together in order to partly or fully fund
the infrastructure, w hich is then operated
by a third-party service provider.
Financing m odels for infrastructure
developm ent w ill continue to evolve as each
new stakeholder in the project is essentially
a new variable in the equation. Transaction
participants need to continually adjust their
m odels to accurately assess their exposure
to the risks so that risk and rew ards can be
appropriately structured.
7. India considers SPV for m ining projects,Miningweekly.com,
30 A pril 2014, http://w w w.m iningw eekly.com /article/
india-considers-special-purpose-vehicle-for-m ining-
projects-2014-04-30, accessed 4 June 2014.
Risks for stakeholders
St akeholder
Tolerable risks major Tolerable risks minor
M iner Com m odity price risk Construction risk
Expansion risk
Infrastructure operator O perational risk
Governm ent U ncom m itted capacity risk Partial credit risk
Investor (fund) Investm ent-grade credit risk Foreign exchange risk
Builder Construction risk
Third-party users A ccess risk
Custom er Com m odity price risk Foreign exchange risk
Expansion risk
Dilemma: Project nancing issues in shared use/open access
The shared-use m odel
8
is increasingly
being preferred not only in frontier
regions, but also in developed countries.
For exam ple, in the Pilbara (W estern
A ustralia), the Governm ent has inserted
clauses in agreem ents to facilitate
third-party access.
9
To date though, these
agreem ents have been unsuccessful.
There are, how ever, a num ber of
challenges in w orking w ith the shared-use
m odel such as:
Potentially higher capital costs as
infrastructure design w ould need to
accom m odate varying requirem ents of
both m ining and non-m ining users
Reduced ef ciency due to com peting
interests leading to suboptim al use of
infrastructure
U ncertainty in design as users m ay be
identi ed or provided access on a later
date after nancing is closed
Delay in developm ent of
infrastructure as negotiations w ould
involve m ore parties
A ll of the above introduce additional
variables and m ake assessing the
bankability of the project m ore com plex.
There are additional costs associated w ith
the need to have a strong regulatory or
policy regim e, w hich is m issing in m ost
frontier m arkets. In the absence of a
regulatory or policy regim e, infrastructure
users in a shared-use m odel w ill have:
M onopoly concerns, if the infrastructure
is ow ned by a large m iner, w hich w ill
have control over w ho accesses the
infrastructure
Pricing concerns, if the infrastructure is
ow ned by a third party, for w hich
infrastructure w ill be a pro t center and
m ay excessively charge users, w ho do
not have an alternative
In both instances, cost plus charging for
infrastructure access and services m ay be
the appropriate m echanism .
For bankable project nancing under the
shared-use m odel, the IFC recom m ends
that an investm ent-grade m ining and
m etals com pany can act as an anchor
m ining clientthat provides the take-or-
pay com m itm ent to the SPV that ow ns the
m ining infrastructure. The anchor client is
given founding rightssuch as prioritized
use, tariffs and control of the
infrastructure.
10
The anchor client needs
to account for the probability that at a
later stage, new users (m iners or other
industries) w ill be entitled to use the
infrastructure, w hich w ill need to be
expanded or m odi ed.
11
The
im plem entation of such a com plex SPV
w ould require an effective regulatory
regim e to enforce contracts.
8. A Fram ew ork to approach shared use of m ining related
infrastructure,Vale Colum bia Centre, M arch 2014.
9. M ining infra - case for a new approach,Latham and W itkins,
Septem ber 2013.
10. Fostering the developm ent of green eld m ining related
transport infrastructure through project nancing,IFC,
A pril 2013.
11. M ining infra- case for a new approach,Latham and W itkins,
Septem ber 2013.
Outlook
Increasingly and going forw ard,
governm ents prefer the shared access
m odel of infrastructure developm ent, even
though this m odel m akes the design,
capacity allocation and assessing the
bankability of the project m ore com plex. W e
see innovation in nancing, and a change in
the ow nership m odel and the operation of
infrastructure, as a large num ber of future
projects w ill consist of a cluster of m ines
rather than just a single large-scale m ine.
M ining and m etals com panies should also
view infrastructure developm ent from a
sustainability perspective in that it provides
social and econom ic bene t to local
com m unities and businesses. These
bene ts are not just m onetary (such as
w ages and com m unity donations), but also
socioeconom ic contributions (such as
providing em ploym ent, local purchases and
the transfer of technology). Infrastructure
developm ent leads to m onetization of
otherw ise stranded deposits and has a
m ultiplier effect on the region. M ining and
m etals com panies, through this process,
also play a role in building institutional
capacities. They provide support in funding
of universities and im provem ent of m ining
policies and legislation.
It is vital that shared value from m ining
and m etals projects is proactively
com m unicated to all stakeholders. A s
com m unities and governm ents see bene ts
in infrastructure developm ent, com panies
w ill see less com m unity resistance leading
to fast-tracking of projects and
governm ents acting as enabler (through
policy support) in project developm ent.
Together, it w ill provide the project
developer w ith m ore certainty of project
m ilestones, thereby reducing projects tim e
to com pletion and cost overruns.
9
. B
a
la
n
c
in
g
t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
5
. C
a
p
ita
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
c
e
s
s
to
w
a
ter and energy
8
. S
h
a
rin
g
t h
e benet s
im
provem
e
n
t
1
. P
roduct ivity

Carving up bene ts is the reality, ensuring all stakeholders
see it that w ay is the challenge.
1. Scoping paper: m ining and m etals in a sustainable w orld,
W orld Econom ic Forum , February 2014.
Sharing t he bene t s
(8 in 2013)
08
Managing expect at ions
t hrough t he commodit y
price cycle
During the course of this year, some
stakeholder demands, such as those
of suppliers and governments,
have largely rebalanced as it has
become clear that mining and metals
companies are grappling with reduced
prots and soaring costs leading
to the scaling back, suspension or
closure of projects. The difference
in the amount of economic value
retained to fund growth or even
reserve replacement between 2011,
when commodity prices were high,
and 2013, when commodity prices
are closer to the marginal cost of
production, is clear.
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
O perating costs -
suppliers, etc.
Econom ic value
retained
Em ployees Paym ent to
capital providers
(shareholders & interest)
Governm ent Com m unities
U
S
$
m
2011 2013
Declining economic value ret ained vs. rising cost s (201113)
Source: EY consolidation of com pany sustainability reports
Risk: Competing demands from
stakeholders
Sustainability in the broader sense is about
shared valuefor all stakeholders in m ining
and m etals projects. This is an im portant
concept for m ining and m etals com panies
to prom ote in order to ensure, once the
inevitable cyclical recovery in com m odity
prices occurs, that stakeholders have m ore
balanced expectations in the longer term .
U nless this cultureis established, im proved
pro ltability or changes in shareholders or
com m unity/national leadership w ill reignite
tensions.
H ow ever, em bracing this concept of shared
value fully w ould take signi cant changes to
the ow nership m odels of m ining and m etals
com panies. For exam ple, in a recent report,
the W orld Econom ic Forum
1
suggested that
in a sustainable w orld, com panies w ould
shift from m ineral rights ow ners to leasing
of deposits or project developers. A s the
com panies are balancing the needs of
investors, governm ents and com m unities,
such a radical change to ow nership m odels
is not the current option, particularly given
the risk associated w ith m ining projects.
Getting the right risk-rew ard ratio is
dif cult, but im portant, to ensure that
m ining and m etal com panies and their
investors are receiving adequate return for
this risk. Given w here the econom ic cycle is
currently, long-term agreem ents w ith
governm ent, labor and suppliers could be
considered for negotiation now.
If com panies are not able to effectively
m anage the com peting needs of
stakeholders, they run the risk of dam aging
their corporate reputation, project approval
delays and protests or violent opposition,
and accelerating the m ove aw ay from a
m ineral rights ow nership m odel.
Key thought
Government s and t he level of rent s t hese
invest ment s can pay: Governm ents have,
over the last few years of higher com m odity
prices, increased their expectations of the
levels of investm ent that m ining and m etals
com panies can m ake in their countries. N ow
that pro ts are low er, expectations of
governm ents have to be carefully m anaged,
particularly in cases w here som e
investm ent has been m ade but the project
has been suspended until com m odity prices
im prove. There is also a lot of pressure on
governm ents to ensure that citizens receive
their fair share of bene ts from m ining and
m etals projects. For exam ple, in Tanzania,
the M ining and Energy M inister announced
that the Governm ent w as in talks w ith
gold m iners about higher taxes and
royalties follow ing grow ing public dem and
for m ore bene ts from the countrys
natural resources.
2
Changes in the investm ent clim ate have
m ade m ost green eld projects highly
unlikely, and m any higher-cost operations
are beginning to close. A s a reaction to this,
m ost governm ents and policym akers have
becom e m ore pragm atic in the expectation
of econom ic rents to either attract or
preserve investm ent. For exam ple, the
Ecuador Governm ent plans to adjust a
w indfall tax, m ake changes to its m ining law
and offer tax incentives to attract foreign
investors into its stalled m ining sector.
3
Communit ies: A lack of consultation prior
to developing projects can lead to long-term
protests, w hich m ay turn violent. The
El Tam bor project in Guatem ala, w here
protestors have been blocking developm ent
of the m ine since early 2012 is one such
exam ple. Protestors argue that there w as
no appropriate consultation process before
the license w as issued to Radius Gold and
KCA . Their m ain concern is that the m ine
w ill threaten their already lim ited w ater
supplies.
4
Com m unities take m uch longer to
reset their expectations arising from the
changing com m ercial reality. O ften, they
w ill be prepared to continue pursuing a
larger proportion of a shrinking pie. For
exam ple, w hile the rents and bene ts of the
Sim andou iron ore project in Guinea are
likely to be delayed, the com m unity is
protesting and arguing about how
U S$700m of existing access paym ents are
to be used or distributed.
The im pact of these political and civil
actions w ill m ost likely delay even m ore
projects. In Peru, the O m budsm an of ce
reported that in M ay 2014 alone there w ere
225 social con icts, of w hich 66.2% related
to m ining activities and hydrocarbon
projects.
5

Employees: In som e cases, it m ay be
dif cult to rebuild relationships w ith
stakeholders. For exam ple, in the afterm ath
of the M arikana m assacre and large-scale
strikes in South A frica, platinum m iners
w ere unable to com e to a w age agreem ent
w ith w orkers for ve m onths, and therefore
struggled to recom m ence production. The
three largest platinum m iners have lost
m ore than U S$2b in com bined revenue as a
result of the strike.
6
The settlem ent has had
far-reaching im plications, w ith the
engineering sector striking over their w age
negotiations having w itnessed the success
of the platinum sector.
7

M ine closures have m oderated w age
dem ands in a num ber of high-cost regions
of the w orld. The m ore exible the labor
m arket, the m ore responsive it has been to
the cycle. H ow ever, in m any em erging or
recently em erging econom ies, w age
dem ands across the econom y are rising
faster than in ation or increases in
productivity.
Shareholders: In the boom tim e, m iners
adopted a grow th-at-any-cost policy but
are now suffering the sharp reversal of this
policy. N ot only have w e seen a change in
shareholder expectations, but also a change
in the m akeup of shareholders. This is
evident in the rise of patient private capital
into the sector. Sim ilarly, institutional
and retail investors w ith sim ilar investm ent
characteristics to private capital are
becom ing m ore prevalent investors via
public capital m arkets. H ow ever, the
continued recent focus on RO CE is constant
and is expected to continue for the
foreseeable future.
Consideration: Embracing a
multistakeholder model
There needs to be a m ultistakeholder
approach to sharing the bene ts, and
com panies should tailor their approach
depending on the group. Com panies need
to ensure that governm ents, com m unities,
shareholders, em ployees and suppliers have
a com m on understanding of the challenges
their projects face. By form ing strong
partnerships w ith each of these groups,
they are better able to com m unicate their
long-term value to shareholders as w ell as
integrate them selves into the local and
regional com m unities.
Com panies are seeing the im portance of
listening to com m unities via new m ethods
such as social m edia, rather than
com m unicating from the top dow n. There is
4. U N urges talks follow ing violent Guatem ala m ining protest,
Mining.com, 2 June 2014.
5. Perus m ining con icts m ade countrys total social issues clim b
to 225 in M ay,Mining.com, 13 June 2014.
6. South A frica platinum m iners consider new union offer to end
strike,Wall Street J ournal, 4 June 2014.
7. SA engineering strike latest blow to sickly econom y,
Engineering News, 1 July 2014, http://w w w.engineeringnew s.
co.za/article/sa-engineering-strike-latest-blow -to-sickly-
econom y-2014-07-01, accessed 1 July 2014.
2. Tanzania pressures m iners for m ore cash,Reuters,
2 June 2014.
3. Ecuador plans legal reform , tax incentives to spur m ining,
Legal Monitor Worldwide, 7 June 2014.
a need for im proved m etrics and case
studies to enable com panies to show that
they are m anaging com m unity outreach
system atically and inclusively. It w ill also
provide them w ith the evidence to prove
they are delivering bene ts to the
com m unity.
8

There is a m ove to restore shareholder
con dence in the sector by earm arking
the m ajority of excess cash after
investm ents in the near term for return to
shareholders. In addition, there is a focus
on delivering value to shareholders by
im proving m argins. H igher productivity
businesses are m ore robust businesses and
are better placed to cope w ith low er
com m odity prices.
Consideration: Communicating
a broad view of shared value
and benets
Proactive com m unication of shared value
from m ining and m etals projects to all
stakeholders is vital. Stakeholders do not
alw ays understand that shared value is not
just m onetary, i.e., w ages and com m unity
donations, but it also encom passes the full
range of bene ts. This includes
socioeconom ic contributions, such as
providing em ploym ent, local purchases and
transfer of technology from global m ining
and m etals com panies. Project revenues
also provide a substantial catalyst for
developm ent w ithin countries via
infrastructure and value-added processing.
In addition, corporate sustainability
agendas include program s to im prove
health, education and skills of em ployees
and com m unities. Com panies play a role in
building institutional capacities in
developing countries through support for
research and developm ent and funding for
universities. Support is also given to
im prove m ining policies, legislation and
guidelines. Public recognition of this
corporate contribution is vital in
dem onstrating the sharing concept
in action.
Consideration: Owning
transparency and
accountability
W hile there is no perfect ow nership m odel
that w ill appease all stakeholders, increased
transparency by m ining and m etals
com panies helps generate trust w ith
stakeholders. Lack of transparency in
paym ents to governm ents and
com m unities, equity arrangem ents w ith
landow ners, as w ell as equity returns to
investors can lead to w idespread com m unity
activism and loss of signi cant revenues to
the country due to unreported paym ents.
The adoption of the Extractive Industries
Transparency Initiative (EITI) standards is
grow ing as countries seek to gain increased
transparency in the extractive industry.
Decisions to join the EITI have been largely
underpinned by econom ic m otivations.
Transparency leads to better contracts and
better deals and builds trust. So far, 42
countries
9
have joined the initiative, w ith
the U S recently joining and the U K planning
to subm it their candidacy this year.
Together w ith m ining and m etals
com panies, governm ents should w ork to
increase transparency in m ineral
developm ent contracts. This also helps
ensure that com m unities have greater
visibility of equity returns. Governm ents
need a credible, concise and explicit
program to detail paym ents to and from
stakeholders. There is also a need for
transparency in donations m ade by m ining
and m etals com panies, thereby ensuring
local com m unities get a fair share.
There is an onus on governm ents to
im plem ent effective and transparent
regulatory fram ew orks both at the national
and regional level. A n effective fram ew ork
w ill not only prevent the w holesale
departure of pro ts from the country, but
also facilitate the sharing of tax revenues
am ong central, regional and local
governm ents. It w ill ensure that adequate
return is received by com m unities around
m ining projects.
In addition, governm ents also have a role to
play in m anaging resource rents effectively
for future investm ent (e.g., investing in a
future fund) and thereby m itigating som e of
the risks of com m odity price uctuations.
This also takes into account the fact that
m ines w ill close and provide bene ts to
com m unities for a longer period than the
life of m ine.
Com panies also need to provide
shareholders w ith transparency in the rigor
of decision-m aking processes on
investm ents to provide shareholders w ith
con dence in their long-term value.
Outlook
By 2017, de cits are forecast for a num ber
of com m odities. Dw indling reserves due to
the effects of current m othballing/lack of
capital w ill create a shortage in the m arket,
im plying a recovery in com m odity prices.
M ining and m etals com panies need to w ork
to build credibility and trust w ith all
stakeholders now to m anage how these
increased bene ts are best shared.
Transparency initiatives have thus far been
voluntary, but transparency rules are being
enacted in the EU and the U S. A nd unlike
the EITI m easures, new EU and U S rules w ill
eventually have strict legislative m easures
behind them .
10

8. M ining Indaba focuses on the new science of stakeholder
outreach,The World Bank, 12 February 2014, via http://blogs.
w orldbank.org/energy/m ining-indaba-focuses-new -science-
stakeholder-outreach.
9. Transparency: Voluntary disclosure group expands
in uence slow ly,Energy Compass, 4 A pril 2014.
10. Transparency: Voluntary disclosure group expands
in uence slow ly,Energy Compass, 4 A pril 2014.
9
. B
a
la
n
c
in
g
t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
5
. C
a
p
ita
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
c
e
s
s
to
w
a
ter and energy
8
. S
h
a
rin
g
t h
e
benet s
im
provem
e
n
t
1
. P
roduct ivity

The skills shortage risk has becom e m ore com plex and is
no longer a universal concept across the sector. It is now
a m atter of balancing the needs of an advancing industry
against the skills that exist and investing in those of the
future to avoid it becom ing acute in the next cycle.
Balancing talent
requirement s
(5 in 2013)
09
1. Skills shortage blocks m ining boom bene ts,ABC News,
20 M arch 2013.
2. 2014 M ining Insight: M ining productivity [opinion],
Mining Australia.com.au, 1 A pril 2014.
3. O ther reasons include the decline in ore grade and increase in
the depth of the m ines.
A t wo-needs economy
The structural skills shortage still
exists, despite the temporary relief
that it has been afforded through
declining commodity prices and
project closures. The sector is battling
demographics on the back of an
aging population (in countries such
as Australia, Russia and Canada) and
the remoteness of operations (on
continents such as Africa and South
America). In addition, the sector is
currently viewed as an unattractive
career option for young graduates
or professionals as it is in cyclical
decline, which further thins out the
talent pipeline.
Challenges companies face in
competing for skills
A vailability: The lack of suf cient, suitable
candidates for m iddle and senior
m anagem ent is set to increase.
Com petition w ithin the sector for talent
w ill result in additional training needs of
candidates w ho are not quite as skilled as
the job requirem ents (a fam iliar situation
over the past decade).
Costs: Costs are both direct and indirect.
Direct costs include sunk costs related to
training and severance pay, and indirect
costs include training costs for new hires
or higher com pensation to re-attract and
induct talent w hen the m arket outlook
im proves.
Productivity: Productivity m ay slum p if
sem i-to-unskilled people are used for
skilled positions. For instance, the m ining
labor productivity index in A ustralia has
declined for the past 11 years
1
because
of high cash costs em ployed to produce a
tonne of m aterial. These have nearly
doubled since 2005.
2
The labor
productivity (output per labor em ployed)
for A ngloGold A shanti declined steadily
during 2002 to 20.
3

W hile m uch of the analysis of labor in
m ining and m etals focuses on gross
em ploym ent, w hich is undoubtedly
shrinking, this perspective is too broad and
sim plistic. Rising real w ages in previous low
labor cost jurisdictions, such as China,
South A frica and Indonesia, are
fundam entally changing the m ine planning
in these regions. This is resulting in m ore
capital being substituted for labor, and
consequently the new labor is required to
be m ore skilled. These skills are those
experiencing the greatest shortage.
0.03
0.04
0.05
0.06
0.07
0.08
P
r
o
d
u
c
t
i
v
i
t
y

(
o
u
n
c
e
/
l
a
b
o
r
)

2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
Source: A ngloGold A shanti, EY
Key thought
4. A m plats is to give notice to 3,300 w orkers on M onday,FSP Invest, 30 A ugust 2013.
5. A ngloGold to cut Ghana m ine jobs in m echanising efforts,Business Day, 3 O ctober 2013.
6. U PDA TE 6-Barrick to shelve Pascua-Lam a, issue shares to cut debt,Reuters, 31 O ctober 2013;
M ore layoffs at Barrick Gold,Mining.com, 25 June 2013.
7. BH P Billiton M itsubishi cuts 230 jobs at Q ld m ine,The Wall Street Business, 7 February 2014.
Real wage index in t he mining sect or (indexed, 2003 = 100)
Source: N ational Bureau of Statistics of China; Statistics Indonesia
0
100
200
300
400
500
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
China Indonesia
Dilemma: Short term and
unskilled
Low er com m odity prices, w eaker dem and
grow th and the suspension of som e
high-cost operations m ean that m ining and
m etals com panies are experiencing less
pressure on labor requirem ents in the short
term as they reset their w ork force to
m aintain pro tably. In addition, there is also
a softening of em ploym ent conditions due
to the com pletion of som e large
developm ent projects as m ines transition
from a construction phase to a less
labor-intensive operational phase. In fact,
grow th in m ining em ploym ent is in a steady
decline after hitting a high of about 20%
year-on-year (y-o-y) in 2011.
Major reduct ions in work force 201314
Company
Count ry No. of employees
A m plats
South A frica 3,300
4
A ngloGold A shanti
Ghana 400
5

Barrick Gold
Peru 155
6

BH P Billiton M itsubishi A lliance
A ustralia 230
7

Cut t ing of muscle
W ith low er m ineral prices putting pressure on m argins, the short-term focus of the
global capital m arkets has rew arded indiscrim inate cutting of costs. In a large
num ber of instances, this has led m anagem ent to lay off w orkers that w ill be
dif cult to rehire in the next cyclical upsw ing. To our know ledge, very little cost-
bene t analysis has been done on skills retention.
Annual growt h in mining employment in Aust ralia (y-o-y %)
-10
0
10
20
30
Jan 09 Jan 10 Jan 11 Jan 12 Jan 13
This does not necessarily m ean that the
industry has an adequate supply of critical
skills as this cycle is creating a structural
change in m ining em ploym ent. The critical
skill shortages exist in another pool of
talent altogether.
Dilemma: Long term and
skilled
A n increased focus on im proving
productivity and a m ove tow ard
autom ation, m echanization, data analytics
and contract negotiation m eans that there
is an increasing level of sophistication in the
operations of m ining and m etals projects. In
addition, there has been a m ore proactive
approach tow ard stakeholder m anagem ent
that has seen the introduction of roles, such
as governm ent relations and com m unity
engagem ent. W ith this com es the need for
a m ore skilled subset of the w ork force
w ithin the sector.
Finding the right people to ll these roles is
com pounded by the high rates of em ployee
turnover in the sector and the tim e it takes
to ll jobs at m iddle and senior
m anagem ent (8 to 10 years of experience).
The younger segm ent of the w ork force
does not stay in the m ining industry for
m ore than tw o to three years.
8
A ccording to
the form er South A frican M inerals M inister,
Susan Shabangu, the industry loses m ore
than half of technical graduates to other
sectors of the econom y in the rst ve
years of em ploym ent. This gure increases
to m ore than 70% in 10 years of
em ploym ent.
9
This leaves this portion of the
labor force in short supply.
Fut ure skills needs
Despite current conditions, forecasts
show that a skills shortage is still likely
to occur during the next upsw ing of
com m odity prices. The M inerals Council
of A ustralia has predicted the need for
an additional 86,000 m ining
professionals and skilled m ine w orkers
by 2020.
11
In Canada, about 145,000
w orkers are required by 2023, w hich
w ould be approxim ately half of the
current w ork force em ployed in the
sector.
12

8. A nnual report 2013,A ngloGold A shanti, 2013.
9. M ining industry - The skills m yth,Financial Mail,
6 Decem ber 2012.
10. Canadian M ining Industry Em ploym ent, H iring Requirem ents
and A vailable Talent 10-year O utlook,MiHR website, http://w w w.
m ihr.ca/en/resources/H iring_Requirem ents_A vailable_Talent_10_
year.pdf, accessed 2 June 2014.
11. M inings graduating w orkforce: A plug for the skills shortage
drain,Mining Australia, 21 M arch 2013.
12. Canadian M ining Industry Em ploym ent, H iring Requirem ents
and A vailable Talent 10-year O utlook,Mining Industry Human
Resources Council website, http://w w w.m ihr.ca/en/resources/
M iH R_10_Year_O utlook_2013.pdf, accessed 2 June 2014.
M ining and m etals com panies are also
battling dem ographics in keeping their
skilled w ork force. The aging population
m eans that m any skilled em ployees are
reaching the age of retirem ent. A ccording
to the Canadian M ining industry H um an
Resources Council (M iH R), roughly 20%
of the Canadian m ining w ork force is eligible
to retire by 201618, w hereas 6% are
currently eligible to retire. The aging
w ork force is highlighted by the expected
rise in retirem ent age in Canada from
2.2% in 2013 to 2.8% in 2023, an increase
of 27%.
10
Outlook
The nature of the risk has changed and is
focused m ore on skilled than unskilled
w orkers. A solution to the issue is beyond
the control of an individual com pany, and it
requires the industry participants to change
how they think about their business
individually and as a sector as a w hole. The
key is to learn from the last upsw ing and
plan ahead, using a m ore holistic fram ew ork
that involves all stakeholders. Being m ore
forw ard looking and considering skills
retention for the next cyclical upsw ing w ill
help m anage volatility and lessen the
perm anent loss of skills from the sector.
The solution lies in collaboration am ong the
industry, various governm ents and
academ ic institutions. W hile the current
econom ic clim ate does ease som e of the
near-term pressure on the sector, the
longer term risk of a shortage of critical
skills and attrition still rem ains.
M ining leaders need to be forw ard looking
and invest in a com panys future capability
needs. To m anage skills through different
phases of the com m odity price cycle,
m ining and m etals com panies can invest in
m ore effective and ef cient w ays of
engaging their staff irrespective of w here
they are in the w orld.
Considerations
Product ivit y recapt ure: In the age of big
data, industry can analyze and address
speci c challenges and bottlenecks to labor
productivity. The m ining and m etals
industry needs to identify operational
productivity protocols that utilize labor
m ore ef ciently and utilize data analytics to
generate actionable insights.
Crit ical role of human resources: The m ost
cost-effective and logical role is to retain
and develop your existing talent pool. This
can be done through em ployee
engagem ent, bene ts and perks, including
exible bene ts, variable pay, exible w ork
schedules, skills m anagem ent and
developm ent, extended retirem ent,
im proving m id-career engagem ent, and
providing a com pelling value proposition.
O rganizations can also target the
know ledge developm ent of the w orkers and
enhance retention through training,
upskilling and redeploym ent.
Diversit y and inclusiveness: The m ining
and m etals industry can further plug its
skills gaps by considering and attracting a
m ore diverse group of talent such as
w om en, indigenous and im m igrants w ho are
still under-utilized and under-represented in
the sector.
A m obile im m igrant w ork force can also be
used to ll the skills gaps in know ledge
occupations such as professional
geoscience and engineering.
The retiring or sunset labor pool should
be encouraged to either stay on for longer
or m entor less-experienced colleagues in
the sector.
Willingness t o invest in vocat ion and
t ert iary funding in t he face of volat ilit y:
O rganizations should not underinvest
during the dow n cycle as this is a short-
term strategy. Industry can coordinate and
collaborate w ith educational institutions to
develop technician training schem es or
speci c post-graduate quali cations that
include practical industry internships. The
idea is to be prepared for the dem and of
highly skilled and m iddle- to senior-level
m anagem ent professionals during the next
upsw ing in the com m odities m arket.
Accessing people from aligned sect ors:
Com panies can continue to tap into skills
from sim ilar sectors such as oil and gas,
engineering, construction and
m anufacturing that require com plim entary
skills. Targeting resources in these sectors
can create a w idening resource pool of
technical (e.g., electrical trades, tters and
turners) and professional (e.g., civil and
m echanical engineers) skills.
9
. B
a
la
n
c
in
g
t a
lent requirement s
7
. In
fra
s
t ru
ct ure access
6
. P
r
ic
e
a
n
5
. C
a
p
ita
l project s
4
. R
e
so
urce nat ionalism
3
. S
o
cial license to ope
ra
te
2
. C
apital dilem
m
a
s
1
0
. A
c
c
e
s
s
to
w
a
ter and energy
8
. S
h
a
rin
g
t h
e benet s
im
provem
e
n
t
1
. P
roduct ivity

Burgeoning energy costs and com peting w ater dem ands
are beginning to hurt both opex and ability to operate.
A n end-to-end approach needs to be adopted, and
renew ables is a large part of the future.
Compet ing or deplet ing
Accessing water and energy is an
essential part of operations for
mining and metals operations, and
is becoming increasingly difcult
and expensive in many regions
of the world. In 2013, mining
companies spent US$11.9b on water
infrastructure globally an enormous
250%increase from US$3.4b in
2009.
1
Likewise, global energy prices
have leapt by 260%since 2000.
2
Dilemma: Increasing capex
The m ining and m etals sector faces
increasing fuel prices w hile com m odity
prices tighten, resulting in ever-narrow ing
operating m argins. These high energy costs
are im pacting the com petitiveness of the
industry as costs escalate. In Chile,
electricity costs have increased by 11% a
year since 2000, m aking it one of the m ost
expensive m ining regions in term s of
securing energy. Rising residential energy
dem and, com bined w ith underinvestm ent
by utilities in South A frica, m eans a loss of
com petitive advantage as a low -cost energy
location. South A frican m ining com panies
are struggling to adapt their consum ption
patterns and m ining m ethods, resulting in
substantially higher electricity bills and
notable m argin erosion. In 2013, the
N ational Energy Regulator of South A frica
(N ERSA ) granted Eskom an 8% average
increase per annum over the next ve
years. Despite these tariff increases being
low er than those in the previous few years,
they continue to be higher than in ation.
The large am ounts of capital expenditure
required in developing the necessary w ater
and energy infrastructure is a lim iting factor
in developing som e of the w orlds richest
m ineral deposits. For instance, several large
projects have shelved developm ent plans,
including Barrick Golds Casale project,
4
Goldcorps El M orro project and Tecks
Relincho project.
5
A lternative w ater sources, such as
desalination facilities, and pipelines to
transport w ater over long distances are
expensive; for exam ple, the Escondida
0
5
10
15
20
25
30
35
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Tariff increase (%) CPI (%)
Sout h African elect ricit y t ariff increases versus inat ion
Source: Eskom
3
1. W ater: critical resource and costly risk for m iners,
Mineweb.com, 30 M ay 2013.
2. Decoupling technologies, opportunities and policy options,
U nited N ations Environm ent Program m e, 2014, http://w w w.unep.
org/resourcepanel/Publications/A reasofA ssessm ent/Decoupling/
Decoupling2/tabid/133371/Default.aspx, accessed 1 July 2014.
4. W ater Shortage Confronting Global M ining Industry,RWL
Water Group, 1 M ay 2013.
5. Chiles M ining Sector Seeks Solutions to W ater, Energy
Problem s in 2013,OOSKAnews, 2 January 2013.
3. Pricing docum ents,Eskom website, http://w w w.eskom .co.za/
Custom erCare/TariffsA ndCharges/Pages/A verage_Price_
Increases.aspx, accessed 18 June 2014.
Key thought
Access to water and
energy
(12 in 2013)
10
seaw ater desalination plant w ill cost
U S$3b.
6
The large, globally diversi ed
com panies, such as Rio Tinto, A nglo
A m erican and BH P Billiton, have the
requisite expertise and nancial strength to
build these com plex w ater procurem ent
system s for large-scale projects. They are
likely to em erge as the partners of choice in
w ater-scarce countries seeking to exploit
their natural resources as a result. H ow ever,
sm aller com panies, particularly those w ith
single-m ine operations in w ater-scarce
regions, such as South A m erica, are the
m ost vulnerable. This is because they are
likely to have the greatest exposure to
event risks but have lim ited nancial and
technical resources at their disposal to deal
w ith them .
Dilemma: Unreliable access
to energy
In addition to the increasing cost of energy,
there has been an unreliable pow er supply
from the grid w ith uncertain pow er prices.
In m ost instances, grid-connected electricity
needs to be supplem ented w ith on-site
generation, typically large-scale diesel
generation, resulting in a dependency on
diesel fuel.
The m ore rem ote the m ine, the m ore likely
off-grid pow er solutions are required, e.g.,
the m ajority of Chiles m ines are located in
rem ote locations at altitude in the N orth of
the country. M uch of Chiles rem aining
hydro potential is located in the South of
the country, far from the m ines and the
urban center of Santiago and not currently
linked to the transm ission netw ork, and any
proposals to date to link them to the
netw ork have been extrem ely politically
unpopular. This is increasingly m irrored for
operations around the w orld.
Dilemma: Impact on social
license to operate
In em erging and frontier countries, the risk
is am pli ed as m ining and m etals
com panies have to com pete w ith both
governm ents and com m unities for these
scarce resources. Failure to carefully
m anage a m ines use of w ater and energy
m ay jeopardize the industrys SLTO .
Poor environm ental risk m anagem ent can
lead to w ater contam ination and resulting
com m unity backlash. This can lead to
production stoppages, protests, nes and
license w ithdraw als. For exam ple, in Peru,
the Tia M aria copper project and M inas
Conga copper and gold project faced
overw helm ing com m unity opposition over
local residentsconcerns about the im pact
of the projects on local w ater supply. It
caused suspension of w ork at the m ines and
a large loss of tax revenue for the
Governm ent. A nti-m ining form er
presidential candidate M arco A rana
declared: W e all know that neither Conga
nor Tia M aria have obtained social licenses
nor the suf cient environm ental basis w ith
w hich to proceed.
7
Consideration: Improve water
management
A n ef cient w ater m anagem ent fram ew ork
is essential and needs to be considered
across all developm ent and operational
processes, including prelim inary approvals,
production, de-com m issioning and closure.
Such a fram ew ork and its practices m ust
aim to m inim ize contam ination and
optim ize consum ption. Com panies need to
nd innovative m ethods to nd a balance
betw een regulatory com pliance and cost
savings.
Consideration: Take a strategic
approach to energy
It is not about choosing either renew ables
or conventional energy but using the
com plim entary characteristics of both
energy types to optim ize energy spend and
energy risk pro le. To better understand
their energy pro le, com panies should
understand:
Their com pany-w ide strategic approach to
energy
W hether it is m ore econom ical to
generate energy on-site in som e locations
The available incentives being secured
and the optim al nancing structures
being deployed
Consideration: Harness
renewable energy
The sector is increasingly evaluating
renew ables as a possible source of cost-
effective and reliable energy. M any of the
w orlds largest m ining com panies are
evaluating greater use of renew able energy
plants a trend set to intensify rapidly as
part of a broader strategy to lock in
long-term xed electricity prices and
availability w hile m inim izing exposure to
regulatory changes, m arket pricing and
external fuels. For exam ple, Rio Tinto has
enlisted First Solar 1.7 m egaw att (M W )
solar-diesel hybrid energy plant in A ustralia
to offset its diesel consum ption.
8
Codelco
has replaced 85% of diesel dem and w ith
51.8GW h solar therm al energy at
one facility.
9
6. Desalination plant,Mining Weekly, 26 July 2013.
7. Billions of dollars w orth of Peru m ining projects to resum e
soon,Mining.com, 22 Septem ber 2013, http://w w w.m ining.com /
conga-and-tia-m aria-to-resum e-soon-peruvian-
governm ent-20420/, accessed 1 July 2014.
8. Rio Tinto to im plem ent solar pow er at Q LD m ine site,
Australian Mining, 22 M ay 2014, http://w w w.m iningaustralia.
com .au/new s/rio-tinto-to-im plem ent-solar-pow er-at-qld-m ine-sit,
accessed 1 July 2014.
9. Elizabeth Judd, W hy solar is a good t for m ines: A Codelco
case study,Canadian Clean Energy Conferences, 2013, via
Renew ables and M ining.
$104
$125
$109
$102
$89
$87
$45
$50
$0
$0 $50 $100 $150 $200 $250 $300 $350
$95
$116
$142
$135
$164
$206
$216 $329
$297
$179
$154 $95
$122 $86
$65 $145
$61 $87
$230
$332
$99
$149
$64 $89
$68 $91
$204 Solar PV - Crystalline rooftop
Solar PV - Crystalline utility scale
Solar PV 1hinllm uLiliLy scale
Solar Lhermal
Fuel cell
M icroturbine
CeoLhermal
Biomass direcL
Onshore wind
Lnerqy ellciency
Battery storage
Diesel generator
Gas peaking
IGCC
N uclear
Coal
Cas combined cycle
Alt ernat ive
energy
Convent ional
Assuminq: USS^.50/MMBLu qas; USS1.99/MMBLu coal; USS^/qallon diesel Levelized cosL (USS/MWh)
Cost of energy comparison
Source: Lazard
There is a grow ing understanding that
renew able energy needs to becom e core to
operations as it can potentially increase the
acceptability of a project, both in term s of
environm ent regulations and social
acceptance.
Costs for renew able energy sources, such
as solar and w ind, have declined
dram atically over the past decade, w hereas
the cost of accessing conventional energy
sources has been increasing, especially in
rem ote locations, thereby m aking
renew able energy an increasingly
com pelling nancial choice for large
corporations. In a grow ing num ber of
m arkets, renew able energy is cheaper than
conventional sources.
10. Clim ateScope 2013 N ew frontiers of low -carbon energy
investm ent in Latin A m erica and Carribean,The Multilateral
Energy Fund and Bloomberg New Energy Finance, 2013.
11. Ibid.
In Chile, the m ining industry is responsible
for about 36% of the countrys electricity
consum ption,
10
w ith electricity
consum ption in the country expected to
grow by 6% to 7% per year until 2020.
Consum ers in Chile pay som e of the
m ost expensive electricity prices in
Latin A m erica
11
because of a reliance on
fossil fuels and an im port restriction from
gas-rich A rgentina. This has m ade
harnessing renew able energy an essential
strategy for the m ining and m etals sector as
both w ind and solar energy are cheaper
than the long-term w holesale electricity
projects in Chile. It also reduces
transm ission issues through on-site or
near-site renew able production, including
off-grid production in the rem ote A tacam a
region. This could also reduce w ater
consum ption for therm al generation, low er
fuel transportation costs and ensure a
regular and affordable pow er supply. A n
abundant w ind resource along Chiles
lengthy coastline and som e of the highest
insolation rates in the w orld seen in the
A tacam a Desert region m ean there is
plenty of potential for renew able
investm ent.
Consideration: Be innovative
There is an increasingly urgent need for
the industry to innovate and establish less
w ater and energy intensive processes. This
w ould include the use of hydrom etallurgical
system s that consum e less w ater and
energy, and produce tailings that are
environm entally benign.
Outlook
A s global dem and for energy is expected
to increase 36% by 2035, this risk is
com pounding year by year, w ith the sector
facing higher energy price increases and
volatility. M anaging costs sustainably is a
priority. A s the cost of renew able energy
declines, the m ining and m etals industry
w ill increase its reliance on renew ables.
The shift tow ard a resource-ef cient and
low -carbon operation can ensure
com m unity acceptance.
Renewable energy invest ment in t he mining indust ry (base case, US$m), 201322
Source: M ining: the grow ing role of renew able energy,Global Cleantech Center, EY, 2014.
38 44
262
312
445
39
174
379
51
688
1343
37
532
1047
729
N orth A m erica Europe A sia-Pacilc Latin A m erica M iddle East and A frica
2013 2018f 2022f
W ater scarcity is an issue that dem ands a
strategic and practical response from
businesses to develop and im plem ent
solutions. Com panies that treat w ater risks
as a strategic challenge w ill be far better
positioned in the future. This m eans
assessing dependence on w ater and future
supplies, and developing plans to cope w ith
increased prices and possible shortages.
M apping w ater risks w ithin the w hole supply
chain rem ains a key challenge. Going
forw ard, a w idely accepted w ater
accounting fram ew ork m ay im prove
capability of the industry to report
sustainable use of w ater resources, in a
consistent and contextual m anner, w hile
enabling benchm arking of operations to
identify potential ef ciency m easures.
Business risks facing mining and metals 20142015 46 46
Top risks for
commodities
Aluminium
C
o
p
p
e
r
G
o
l
d
C
o
a
l
I
r
o
n

o
r
e
L
e
a
d
/
Z
i
n
c
N
i
c
k
e
l
P
G
M
P
o
t
a
s
h
S
i
l
v
e
r
U
r
a
n
iu
m
S
t
e
e
l
The top three risks for each com m odity
draw out the issues that are especially
pertinent to that com m odity. The num ber
one risk, productivity im provem ent,
features prom inently as one of the top risks
for m any com m odities as producers seek to
address the signi cant decline in
productivity across the industry. In base
m etals and bulk m aterials, in particular,
oversupply is also fuelling the push for
greater productivity as prices decline and
producers are feeling increased pressure on
m argins as a result. M any producers have
been, and w ill continue to, reassess their
Business risks facing mining and metals 20142015
Copper A lum inium Coal
3
.

A
c
c
e
s
s
to water an
d
e
n
e
r
g
y
i
m
p
rovem
e
n
t
2
. P
roduct iv
it
y
c
a
pacit
y
1
. Exces
s
3
.

S
o
c
ia
l license to
o
p
e
r
a
t
e
s
u
bst it ute
s
2
. Threat o
f
i
m
p
r
ovem
e
n
t
1
.

P
r
o
duct iv
i
t
y
3
.

A
c
c
e
s
s
to water an
d
e
n
e
r
g
y
i
m
p
rovem
e
n
t
2
. P
roduct iv
it
y
t
o
o
pera
t
e
1
.

S
o
c
ial lic
e
n
s
e
Potash N ickel PGM
3
. C
a
pit al proje
c
t
s
v
olat ility 2
.

P
r
ic
e
and cu
rr
e
n
c
y
n
a
t
ionalis
m
1
.
R
esou
rc
e
3
.

R
e
s
o
urce nat io
n
a
lis
m
i
m
p
rovem
e
n
t
2
. P
roduct iv
it
y
b
e
ne
t
s
1
.

S
h
aring
t
h
e
3
.

I
n
f
r
a
st ruct ure a
c
c
e
s
s
i
m
p
rovem
e
n
t
2
. P
roduct iv
it
y
p
roject
s
1
. Capita
l
47 Business risks facing mining and metals 20142015 47
reverberated across a num ber of
com m odity m arkets. The ban has shifted
the supply-dem and balance in both nickel
and copper.
Excess capacity rem ains the num ber one
risk for steel and alum inium . In view of
continued low alum inium prices, producers
have started a fresh round of production
cuts, as w ell as shelving or delaying new
capacity in an effort to reduce excess
production. Steelm akers continue to closely
m anage their capacity utilization.
portfolios and consider either deferring high
cost projects or divesting non-core assets.
A ccess to energy and w ater, the new risk
in our top 10 this year, is also im pacting a
num ber of com m odities including copper
and alum inium . A s energy and w ater costs
increase, these producers w ill have to
start looking to renew ables to keep costs
under control.
Resource nationalism features prom inently,
particularly in light of the Indonesian ban on
ore and concentrate exports w hich has
Business risks facing mining and metals 20142015
Gold Iron ore Lead/Zinc
3
.

S
o
c
ia
l license to
o
p
e
r
a
t
e
2
.

C
a
p
ital dilem
m
a
s
i
m
p
r
ovem
e
n
t
1
.

P
r
o
duct iv
it
y
3
. C
a
pit al proje
c
t
s
i
m
p
rovem
e
n
t
2
. P
roduct iv
it
y
v
o
lat ilit
y
c
u
rrenc
y
1
.
P
rice a
n
d

3
. C
a
pit al proje
c
t
s
2
. P
roduct iv
it
y
i
m
p
rovem
e
n
t
s
h
rinka
g
e
1
. P
ipelin
e
Silver Steel U ranium
3
. C
a
pit al proje
c
t
s
v
olat ility 2
.

P
r
ic
e
and cu
rr
e
n
c
y
n
a
t
ionalis
m
1
.
R
esou
rc
e
3
.

P
r
i
c
e
a
n
d currency
v
o
la
t
i
l
i
t
y
i
m
p
rovem
e
n
t
2
. P
roduct iv
it
y
c
a
pacit
y
1
. Exces
s
3
.

S
o
c
ia
l license to
o
p
e
r
a
t
e
2
.

I
n
c
r
e
a
sed reg
u
la
t
i
o
n
s
u
b
s
t
itutes (o
t
h
e
r

e
n
e
r
gy typ
e
s
)
1
. T
hreat o
f

Under the radar risks
19
15
13
11
14
10
17
R
a
n
k
i
n
g

i
n

2
0
1
3
Up from 2013 Same as 2013 Down from 2013
11
12
13
14
15
16
17
N
e
w

t
e
c
h
n
o
lo
g
ie
s
C
o
m
p
e
t
in
g
d
e
m
ands f or land use
F
r
a
u
d
a
n
d
c
o
rrupt ion
P
i
p
e
lin
e
s
hrinkage
T
h
r
e
a
t o
f subst it ut e
s
C
y
b
e
r at t acks a
n
d

C
l
i
m
a
t
e
c
h
a
n
g
e
concerns
i
n
f
o
r
m
at ion sec
u
r
it
y
20142015
2. Coal-t o-liquids (CTL) and pet roleum: CTL is a
process of coal liqui cation w hich allow s coal
to be utilized as an alternative to oil. In South
A frica, CTL fuels are not only used in cars and
other vehicles, but CTL fuels produced by
South A frican energy com pany Sasol also
have the approval to be utilized in com m ercial
jets.
5
India-based steel m anufacturer Jindal
Steel and Pow er (JSPL) is investing IN R550b
to set up a CTL plant in O disha, India. The
investm ent w ill allow JSPL to produce
m ethanol, petrol and diesel from coal.
6
3. Aluminium and st eel: Steel w as thought to be
irreplaceable in car m anufacturing due to its
strength and durability. H ow ever, w ith
innovation in alum inium , cars are increasingly
m ade from alum inium , including engines and
drive shafts. This m akes the cars lighter and
m ore fuel ef cient. A ccording to A lcoa,
alum inium usage in car m anufacturing is
expected to double by 2025. In recent
exam ples, Ford is m anufacturing its F-150
pickup truck and Toyota its 2018 Cam ry using
alum inium instead of steel in a bid to lighten
the w eight and thus im prove fuel econom y.
7
12
Threat of subst it ut es
(10 in 2013)
The progress in technological innovation across
dow nstream industries and com m odities has
proved that no com m odity is beyond substitution.
The recent supercycle that led to high com m odity
prices had sow ed the seeds of technical
innovation to nd or use low -cost substitutes.
O ther drivers that prom ote substitution, and
potentially disrupt the existing business m odels,
are regulatory change and environm ental
concerns. The follow ing trends highlight the
grow ing challenge som e of the com m odity
m anufacturers are facing.
1. Gas and met coal: The steel business m odel is
facing a challenge from w ithin the industry.
South Korean steelm aker PO SCO could
potentially alter the dynam ics of the steel
m arket through its ITm K3 technology, w hich
does not use m etallurgical coal for producing
virgin steel. The com panies that have heavily
invested in coking coal assets could be
required to alter their business m odel once
this technology opens up for the w ider m arket
in 2015 upon expiration of the patent.
Low -cost gas and DRI (direct reduction iron)
are also m et coal-free alternatives.
Key thought
Substitution is a risk for all
com m odities and all operators.
1. Global Information Security Survey 2013, EY, 2013.
2. Global risks 2014 ninth edition,World Economic Forum,
http://w w w 3.w eforum .org/docs/W EF_GlobalRisks_Report_2014.
pdf, accessed 30 M ay 2014.
3. O bam a Says Cyberterrorism Is Countrys Biggest Threat,
International Business Times, 18 February 2014.
4. Disclosing Cyber Security Incidents: The SEC W eighs In,
Forbes, 4 June 2012.
5. Coal to Liquids,World Coal Association,
http://w w w.w orldcoal.org/coal/uses-of-coal/coal-to-liquids/,
accessed 23 M ay 2014.
6. JSPL to soon tie-up technology partner for A ngul CTL plant,
Moneycontrol.com, 14 M arch 2013.
7. Fords A lum inium F 150, W hat Took Them So Long?,Forbes,
27 Decem ber 2013; W ill alum inum Ford F-150 be a rolling beer
can?,USA Today, 31 Decem ber 2013.
11
Cyber at t acks and
informat ion securit y
(17 in 2013)
M ore than 75% of our clients in m ining and m etals
cite cyber threats as their top security priority in
201314, w ith 41% of the m ining and m etals
respondents experiencing an increase in external
threats over the past 12 m onths
1
w hile the W orld
Econom ic Forum nam es cyber attacks am ong the
top- ve likely global risks.
2
In response to this
threat, the U S Governm ent has m ade
cybersecurity a priority and has asked m ilitary
services to contribute m anpow er tow ard a new
force of cyber w arriors.
3
Cyber crim es com e in
m any form s such as industrial espionage,
intellectual property (IP) theft, cyber hacktivism ,
online scam s, custom er data theft, extortion,
identity theft and m oney laundering.
To increase transparency around this threat,
security exchanges have introduced regulations
directing com panies to disclose data breaches.
For exam ple, the U S Securities and Exchange
Com m ission (SEC) has guided com panies to
report breaches that are likely to affect investor
decisions.
4
The European U nion and A sia have
started to introduce sim ilar breach notice law s.
Businesses can no longer afford to take
cybersecurity just as a com pliance exercise and a
cost burden. The m ining and m etals industry
needs to approach the issue of cyber hacking and
cybersecurity w ith the sam e seriousness as it
took health, safety and environm ent issue in the
last decade. There is a historical legacy in m ining
and m etals com panies that inform ation
technology (IT) cam e under the responsibility of
the chief inform ation of cer (CIO ) w hereas
operational technology (O T) production control
system s w ere often the responsibility of the
relevant technical function. N ow, the better
practice is that responsibility for the security,
m aintenance and integration of IT and O T should
be m anaged by the CIO .
Key thought
The full potential of this threat has
just started gaining m om entum .
9. A nnual W orld Exploration Trends 2014 Report,
SNL Metals &Mining, 2 M arch 2014.
10. U ranium O ne Steps A w ay From H oneym oon,Nuclear
Intelligence Weekly, 15 N ovem ber 2013; IN TERVIEW -A nglo
A m erican m ay exit Peru copper project to save m oney,Reuters,
7 A pril 2014.
8. A lum inium spearheading substitution of costly copper,
Business Standard, 9 O ctober 2012
Copper t o aluminium price rat io
Source: Thom son Datastream
3.4
3.5
3.6
3.7
3.8
3.9
4
4.1
4.2
4.3
4.4
J
a
n

1
2
M
a
r

1
2
J
a
n

1
4
M
a
r

1
4
M
a
y

1
2
J
u
l

1
2
S
e
p

1
2
N
o
v

1
2
M
a
r

1
3
M
a
y

1
3
J
u
l

1
3
S
e
p

1
3
N
o
v

1
3
J
a
n

1
3
4. Coal and shale gas: The m ost pertinent risk
of substitution w as the increasing penetration
of shale gas in the U S for therm al coal. Coals
share of pow er production slipped from 50% in
2002 to 33% in 2012, w hereas that of shale
gas im proved from 18% to 30% over the
sam e period.
5. Aluminium and copper: U ntil recently, the
prem ium in copper prices put the m etal in
signi cant risk of substitution in roo ng,
plum bing tubes, refrigeration, air conditioning
and com puter chip interconnects. A lum inium
is increasingly used to replace copper in
autom otive precision tubing to reduce vehicle
w eight. Price differential is the m ain driver for
copper substitution, w ith copper being nearly
four tim es as expensive as alum inium . O ther
drivers include the developm ent of the
alum inium zirconium alloy by com panies such
as Rusal and A lcoa,
8
w hich can w ithstand
extrem e cold and snow fall, to be used in
pow er transm ission line m anufacturing
instead of copper.
Those m ost at risk are single-com m odity
organizations or organizations in w hich one
com m odity dom inates the product m ix or pro t
share. M ining com panies have to consider a
diversi cation strategy along w ith not aim ing to
invest for a very long term w ithout taking
equivalent risk m itigation m easures. Is it so
strange to think that steelm akers m ay also sm elt
alum inium as custom er-focused m etal producers?
It is im perative that players strive to be in the low
quartile of the costs so that even if the m arket
changes, they w ould have business continuity
to respond.
13
Pipeline shrinkage
(14 in 2013)
There has been a notable drop in exploration
spend, w ith global nonferrous m etals exploration
budgets falling from U S$21.5b in 2012 to
U S$15.2b in 2013 a 29% decline.
9
This is due
to the capital discipline em ployed by several
com panies to arrest m argin decline, as w ell as
the general drought of affordable risk capital for
the juniors w ho undertake m ost of the
exploration. Projects have either been stalled and
exploration deferred. For instance, A nglo
A m ericans M ichiquillay copper project in Peru or
U ranium O nes H oneym oon m ine in A ustralia.
10

The change in investor sentim ent and risk
appetite has also contributed to this, and has
especially im pacted the junior explorersability to
raise suf cient capital for projects. M any of these
com panies are in survival m ode until conditions
im prove, operating on skeletal resources to stay
a oat. In the current low -risk environm ent, it
seem s unlikely that com panies w ill increase
exploration spend in the near term . A nd the
lack of exploration today w ill lim it discoveries
tom orrow and production in the years to com e.
This is going to have a large im pact on the
grow th of the m ining industry and supply in the
long term .
Key thought
A long-term supply risk due to the
short-term investm ent environm ent.
14
Fraud and corrupt ion
(11 in 2013)
In a low er m argin environm ent, executives are
expected to deliver im proved nancial
perform ance w ith less capex. This bolsters the
grow ing risk that bribery or other unethical
practices m ay be used to w in business. A ccording
to the EY Fraud Survey 2013, respondents gave a
concerning picture about the prevalence of
unethical practices in their respective countries.
In rapid grow th m arkets, 67% thought bribery and
corrupt practices w ere w idespread, w hereas only
one-third believed the sam e in m ature m arkets.
11

M ost m ajor m ining and m etals com panies are
now operating in em erging countries w here law s
regarding corrupt practices and their
enforcem ent are com paratively w eak. For
instance, the Dem ocratic Republic of the Congo
(DRC), w hich is ranked 154 out of 177 in
Corruption Perceptions Index 2013,
12
m ade it to
the top-10 investm ent destinations in term s of
total global budget for nonferrous m etals
exploration in 2013.
13
O ver the past few years, countries have
developed m easures to enforce actions related to
unlaw ful activities. N ew law s, such as the U K
Bribery A ct, U S DoddFrank A ct and Canadas
CFPO A , are im pactful and have helped identify
individuals involved in corrupt practices. In
addition, com panies are engaging in m ore robust
anti-bribery and corruption due diligence as they
evaluate new licenses or acquire other
com panies. A s m any bribery and corruption
incidences relate to third parties, com panies are
also autom ating vendor due diligence and
focusing on the business reason to em ploy a
particular agent or consultant. H ow ever, risk
exposure is still elevated in em erging countries,
and far m ore effort is required by top
m anagem ent to create a fram ew ork that
m itigates fraud and corruption w ithout hindering
the grow th prospects of the com pany.
11. Navigating todays complex business risks, Europe, Middle
East, India and Africa Fraud Survey 2013, EY, 2013.
12. Corruption Perceptions Index, http://countryeconom y.com /
governm ent/corruption-perceptions-index#, accessed
19 M ay 2014.
13. Global exploration budgets dow n 29% in 2013,Mining.com,
http://w w w.m ining.com /global-exploration-budgets-dow n-29-
in-2013-24176/, accessed 19 M ay 2014.
Key thought
A n enduring threat that w ill never
abate, it w ill just becom e better
m anaged.
15
Compet ing demands
for land use
(13 in 2013)
Land access rem ains a signi cant risk to the
sector that often faces com m unity opposition
over environm ental concerns and land usage,
w ith the resulting national and local governing
law s becom ing m ore stringent about land use.
This opposition can increase start-up costs and
cause signi cant delays to operationalizing a
project. The issue is com pounded in em erging
m arkets w here a larger num ber of people are
dependent on the land.
Land m anagem ent is critical for com panies due
to its im pact on biodiversity and increased
scrutiny by regulators, local com m unities,
investors and non-governm ent organizations
(N GO s). For instance, PO SCO has not been able
to begin construction of its steel plant in O disha,
India because of local resistance to land
acquisition, leading to a reduction in the steel
plants slated capacity from 12M TPA to 8M TPA .
14

In other cases, steel com panies A rcelorM ittal and
M onnet Ispat have had to pull out of projects in
Karnataka and Jharkhand, India because of
deferrals in land acquisitions.
15
A ccordingly,
com panies are focusing on m easures to offset
or m inim ize the im pact of their operations on
biodiversity. For exam ple, BH P Billiton established
a ve-year alliance w ith Conservation
International to preserve areas of high
conservation value, in collaboration w ith local
partners. The alliance aim s to deliver lasting
bene ts to the environm ent, w ith Conservative
International providing technical expertise to
BH P Billiton.
16
Key thought
Com peting w ith traditional land
users w ill never be popular.
14. Posco land acquisition over, not the problem s,
The New Indian Express, 5 July 2013.
15. N o country for foreign steel com panies?,
The Hindu Business Line, 24 July 2013.
16. BH P Billiton Sustainability Report, EY, 2012.
17. Greenpeace, other N GO s stance on developm ent projects to
hit econom ic grow th: IB,The Financial Express, 11 June 2014.
18. The W ar O n Coal Is A W ar A gainst A m erican Jobs,Forbes,
6 June 2014.
19. China Steel Sector,UBS, 20 February 2014, via
Thom sonO ne.
20. Clim ate change and energy,Anglo American company
website, http://w w w.angloam erican.com /developm ent/envs/
clim ate-change-and-energy/approach.aspx, accessed
23 M ay 2014.
16
M ining and m etals com panies are constantly
under scrutiny by regulators, external
stakeholders, local com m unities and activist
N GO s to adopt a m ore sustainable approach to
operations. Clim ate change concerns have
increased the sensitivity of all the stakeholders,
resulting in legal or punitive action on the
com panies. The im pact is not only on the
perform ance and brand im age of the speci c
com pany, but also on the industry and
em ployees. For exam ple, activist N GO s such as
Greenpeace are advocating an anti-coal stance
due to the claim ed negative im pacts of coal
m ining and usage. Such opposition has resulted
in stalling or delaying several coal-based projects
across the w orld. For exam ple, the M ahan coal
block in M adhya Pradesh, India has faced
resistance since 2013.
17
In another exam ple, the
U S-based Environm ental Protection A gency
(EPA ) plans to im pose new regulations on carbon
dioxide (CO 2) em issions from pow er plants that
use coal. The regulation proposes existing coal
plants cut 30% of their CO 2 em issions by 2030.
Though intended to reduce the countrys carbon
footprint, it is expected that the necessary
investm ents w ill cost roughly U S$8b per year,
w hich w ould push the cost of electricity up,
resulting in job losses and slow dow n in business
grow th due to lack of affordable, reliable
electricity.
18
In China, to address rising pollution levels, the
State Council released a report Guidance for
curbing excess capacity in w hich it outlined
plans to reduce high-polluting steel capacity by
80 m t by 2017. This includes clean production
audits and an upgrade to clean production
technologies by 2017 in the BeijingTianjinH ebei
region. The Governm ent has also decided not to
allow new additions to overcapacity industries.
19
W ith clim ate change posing a direct challenge to
com paniesreputation and SLTO , they are taking
action to m itigate this risk by reducing their
carbon footprint or im proving product
stew ardship by investing in carbon capture and
storage technology research. Com panies are
increasingly leveraging renew able energy and
setting greenhouse em ission targets by
em ploying technology. For instance, A nglo
A m erican has invested U S$201m in low carbon,
and energy ef ciency, research and technology
developm ent. The com pany aim s to save
U S$75m through the sharing and adoption of
best available technologies in underground
ventilation, diesel use, pum ping and conveyor
optim ization.
20
(15 in 2013)
Climat e change
concerns
Key thought
A sustainable operating m odel w ill
becom e an essential part of the
strategy.
21. A rcelorM ittal takes hom e Best Innovation Processaw ard
at A m erican M etal M arkets fth annual A w ards for Steel
Excellence,ArcelorMittal company website, http://autom otive.
arcelorm ittal.com /N ew s/new sapriljune/
A M M A w ard2014H ondaDoorRing, accessed 27 June 2014.
New t echnologies
(19 in 2013)
A m id the constant pressure on m argins and
declining prices, the m ining and m etals sector
has been forced to look for innovative w ays to cut
costs and increase ef ciencies. To achieve this,
com panies have been leveraging technology to
advance exploration, increase productivity,
im prove safety, discover new ore bodies, im prove
recovery rates, rem ove w aste and decrease
energy use. There has been an investm ent in
research into innovative processes and
disruptivetechnologies. Such technologies can
alter the dynam ics of the m arket, from changing
dem and to threatening investm ents already m ade
to develop existing technologies. For exam ple,
steel is under constant threat to be substituted by
other lighterm aterials such as alum inium .
A rcelorM ittal has responded to the threat via its
S-in-m otion program , w hich includes a collection
of m ore than 60 different advanced and
ultra-high-strength steels that are 30% to 40%
lighter than the standard steel. O ne of them is
U sibor technology,w hich is press hardened
steel that provides light steel w ithout reducing its
strength. H onda had used the new steel for its
new A cura M DX and achieved not only a 4 kg
reduction in w eight, but also the highest available
collision safety rating from the Insurance Institute
for H ighw ay Safety.
21
Such new disruptivetechnologies can also
potentially disrupt the status quo in the m arket.
For instance, if the new ITm K3 steel-m aking
technology developed by PO SCO , w hich does not
use m etallurgical coal, nds traction in the
m arket, it can potentially change the investm ent
dynam ics in the steel and m etallurgical coal
industry.
17
Key thought
M argin pressure to prom ote use of
m ore disruptive technologies.
EYs Global Mining & Metals Center
W ith a volatile outlook for m ining and m etals, the global sector is
focused on cost optim ization and productivity im provem ent, w hile
poised for value-based grow th opportunities as they arise. The
sector also faces the increased challenges of changing expectations
in the m aintenance of its social license to operate, skills shortages,
effectively executing capital projects and m eeting governm ent
revenue expectations.
EYs Global M ining & M etals Center brings together a w orldw ide
team of professionals to help you succeed a team w ith deep
technical experience in providing assurance, tax, transactions and
advisory services to the m ining and m etals sector. The Center is
w here people and ideas com e together to help m ining and m etals
com panies m eet the issues of today and anticipate those of
tom orrow. U ltim ately it enables us to help you m eet your goals and
com pete m ore effectively.
EY | A ssurance | Tax | Transactions | A dvisory
About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services w e deliver help build trust
and confidence in the capital m arkets and in econom ies the w orld over.
W e develop outstanding leaders w ho team to deliver on our prom ises
to all of our stakeholders. In so doing, w e play a critical role in building
a better w orking w orld for our people, for our clients and for our
com m unities.
EY refers to the global organization, and m ay refer to one or m ore,
of the m em ber firm s of Ernst & Young Global Lim ited, each of w hich is
a separate legal entity. Ernst & Young Global Lim ited, a U K com pany
lim ited by guarantee, does not provide services to clients. For m ore
inform ation about our organization, please visit ey.com .
2014 EYGM Lim ited.
A ll Rights Reserved.
EYG no. ER0170
CSG/GSC2014/1393438
ED N one
This m aterial has been prepared for general inform ational purposes only and is not intended
to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors
for specific advice.
ey.com/miningmet als
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