As part of Metal Bulletin’s Next 100 series of articles looking at the future of the metals and mining industries, Loren Padelford, executive vp and gm at Active Risk, looks at the future of risk management in the sector and makes some bold predictions.
The past decade has seen massive overall growth in the size and value of mining companies, driven by commodity price increases fuelled by demand from emerging markets.
But with the prices of copper, gold and iron ore down by 30-40% from their 2011 highs, analysts now believe the latest commodities supercycle is dead, as growth in China slows and economic recovery worldwide takes longer than expected.
The end of the boom in the supercycle is hitting the mining community hard. Share prices of the big players have tumbled. As prices and profits fall, miners need to adjust their business strategies and operations. The next 20 years must see miners returning to their roots as skilled operators, rather than pseudo-financial institutions.
The focus needs to be on how to make mining operations as efficient as possible. Inefficiencies will no longer be masked by rising commodity prices, so scrutiny of the risks likely to affect margins needs to be more stringent than ever.
It will be a case of “back to the future” – back to the fundamentals of being a good miner. Identifying and managing the risks to operational margins, reputation and shareholder value will be essential, as shareholders continue to demand growth despite falling prices.
The commodities supercycle saw many companies transform themselves into so-called “mock bankers”, focusing on the management of funds and acquisitions, rather than being superbly efficient at advancing big investment projects and operations to find and exploit new resources.
Risk management and credit rating
Without a commodities boom to cushion the industry, the real bankers will want to be sure that companies have control of their risks before providing the capital that miners need. In the next 20 years, an organisation’s ability to show they can effectively manage risks will become a strategic advantage in the sector.
Credit rating agencies, such as Standard and Poor’s, are increasingly building an evaluation of risk management effectiveness into the criteria that determine the credit ratings they give to organisations. This always affects the cost of borrowing.
In turn, this means that mining companies now require both a deeper, more granular understanding of the risks to their businesses and an integrated enterprise picture, at the same time as they tighten their corporate and operational efficiencies.
For ceos to use consolidation, mergers and acquisitions as a way to satisfy shareholders’ demands for growth is a risky strategy. There is a chance that the acquirer will be brought down if the acquisition chosen damages the share price. Understanding the risk profile of companies that might be purchased is crucial at the point of acquisition.
The investment money to make the purchase will be hard to secure unless there is a risk management strategy in place. This strategy must stand up to close inspection for both the purchasing organisation and for the business to be acquired.
Miners have led the world in risk management
In terms of risk management, mining companies have led the way for decades due to the risky nature of all aspects of their businesses. But, in the next 20 years, the need for excellence in risk management will be supreme.
Mining is no longer “safe” anywhere in the world. Miners are going deeper than ever before. Going to locations never exploited before, therefore facing new socio-political challenges and employing ever more complex technologies.
Tighter risk management is crucial for major projects and day-to-day operations and this approach needs to be integrated and shared across the enterprise.
Make risk management simple, valuable and personal
A typical mine operation has numerous risk and compliance systems and registers, often using standalone spreadsheets. There will be risk registers for health and safety, engineering, maintenance, operations, legal, finance, and for special projects requiring major investment. This leads to duplication, information silos and gaps, and even exasperation among employees as they enter the same data into multiple places.
It’s time to go back to the future and make things simple, valuable and personal for every employee. Effective risk management boils down to three simple questions:
• What are the real material risks?
• What are we doing about them?
• Is it working?
Addressing these points will allow mining companies to assess the risks at each project, at different sites and levels in the business and to devote resources to manage them.
Three top tips for a mining company executive’s future
Here are three top tips for effective risk management for mining company executives:
• Ensure the business has a risk-aware culture and that risk management is in the hands of everyone. Get each and every employee involved in the risk process because the risk that might destroy your business could come from a place you did not expect. Look at all the places where risk could hit your business, not just the obvious ones.
• Provide support for risk management initiatives throughout the organisation – not just a one-off policy announcement. The executive board must embrace risk management and see it as strategic for the business or it will not get off the ground.
• Implement risk management at the start of the planning process – both in terms of strategy and capital projects. Use thorough risk assessments as a tool to help decide which projects to embark on. It might be too late by the time risks begin to materialise.
Loren Padelford is executive vp and gm at Active Risk, a provider of Enterprise Risk Management software that drives business performance by enhancing visibility, accountability and confidence.
As part of its centenary celebrations, Metal Bulletin has asked leading participants from different parts of the metals and mining industry to take part in MB’s Next 100, a series of pieces on how the future might unfold.