Costs, consolidation and capital make up this year's top mining risks: Ernst<br>& Young

Firm outlines scenarios Canadian miners should prepare for

TORONTO, Sept. 17 /CNW/ - Cost containment tops the list as the risk that could pose the greatest challenge to the mining and metals sector this year, according to Ernst & Young's annual global risk ranking.

"Last year, capacity constraint issues - including a projected skilled labour shortage and infrastructure bottlenecks - dominated the sector's top 10 strategic risks, whereas this year's focus is on funding and cash flow," said Tom Whelan, leader of Ernst & Young's Canadian mining practice.

Industry consolidation remains the number-two-ranked risk this year. Lower asset prices and a thirst for alternative sources of capital have provided opportunities for investors with a long-term investment outlook to make strategic acquisitions. A new class of investor comprising Asian mining and metals companies has primarily been seizing these opportunities.

Access to capital replaced infrastructure access as the number three risk this year. While sovereign wealth funds, private equity, Islamic funds and Middle Eastern and Asian banks have all begun to emerge as new sources of financing for larger players, for hundreds of Canadian exploration companies, the taps have effectively been turned off.

From a Canadian perspective, Whelan cautions the country's significant gold sector. "Canadian gold companies have a partial hedge in that their product rises in price when a number of these risks increase," said Whelan. "Despite this partial hedge, it's equally important that the Canadian gold sector follow a strategic risk management process, including ensuring the unique characteristics of their product are fully considered and debated within their organization."

A previous Ernst & Young report released earlier in the year revealed that 90% of mining and metals companies are placing a renewed emphasis on improving risk management.

"It's clear that the financial crisis has created some new risks that threaten the near-term survival of a number of mining and metals companies," said Whelan. "At the same time, as we begin to see signs of recovery in commodity prices, it's clear that there are significant opportunities for well-capitalized companies to position for the upturn."

Here are Ernst & Young's top 10 risks for the mining and metals sector in 2009-10:

    
    1.  Mining and metals companies are left scrambling to achieve cost
        containment following the remarkable drop in commodity prices, which
        decimated companies' margins and, in some cases, wiped them out.

    2.  Industry consolidation remains a top risk this year, with a new class
        of acquirers emerging from the downturn - the miners from rapidly
        developing economies.

    3.  The global credit squeeze and resulting recession has severely
        limited access to capital and the ability to fund ongoing operations
        and new projects.

    4.  There is great pressure on companies to reduce capital and operating
        costs, making maintaining a social license to operate more difficult.
        In particular, mine closures or staff reductions can have a negative
        impact on a community's and government's perception of a mining
        company.

    5.  Climate change concerns are a major issue for the mining and metals
        sector - a major user of energy and primary user of land. New
        initiatives to combat climate change are being introduced, and
        there's an escalating need for companies to respond to increased
        regulation of emissions.

    6.  Despite a drop in demand resulting from the global financial crisis,
        strong longer term fundamentals still make the possibility of a
        skills shortage very real. An inadequate supply of skilled workers
        could delay future project development and production.

    7.  Lack of infrastructure access is creating bottlenecks in getting
        product to market in many countries. If global mining companies don't
        push infrastructure development forward now, they may have trouble
        capitalizing on the recovery when demand returns.

    8.  Mining and metals production is energy intensive and requires
        reliable, sustainable and efficient energy supplies. Access to secure
        energy is threatened by underinvestment in critical infrastructure
        and is putting pressure on the reliability of existing supply.

    9.  Resource nationalism places a large cost burden on mining companies
        and can influence the stay-or-go debate in times of depressed
        margins.

    10. Pipeline shrinkage deals with the fact that a lack of exploration
        today will limit discoveries tomorrow and production in the years to
        come. Despite the fact that exploration is the lifeblood of the
        mining and metals sector, a general decline has been exacerbated by
        the drought in risk capital.
    

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