Sourcing capital becomes mining industry's number-one risk: Ernst & Young

Shortage of skilled labour and resource nationalism also climbs the risk agenda

VANCOUVER, Oct. 13 /CNW/ - Capital allocation is creating the most complex challenges for businesses in the mining and metals sector this year, soaring from 17^th place in 2009 to become the number-one risk this year. The findings are part of Ernst & Young's annual report, Business risks facing mining and metals.

"Despite a strong outlook for the sector and strong quarterly earnings, banks are still generally unwilling to lend, except when it comes to the very best assets," said Tom Whelan, National Leader of Ernst & Young's Canadian Mining practice. "As illustrated by recent transactions, a number of mining companies have decided the best way is to allocate capital is growth by acquisition."

In the absence of affordable debt, transactions options are limited. The alternatives for Canadian mining and metals companies seeking growth are to do nothing, (an unlikely option, given the long lead times required to develop a new mine); transact with equity alone, (which can be challenging unless the deals are friendly and recommended by both parties); or seek out joint ventures and strategic partnerships, (both viable options in risk-averse, financially constrained times).

While the 2009 risk list was dominated by costs, consolidation and capital, in 2010 it is the supply-side capacity issues that are re-emerging following the sector's advancing recovery.

Skills shortages jumped to the second spot on the risk rankings, up from sixth in 2009. Cost management fell to number three, but remains high on the risk agenda because of the continued need to conserve capital and lack of available debt, and resource nationalism surged to fourth from ninth place last year.

"Although the mining and metals sector is a 'risky business' by nature, the sheer speed of change and level of volatility in the past few years has heightened the need for comprehensive risk management," said Whelan. "The fact that we're seeing skilled labour shortages and infrastructure challenges resurface means we could soon be dealing with delayed project development and production — conditions likely to contribute to another a spike in commodity prices."

The 2010 top strategic business risks in the mining and metals sector identified in Ernst & Young's report:

1. Capital allocation (17 in 2009)
2. Skills shortage (6)
3. Cost management (1)
4. Resource nationalism (9)
5. Maintaining a social license to operate (4)
6. Infrastructure access (7)
7. Access to secure energy (8)
8. Access to capital (3)
9. Price and currency volatility (11)
10. Climate change concerns (5)

The report finds that as governments around the world seek to replenish their depleted treasuries in the wake of the financial crisis, resource nationalism is also soaring to the top of the risk agenda.

"With many mineral-rich countries seeking to extract greater economic rent for the right of a mining company to exploit resources, royalty rates are quickly becoming part of a broader and concerning trend," said Whelan. "Mining and metals companies operating beyond their borders would be wise to invest in transparent relationships with government, not only to foster collaboration, but to become a valued part of that country's infrastructure and community development."

Ernst &Young's report notes that working through scenarios for these top 10 risks and conducting an impact analysis can deliver opportunities for mining and metals companies to tighten processes and controls and to preserve and enhance shareholder value.

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