The Asia Miner

JAN-FEB 2018

The ASIA Miner - Reporting Important Issues to Mining Companies in the Asia Pacific Region

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4 | ASIA Miner | Volume 15 • Issue 1 | 2018 DIGITAL effectiveness has emerged as the number one risk for the mining and metals industry, according to EY's 'Top 10 busi- ness risks facing mining and metals 2017- 2018' report. This priority has emerged as companies strive to improve productivity by introducing new technologies. With the sector increasingly investing in digital, the report indicates that cyber risk has risen from ninth to third position in the ranking as the convergence of information technology and operational technology has made companies more vulnerable to rogue activity. While the majority of sector companies have started their digital journey, poor imple- mentation of technology and a gap between progress and the scale of the opportunity leaves companies at risk of falling behind leading adopters. Meanwhile, despite the unprecedented rise in cyberattacks year-on-year, the report indicates that the sector is yet to catch-up in cybersecurity awareness. EY Global Mining & Metals Advisory leader Paul Mitchell says, "The opportunity through digital is huge. But digital goes beyond just adopting new technologies: it is a critical enabler to address the sector's most urgent operational challenge – improving produc- tivity across the value chain. And as the sector increasingly moves toward digital transformation, the attack surface is also becoming larger and it is critical that mining and metals companies accelerate their cy- bersecurity program." New risks emerge Cash optimisation fell from first to sixth po- sition in the ranking in the wake of higher margins and improved cash generation. The need to drive competitive shareholder returns, however, calls for companies to manage the competing demands of short- term capital allocation with longer-term in- vestment in growth, according to the report. While 2017 saw companies reduce leverage and return cash to shareholders through dividends and share buyback pro- grams, this is a short-term response to the underperformance of recent years, as return on capital employed has consistently fallen below the weighted average cost of capital. Now that balance sheets have been re- stored and excess cash returned, the sec- tor will begin to look for investment opportu- nities that drive long-term return on capital. For those companies that fail to do so, the report points to increasing pressure from activist shareholders – even at the risk of takeover. New world commodities a risk How quickly renewables will step up and replace the need for fossil fuels is the ques- tion hanging over the coal market. Future demand dynamics for coal are largely being driven by innovation associated with emis- sion-reducing technology. EY Oceania Mining and Metals leader Scott Grimley says, "We have seen the volume of coal deals increase as miners, investors and vertically aligned energy com- panies make a bet on coal's future through the acquisition of higher-grade coals in Aus- tralia." Increased requirements in battery power and storage for electric vehicles (EVs) has driven up the price of key commodities associated with making batteries. While demand is expected to rise for cobalt and lithium, more traditional commodities, such as copper and nickel will also be required for electric cars in greater volumes than pe- troleum cars. "Miners will need to adopt a level of flexi- bility in their business models to be agile to change and regularly review their portfolios, considering all future growth assets - new and old," Scott Grimley said. Regulatory risk surges Regulatory risk is a new entrant to the top 10, as governments demand a greater re- turn from their natural resources in light of improving commodity prices and profits, while transparency initiatives continue to gain momentum. Scott Grimley said, "Australia is not im- mune to companies facing regulatory risks. We continue to see proposals to change royalty and tax regimes for projects where significant capital has previously been in- vested or committed to. A stronger collab- oration between the three key stakeholder groups, being the government, local com- munities and miners would assist to reduce this risk." Paul Mitchell added, "The business risks report clearly reflects the positive uptick in the market – volatility has eased-off in a number of commodities, and balance sheets are in a better position. "It is now all about how companies stay ahead of the competition – gaining compet- itive advantage and being at the lower end of the cost curve is key. Managing the risks will assist mining and metals companies in achieving this." The EY Top 10 business risks facing min- ing and metals 2017-2018 report is based on EY discussions with leading global min- ing and metals companies, and analysis of the operating environment for companies in the sector. It is EY's 10th annual report analysing and ranking the top strategic busi- ness risks for companies in the sector. Underlying business risks for mining and metals companies do not vary significantly from year to year, but the acuteness of the issues and its priority can change. While the report does not provide an exhaustive list of the risks facing companies in the sector, it does provide a snapshot of the most signif- icant challenges today. Mining and metals companies that best understand the risk scenarios and potential impacts on their business are better positioned to manage these risks and seize strategic opportunities. Digital implementation is top priority

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