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especially true in the areas of permitting, politics and tax. As mining
companies expand farther afield, they frequently must contend with
challenges beyond winning a license to operate. In some countries,
shifting tax and royalty policies target the mining sector and eat into
profitability. With so many governments short on cash following the
global recession, this may become a bigger risk going forward.
In other countries, precipitous government actions can result in
even more severe consequences. Some mining companies have seen
their licenses withdrawn or faced the prospect of nationalisation. Others
have been caught in the midst of civil violence and wars.
And, in many emerging nations, the risk of corruption remains. In
September 2009, for instance, police in the Democratic Republic of
Congo (DRC) sealed off a copper mine owned by Canada’s First Quantum
Minerals Ltd., forcing the company to halt construction and lay off 700
people. The shutdown followed a questionable decision made by the DRC
government in August to cancel First Quantum’s contract by claiming
the terms were violated.
To anticipate and hedge against this kind of risk, mining companies
will need to engage in more sophisticated scenario planning so they
can make informed decisions about how to respond to intervention by
governments in the countries where they operate.
“As mining companies search for new deposits in many of the
world’s emerging nations, political risk is bound to rise.”
Peter Bommel, Global Energy & Resources Leader,
Amsterdam, The Netherlands
10 NO BRIDGE TO CROSS
INFRASTRUCTURE COSTS ARE ON THE RISE
The mining sector has long relied on access to adequate infrastructure
for production and distribution—from power generators and
transmission lines to ports and railways. As mining companies move
into more remote regions, however, lack of infrastructure threatens to
Russia, for instance, which has one of the world’s largest
infrastructure funds, remains hesitant to extend its reach into less
hospitable regions of the country. Yet the facilities it has built in recent
years—including a new coal port in eastern Russia—are already almost
running at full capacity.
As the industry’s need for infrastructure outstrips its availability,
companies are being forced to bear the costs of infrastructure
development. In countries like Vietnam, the Philippines and Indonesia,
companies are forming consortia to raise the capital necessary to
finance infrastructure builds. Public-private partnerships and similar
initiatives also are being struck to fill the gap.
If the trend continues in this direction, mining companies may find
themselves investing in and managing an entirely new class of assets.
While this move may support local communities in some areas, it also
mandates considerably more collaboration with government stakeholders
around the world.
“Mining companies are coming to understand that, unless they
invest in new infrastructure like railway lines, port facilities and
generation plants, they will be unable to unlock key assets.”
Jeremy Reinhard Arndt, Director, Moscow, Russia
WHERE DO WE GO NEXT?
A ROADMAP FOR THE COMING 12 TO 18 MONTHS
Given the complexities and interdependencies influencing the global
mining sector, it may seem the height of hubris to suggest that a single
roadmap exists for companies mining different minerals and metals, in
different jurisdictions, at different stages of development. Can one
vision accommodate the almost endless variation of challenges and
opportunities mining companies will face in the coming months?
Of course not. So why is it that so many mining companies pin
their prospects for long-term success on one strategy that contemplates
only a handful of likely outcomes?
If your strategic planning is not sufficiently flexible to
accommodate a range of potential scenarios, the future of your business
may be at risk. Five-year plans that hinge on the occurrence of a
specific set of events ultimately derive their value from the strength of
your crystal ball. If your predictions don’t come to pass, you need
That’s what strategic flexibility is all about. Given the uncertainties
facing the mining sector, the time is ripe for organisations to assess the
entire industry landscape, both domestically and globally, to understand
the implications of today’s challenges on your business. Your ultimate
aim is to develop a wide range of strategic options that you can choose
to pursue if specific trigger events should come to pass.
This level of strategic planning requires more than budget
forecasting and traditional blue-sky analysis. Instead, it requires a
holistic approach, an integrated view of your entire enterprise and the
reliance on established methodologies. Many tools already exist to help
mining companies tackle the specific issues they face. For instance,
when considering sustainability initiatives (including those related to
issues such as community engagement, workforce, local suppliers,
biodiversity and the environment, resettlement, health, primary
education and electricity), many companies struggle to assess the
financial value of these investments. However, intuitive tools to help
mining companies estimate expected net present values (NPVs) for
these projects are available. As a result, companies access a framework
that can help them prioritise, structure, time and resource their
Models also exist in the areas of capital allocation and cost control.
In an environment of severe resource constraints and illiquidity,
companies must ensure optimum rationing of their limited capital. Too
often, however, those projects that are developed aren’t linked to
corporate strategy or fail to generate maximum value at either a
portfolio or individual project level. By aligning your capital
investments with corporate strategy, optimising your portfolio of
investments and reviewing the capital efficiency of your individual
projects, you can gain the level of cost control you need to navigate
In fact, mining companies can manage volatility even more
effectively by adopting a forward-thinking approach that encourages
executives to define responses to a range of anticipated futures. By
mastering the area of uncertainty management, you can do more than
identify strategic innovations. You can also align your executive team to
move towards clearly defined long-term objectives.
Mining companies already understand the value of contingency
planning for major incidents, such as health and safety. Strategic
flexibility simply extends the concept of scenario planning to
operational issues. Beyond the examples cited above, this positions
companies to articulate clear responses to the full range of challenges
they currently face—from political risk, commodity price uncertainty
and talent shortages to resource scarcity or becoming the target of a
hostile bid. By envisioning multiple scenarios, this process can help you
maximise your success no matter what the future holds.
“The availability of liquidity should not be left to chance, even
when companies are confronted with a market downturn. To
smooth out this cyclicality, mining organisations must engage in
active planning, maintain strong balance sheets, carefully manage
both information and risk, and engage in sufficient scenerio
planning before making investments. Only in this way can they
gain the transparancy they need to develop capital management
programs which will weather both upturns and downturns.”
David Quinlin, Partner, Zurich, Switzerland
© 2009 Deloitte Touche Tohmatsu. Reproduced with permission.
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