Top 10 Risks and Opportunities for the Mining Sector in 2021
As ongoing disruption reorders global mining and metals rankings, an Ernst & Young (EY) Global Mining and Metals Top 10 Business Risks and Opportunities 2021 Report lists the top 10 changes that miners cannot afford to ignore
While the COVID-19 outbreak has been a truly disruptive, global event, the mining and metals sector has managed to weather its impact extremely well, thanks in no small part to the governance and culture that was already in place throughout the sector.
The factors that have allowed the sector to formulate an effective response to the pandemic are:
- The safety-first culture that prioritised people’s health and well-being
- Excellent governance that enabled agile change management with the right checks and balances in place
- Collaboration among governments, the mining sector, health experts and communities to ensure safety practices were followed
- Changes made on expert advice that were embedded across operations to ensure a consistent, effective response to the pandemic
As a result of these measures, several mines have remained operational and productive during the pandemic, despite having less people on site. However, business continuity has come at a cost due to the added expenses of new processes, procedures, protocols, health testing equipment and support for the workforce.
Therefore, it is clear to see that as we move into 2021, COVID-19 will continue to impact all industries, including mining and metals. While some markets are beginning to show a semblance of economic recovery, others – particularly those in significant mining geographies – remain heavily affected by the virus.
As a result, an EY report has listed 10 business risks and opportunities for the sector in 2021.
1. License to Operate
License to Operate remains the number one issue for miners, with 63 percent of respondents flagging it as a top three risk for the industry. The issue is expected to become even more important as stakeholders broaden and develop a stronger voice. As effective engagement becomes even more critical, miners should consider three tiers of community:
- Local communities will have greater expectations around how miners respect indigenous rights and native title.
- National communities may push for a return to resource nationalism, with increased debate around who miners sell to and for what purpose.
- Broader community commitment will come into focus as socioeconomic issues are highlighted post-COVID-19. We may see pressure build to provide ownership of assets to communities.
Miners will need to work with governments and sector associations to help shape the messaging of the societal contribution and value derived from the mining sector. There is a real need to rebrand, and investors will look to understand value beyond the financials. This will be key to obtaining capital and other sources of funding.
2. High impact risks
Company-destroying risks tend to be rare and, as a result, may not be examined but will stay on the risk register in much the same format year-on-year.
However, in 2020, the COVID-19 pandemic has clearly demonstrated the importance of understanding and reviewing these high-impact risks, particularly as there is a significant link between a company’s ability to manage them well and its LTO.
The experience of the pandemic has heightened stakeholder expectations around how enterprises prepare for, manage, and monitor all high-impact risk exposures.
3. Productivity and rising costs
As the complexity of mining increases and commodity prices come under pressure due to disrupted supply and the impact of ongoing economic uncertainty on demand, rising costs and productivity remain under the scanner.
The impact of COVID-19 has been mixed, with some restrictions imposing new and unforeseen costs, while other measures have removed silos that previously hindered productivity. Over the longer term, it is expected that tackling this issue effectively will require a true end-to-end focus on costs and productivity throughout the value chain.
Decarbonisation and the green agenda have become prominent issues as social responsibility and broader stakeholder demands intensify in the wake of the pandemic.
The pressure to reduce greenhouse gases (GHG) emissions remains the biggest environment issue for mining and metals companies, although the amount of GHG varies across commodities. Therefore, leading companies in the sector are setting out their approaches to decarbonise direct emissions.
However, many current emission reduction targets do not align with the Paris Agreement and there are few miners who comprehend the true environmental impact of their entire value chain.
The EY report states that COVID-19 offers miners an opportunity to reset their operations and increase their focus on environment, safety and governance issues, as this can strengthen their LTO and give them a competitive edge in the fight for capital.
This is a risk new to EY’s Top 10 for 2021, reflecting the global impact of geopolitical uncertainty. A survey of global mining executives for the EY geostrategy report found that the geopolitical issues that are expected to have the greatest impact are the changing role of the United States in the international system, European Union stability, and US-China relations.
This assessment reflects the shifting balance of power amongst the world’s largest economies. The US is repositioning itself from a leadership perspective, while China is playing a bigger role in geopolitics, the EY report says. Meanwhile, Europe is seeking a more cohesive projection of its own power. As emerging blocs consolidate their power, relations between them could become volatile.
These shifting landscapes change many dynamics for mining and metals companies. A trend towards economic protectionism to favour domestic producers and ensure that host countries will receive their fair share of resource wealth will emerge in many jurisdictions, it adds.
6. Capital Agenda
Throughout this crisis, miners have optimised liquidity by tightly managing cash, prioritising the operation of core assets, and reducing or cutting nonessential or non-core capital expenditure, the report says.
However, while strong capital may help mining companies weather volatility, bolder investment decisions and increasing risk will enable them to enjoy greater returns in the mid- and long-term.
While approaches to achieve this may be radically different to those deployed in the past, mining companies will need to evaluate their appetite for risk and approach to capital allocation to ensure that they do not miss out on new opportunities when presented with them.
EY states that in the 2019 edition of its report, Workforce was listed as its second-biggest risk – and the fact it’s dropped to number seven in this year’s edition illustrates the confidence miners now have managing employees.
This has been amply demonstrated during the pandemic, where companies’ commitment to safety and fast action helped protect workers’ health and reduce site exposure risk.
Companies are now realising that the accelerating adoption of remote working and virtual teams has the potential to add value beyond the crisis by keeping teams safe, productive, and engaged. The pandemic has spurred a change in the corporate culture of the mining and metals sector, creating new opportunities for a sustainable workforce transformation.
Almost 80 percent of the mining and metals executives surveyed by EY said that they expect their organisations to become more open to change due to the impact of the COVID-19 pandemic.
Volatility has emerged as a new entrant into EY’s list of the Top 10 Business Risks and Opportunities in 2021 – a reflection of the impact COVID-19 has had on the global commodities market. The pandemic has significantly disrupted supply chains in the near term and created ongoing uncertainty around demand, the report highlights.
Although China’s swift economic rebound has kept up demand for iron ore, and gold and silver retain their status as safe havens, future disruptions could see this change rapidly. Therefore, miners will need to be able to make sustainable, long-term decisions as they deal with the return of severe commodity price volatility, the threat of substitution and changing customer demands.
9. Digital and data optimisation
Digital and data optimisation was regarded as the third-biggest risk in the 2019 edition of the list. That it is now at number nine is an indication of the growing digital confidence of miners, the EY report says.
This is not because it is viewed as a less important risk – or opportunity – but because many of the issues surrounding digital have become ‘business as usual’ for the larger miners in the sector. Many of these companies are now in the second or third year of their digital road map journey, and as their digital transformation becomes more complex, its value to the organisation becomes clearer.
Furthermore, COVID-19’s impact has highlighted the benefits of various technologies, such as automation, AI and blockchain, to help ensure business continuity. Businesses that have already invested in advancing their digital journey are now reaping the benefits and will continue to have a competitive edge beyond the pandemic.
Opportunities now abound for miners to broaden the scope and increase the effectiveness of their innovation agendas, particularly after the sector’s rapid pivot in response to the COVID-19 pandemic. The crisis has provided valuable lessons on how to take a resource-to-market approach to innovation, it adds.
As a result, the industry has seen increased innovation and more solutions implemented across the value chain, in order to deal with the impacts of the pandemic, with several innovation projects being fast-tracked into reality.
COVID-19 has also acted as a catalyst for greater collaboration across mining and metals companies, as they work together to develop creative, agile solutions to the problems they all face.
The sector now faces a huge opportunity to expand this collaboration, including in the co-evolution of new products or technologies, development of shared incentives and rewards from the application of innovations beyond more sales of devices, and consequent fundamental changes in the industry’s business systems or practices, which can yield significant short- and long-term value for individual companies, the entire sector and communities, the report concludes.