Mining, metals sectors face paucity of funds

Ernst & Young (EY) has identified cash optimisation, capital access, productivity, and social licence to operate as some of the major risks to mining and metals industries.

EY in its latest report titled: “Top 10 business risks facing mining and metals, 2016 to 2017”, made available to The Guardian on Monday by its Media Relations Manager, Philip Okafor, listed other risk factors in the sectors to include transparency, switch to growth, access to energy, joint ventures, cyber security and innovation.

The report said that cash generation and preservation will remain a key focus for the medium term due to ongoing market volatility.

EY disclosed that limited pricing and demand visibility as a result of ongoing market volatility is challenging mining and metals companies as they plan for the future.

It said that cash is king once again as companies seek to maintain balance sheet liquidity and implement plans to boost operational cash flow for long-term profitability.

EY emphasized the need for the mining industry to make sustainable cost reductions that do not erode value, increase focus on working capitals and improve capital effectiveness.

It said that capital raising continues to be an issue in the sector. “In 2015, capital raised was down by about 10 per cent. There was a sharp decline in loan finance to the sector, and most loans were used for refinancing existing facilities rather than going into new projects.

“Over the past 12 months, as the risk of default has increased, banks are only extending trade and long-term financing at an increased cost to those mining and metals companies with sufficient security to back the debt. In January 2016, both credit default swap (CDS) spreads and yields peaked, with credit access remaining constrained since.

“The backdrop of challenging market conditions has led to a number of alternative financing strategies being pursued. There were 11 major streaming deals in 2015 worth $4.2 billion, up from $2.2b two years earlier.

EY expect the cost of capital to remain elevated in 2016 unless the commodity pricing environment improves.

It said that corporate credit ratings continue to be placed on either negative watch or downgraded, while banks remain wary of extending credit to the sector.

Dwelling on the productivity aspect of mining, the report production uptime can quickly be increased by up to five per cent, and revenue enhancement can typically be delivered in the range of 10 per cent to 20 per cent without significant investment.

It stated: “Through stable and predictable operations, productivity, particularly around operations and maintenance activities, can also be increased. Operations spending less time dealing with emergencies can create opportunities to support continuous improvement efforts. As a result, this approach translates into improved safety, better forecasting and advanced integrated activity planning.”

EY said that mine accidents, mining-related diseases, community protests and neglecting mine rehabilitation obligations are all having a significant impact on the sector’s image and, in turn, on the ability of the companies to retain their social licence to operate.

To maintain a strong social licence to operate, it said it is important to integrate sustainability into long-term planning and link key performance indicators with productivity outcomes as well as remuneration structures. “Successful companies have highlighted the value of operating in tandem with communities and have shown that it is possible to engage through mutual value creation — for example, offering some local ownership and sourcing labor and procurement domestically will provide a greater level of community engagement,” it added.