By Paul Mitchell
The themes of license to operate and disruption run through this year’s risks as mining and metals companies have to deal with many new and variable factors, including societal expectations, digital transformation, and unique challenges to portfolio and capital investment decisions.
A time of disruption
The large movements across the radar are clear indicators that disruption is already here. Societal change, new technologies and the race to transform business models are driving a whole range of disruption for mining and metals companies. Pressure on technology and automotive companies to secure the supply of New World commodities is opening another avenue of potential disruption to current business models. Over 30% of our survey respondents thought that technology companies have the potential to disrupt the sector. We agree. They have good access to capital and are already investing in the innovation and technology that mining operations need to be more effective.
Does operating in a time of disruption take more than a license? We discuss this below, in the top ten business risks facing mining and metals.
- License to operate (up from 7)
Is license to operate the disruptor you have missed?
A narrow, legacy focus on license to operate may be the strategy that puts you out of business. The stakeholder landscape is shifting. There is more information, bigger platforms and more at stake than ever before. Underestimating the power of even a single stakeholder would be a mistake.
The sector needs to redefine its image as a sustainable and responsible source of the world’s minerals.
To do this, organizations need to:
- Take a whole of business approach to license to operate driven from the top down
- Commit and contribute to community, government, employees and environment needs beyond life of mine
- Walk the talk! Make it part of the company’s DNA
- Digital effectiveness
Is riding the digital wave key to wiping out our competition?
Digital effectiveness is key to gaining a competitive advantage. However, a recent poll of over 600 mining and metals executives revealed that a significant 37% of management have little or no knowledge of the digital landscape.
Miners understand it is about solving productivity and margin but are applying point solutions and are not investing enough to transform. It is only when miners apply these solutions across the entire value chain to create a digital mine that can they truly transform and emerge as the dominant players in the market.
To achieve this kind of transformation, CEOs need to take ownership of the digital agenda.
- Maximising portfolio returns
Is your strategy planning for the future or creating it?
Future returns will only be competitive in the long term if the right decisions over capital are made now. This would be across all strands of capital allocation:
- Buy: Acquisitive growth is preferred but good buys remain scarce
- Build: Brownfield projects are taking most of the capital
- Return: A preference to return capital, rather than invest, will remain a focus
- Transform (invest): Those who invest in digital and innovation will have an edge over competitors
Is cybersecurity about more than just protection?
All mining and metals organizations are digital by default — in an increasingly connected world, the digital landscape is vast, with every asset owned or used by an organization representing another possible entry point. As a result, the attack surface is only getting larger across physical assets, digital infrastructure and business processes. An innovative cybersecurity strategy is critical. The focus should be on how cybersecurity will support and enable enterprise growth. The aim should be to integrate and embed security within business processes and build a more secure working environment for all.
Every cybersecurity transformation should promote three key principles across culture, governance and capabilities:
- Expect excellence in security fundamentals
- Establish a strong governance program and a culture of accountability
- Build a commitment to continuous improvement
- Rising costs
How can you cut costs and still remain competitive?
Cost inputs in the sector are highly susceptible to inflationary pressures. And during periods of higher commodity prices, mining input costs, such as wages, consumables, diesel and energy, often increase at a higher rate than general inflation.
In addition, incremental changes in how mines operate are resulting in rising costs. These include increasing complexity of mines, rising use of technology, a changing workforce and a rising investment in license to operate.
To offset this, organizations need to:
- Focus on sustainable cost-reduction programs
- Review capital tied up in high levels of pre-stripping, advance development and stockpiles
- Implement front- and back-office automation
- Divest in noncore assets
- Energy mix
What is the recipe for tomorrow’s energy mix?
The cost of energy represents up to a third of a company’s total cost base, making it a keenly managed component of operations. But cost is only one aspect of a larger strategic decision. Others include:
- Social and reputational implications of choosing energy sources
- Viability of energy sources
- Management of the availability of energy over the entire mine life
To minimize these risks, companies are opting for a mix of energy sources — fossil fuels, hydroelectricity and renewable energy. In addition, to reduce costs and greenhouse gases, they will be investigating ways to replace diesel-powered equipment with electric ones.
The ultimate solution lies in the development of a range of novel ultra-efficient energy systems for mining operations, which make them greener, less expensive and more sustainable.
- Future of workforce
How will mining tap into it next great resource?
Talent management practices often still mirror the commodity price cycle: miners hire in upswing and shed excess resources in a downturn. As a result, many workers laid off during the downturn have moved to other sectors and never came back. Other trends are reshaping talent and labor supply in the sector:
- Disruptive technology is changing the skills mix required
- The sector’s reputation makes attracting younger talent a challenge
- The global talent market has meant a wider talent pool but also increased competition for talent
Mining and metals companies need to ensure they have a strategic workforce strategy that enables them to attract the required capabilities for new ways of working, while at the same time re-skill those skill sets that will be changed in the future. It is also important to maintain the critical skills that are typically found in the older workforce.
Unwelcome disruption or transformational opportunity?
Many consider disruption as being sector-wide, but disruption has already begun at the value chain level within the sector. For instance, automation has disrupted jobs and electrification has disrupted assets.
Broader sector disruption is inevitable, and it is also coming from outside the sector:
- Technology companies may become investors as a way of shoring up supply in minerals such as cobalt and lithium
- Sovereign states have the capital to become major stakeholders in the sector to secure supply for national industries and protect jobs
- Traders are cashed up and looking for opportunities to secure the supply of key commodities
Companies can respond to this risk by investing in digital and innovation, investing in new opportunities and strengthening relationships with sovereign stakeholders.
Does fraud only become an issue when it’s exposed?
Fraud and corruption was identified as a significant risk by nearly one-quarter of survey respondents.
There are lessons to be learnt from the super cycle, particularly the implementation of stronger controls to deal with third parties such as contractors and suppliers. Overall, the ability to identify fraud has become more sophisticated, particularly with the growing interconnectedness of regulators, but social media also makes any allegations of impropriety visible with unprecedented speed. This places risk of fraud hand-in-hand with the risk to reputation and license to operate.
- New World commodities
Competition for New World commodities is going to increase as they become central to the production of an ever-growing variety of high tech and green technologies, from batteries, smart phones and laptops to advanced defense systems.
Portfolio optimisation is critical. Miners need to understand the interaction among various parts of their portfolio to enable decisions on investment, divestment and rationalization to enhance value of the entire portfolio. Decisions around where to invest and allocate capital will need to be taken long in advance. Miners will, therefore, need to adopt a level of flexibility in their business models to be agile to change and regularly review their portfolios, considering all future growth assets — new and old.
By Paul Mitchell is EY Global Mining & Metals Advisory Leader.
Contributors to this article are: Lee Downham, Andrew van Dinter and Miguel Zweig