Industry Focus

NATURAL RESOURCES Top 10 industry risks A few years ago the biggest risk in the mining and resource sector was talent and skills shortages. Today, the largest threats to the industry are the twin capital dilemmas of allocation and access, according to the Ernst & Young report 'Business Risks in Mining and Metals 2013–2014'. These capital dilemmas are strategic risks that threaten the long-term growth prospects of the larger miners at one end of the sector and the short-term survival of cash-strapped juniors at the other. The other nine major risks are summarised in the following themes: • Margin protection and productivity improvement • Resource nationalism • Social license to operate • Skills shortages • Price and currency volatility • Capital project execution • Sharing the benefits • Infrastructure access • Threat of substitutes Source: Ernst & Young, 'Business Risks in Mining and Metals 2013–2014' Sector in transition Far from going from boom to bust, the mining and resource sector is moving into an operational period, following the fast-paced project development that has characterised the last decade. KPMG Energy & Natural Resources partner Helen Cook says in this transition period many companies are looking at how they can improve efficiencies. "The downturn in commodity prices has driven resource players to look at productivity. Many have had to reduce staff, interrogate inputs such as materials and contract costs, and look for efficiencies in the supply chain," she says. A flow-on effect to contractors, subcontractors and other areas of the economy is also being seen. The silver lining to the downturn in commodity prices is that the cost of developing and operating projects has been tempered because of the drop in demand for labour and materials, in addition to the impact of the lower Australian dollar. Some junior mining companies, however, have been experiencing a difficult phase. "We've seen a real tightening in capital markets and it's much more difficult for junior companies to fund exploration activity," she says. "Only the best projects are attracting capital." Those juniors already in production and with cash flow are in a better position, but are continuing to seek efficiencies and tending to hold off on less viable projects. As for the future, Cook says all eyes are on China in terms of its demand for steel over the next few years, and broader global market sentiment. Risky business Junior resource companies are seeing doors close on traditional sources of funding, such as equity capital markets, and are increasingly turning to risky financial arrangements. "Alternative financiers, such as hedge funds, have spotted an opportunity to provide a whole range of products and, with few alternatives, we are seeing an increase in the uptake," says PPB Advisory partner Simon Theobald. One such alternative source is known as pledging, which comes with its own issues. PPB Advisory partner Campbell Jaski, a former executive at Rio Tinto, says it's not a long-term solution and may come at a relatively high cost. He advises in-depth background checks and research before seeking funding from an uncertain source. "Companies need to do their own due diligence on the counter party so they know whom they are dealing with," he says. 4 Industry Focus

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