Moving forward in a risky environment

The mining sector is an economic behemoth for Australia, but the industry must be prepared for a number of emerging risks. Nickolas Zakharia writes.

It would be an understatement to say that Australia’s mining sector has faced numerous challenges in 2020.

From natural disasters, to COVID-19 and economic strain, the nation’s battle-hardened mining sector has continued to operate.

When mining’s risk trajectory is considered, COVID-19 is the obvious elephant in the room.

A multitude of risks and challenges – both related and unrelated to the pandemic – are on the minds of the industry’s executives and the bodies that represent it.

In February, multinational firm KPMG highlighted several risks that industry was facing in its survey, KPMG Global Risks and Opportunities in Mining – 2020 Outlook.

The survey was released months before the impact of COVID-19 was realised.

An Australian version of the survey, KPMG’s Australian Mining Risk Forecast for 2020-2021, was released in July and included survey results from January, along with commentary on the more recent risks associated with COVID-19.

The survey asked the country’s mining executives to identify their top five leading risks for the sector in the 2021 financial year.

Climate change and natural disasters (46 per cent) and Commodity price risk (46 per cent) charted the highest among the Australia’s mining risk concerns and showed an upward trend.

Global trade war (35 per cent), fuelled by ongoing tensions between the United States and China, along with Economic downturn and uncertainty (35 per cent) also had an upward trend in results.

While COVID-19 has taken centre stage, KPMG stressed that these risks will continue to persist in the background.

“COVID-19 rightly demanded immediate risk management priority. However, we emphasise that other risks will continue to persist and even amplify in the medium to long term,” KPMG states in the Australian Mining Risk Forecast for 2020-2021.

Risky business

Commodity price risk is an area that is likely to stay due to the uncertain nature surrounding COVID-19’s ongoing impact on the market, which has caused a number of big-name mining companies to revise their production targets.

Further to this, Australia’s nightmare bushfire season for summer 2019-2020 appears as a significant factor in why executives have listed this as a major risk.

KPMG’s survey says the bushfires impacted a number of New South Wales mines, along with weeks of poor air quality that led to temporary suspension of operations.

KPMG Mining risk partner Caron Sugars says the risk associated with climate change for the mining sector links back to increased operational costs.

“As with many sectors of industry, it’s a fact that the impacts of climate change will drive costs up in mining and require changes to the way that miners operate,” she tells Australian Mining.

“As an example, climate change will have impacts on how assets operate and their longevity. Water shortages will impact availability and potentially regulations regarding water usage.”

While ‘risks’ are generally associated with negative connotations, Sugars explains this also presents a positive opportunity for an increase in commodity demand for products that are aimed towards a greener future.

“Carbon emissions and their abatement are increasingly demanded by investors and other stakeholders as ESG (environmental, social and corporate governance) continues its importance to miners,” she says.

“It links implicitly to social value. The risk manifests in attracting capital, gaining approvals and securing talent. 

“Climate events impact operational continuity and government regulatory risk will inevitably impact costs. The opportunity rests with the global energy transition and the change in consumer trends to minimise carbon emissions.

“In turn, this leads to increased global demand for the minerals and commodities that go to facilitating these shifts.”

Sugars says mining companies certainly have not lost their focus on climate change amid the COVID-19 pandemic.

“Reducing emissions is now a part of mining sector ‘business as usual’. Furthermore, given increased investor and community pressure, mining companies must seriously address climate change action,” she says.

“With an increased community focus on how COVID-19 has helped awareness of environmental issues, it is likely higher and mining companies will continue on their drive forward to provide innovative ways to operate more sustainably.”

 

Mining giant BHP has this year accelerated its response to climate change and natural disasters by encouraged mining lobbyists to increase their climate action in August, a move supported by industry bodies such as the Minerals Council of Australia.

Fortescue Metals Group also continues to highlight the steps that need to be taken in this space, as it strives for net zero emissions and acknowledges how temperature increases in the Pilbara region could worsen, increasing the number of bushfires this mining hotspot could face.

The three major risks for mining for the past three years (including 2020) have been permitting and operational risks, climate change and price volatility.

“It’s worthy of note that, ultimately, price volatility comes with the territory of mining and miners, on the whole, are good at managing the impacts,” Sugars says.

“KPMG’s view is that some of the best protection can be to drive efficiency and cost reduction into the business. This can help to preserve cash and improve resiliency against downside price movements.”

Sugars believes the rapidly changing COVID-19 environment makes it difficult to make a surefire prediction of next year’s mining forecast. However, certain aspects are already standing out, such as workforce skills and supply chain risk.

“A key risk in not having the right people with the right skill set is likely to be in the top 10 in 2021. We also anticipate another important entrant to the top 10 will be supply chain risk,” Sugars says.

“Looking ahead, KPMG Australia also notes the increased interconnected nature of risk with examples being price volatility, global supply interruption, ongoing COVID-19 impacts, geopolitical and changes to demand patterns from both recession or stimulus.”

An industry perspective

Outside of the Australian Capital Territory, mining is prevalent in all Australian jurisdictions.

With each state having its unique advantages and traits, the country has an abundance of resources-related opportunities.

Minerals Council of Australia chief executive officer Tania Constable says Australia cannot take its global leadership in mining and minerals processing for granted.

“Overseas competition will continue to intensify and inconsistent border restrictions imposed by some states and regulatory constraints domestically may endanger the nation’s ability to attract international investment,” she tells Australian Mining.

Constable says COVID-19 will incite the need for further skills and training for the industry.

“The skills and training needs of both the industry and the future minerals workforce needs will require attention, including retraining and reskilling entrants from other industries affected by COVID-19,” she says.

“Increasingly some skills required in mining are the same as in agriculture, manufacturing, construction and defence industry. There is much scope for a shared approach in this new environment.”

As countries across the globe strategise their economic recoveries from COVID-19, Constable says that Australia’s company tax rate should be reviewed.

“Australia’s competitors will waste no time in attempting to increase their share of the recovery,” she says.

“In this context, Australia’s company tax rate of 30 per cent is too high and not internationally competitive. Canada, a major mining country, has a company tax rate four percentage points lower than Australia. In addition, Canada recently introduced accelerated depreciation write off in response to the USA company tax rate reduction and accelerated write off rules.

“The Treasurer has emphasised that economic recovery will be led by the private sector and that low taxation is a critical policy setting. Future mining investment should not be put at risk by any move to increase the already high burden on the sector.”

Constable also emphasises the importance of Australia’s mining sector in advancing new technologies, and that will also continue to be a world-leader in the adoption of new industry technologies.

She says it is clear that the scale of the technology-led transformation required will not occur without the minerals and raw materials provided by the Australian mining sector.

“The industry sees great opportunities for minerals such as lithium, cobalt and copper in all forms of transport infrastructure, communications and energy systems,” Constable says.

“For many years the Australian mining industry has been a global leader in the development and deployment of new technology and techniques, including data analytics, automation, robotics and artificial intelligence. This leadership will continue in the post-pandemic era.”

It is expected that Australia’s mining industry will strengthen its supply of materials for a clean energy future.

Constable says the Australian mining industry has further enhanced its reputation as a reliable supplier of mineral and energy commodities through its ability to continue operating during the COVID-19 pandemic, while still implementing the highest standards of health and safety to keep workers and communities safe.

“When the world economy begins to recover Australia will again be a key supplier of the materials the world needs to transition to a clean energy future, build modern infrastructure and manufacture the hi-tech consumer goods that are improving people’s lives everywhere,” Constable says.

A number of uncertainties regarding COVID-19 have also impacted the sector’s future outlook.

A Western Australian Department of Mines, Industry Regulation and Safety (DMIRS) spokesperson anticipates there will be “considerable uncertainty” for commodity prices during the 2021 financial year.

The spokesperson says iron ore prices are expected to be impacted by the resumption of supply from Brazil and an expected global recovery that should boost demand.

“Gold prices will continue to be affected by a combination of factors including COVID-19 related economic uncertainty, low interest rates, poor economic growth and geopolitical tensions,” the spokesperson adds.

“The prices of other commodities such as alumina, nickel, lithium, and base metals, are expected to continue to be impacted by COVID-19 related supply chain disruptions and shutdowns stagnating economic activity and demand.”

Western Australia remains well positioned to deal with short-term price volatility as a result of COVID-19, the DMIRS forecasts.

“An advantage for Western Australia is that it is highly competitive in the production of key commodities such as iron ore and gold. This ensures that short-term price volatility is unlikely to have a significant impact on overall levels of production,” the spokesperson says

Australia’s key source of export revenue is iron ore, which was worth $102 billion in the 2019-20 fiscal year.

“The state’s minerals diversity and significance as a global producer has Western Australia well positioned to weather economic challenges in 2020-21 and to benefit when economic activity returns to normal levels,” the spokesperson says.

In Victoria, an influx in exploration projects has brought the industry’s attention towards the state’s gold and mineral sands resources.

Responding to KPMG’s survey results, the Victorian Government’s head of resources John Krbaleski says many of the state’s mines still consider natural disasters, such as bushfires, a significant factor. 

“As far as climate change, I know from a risk perspective that the industry is very attuned to intensity and frequency of extreme weather events and their impact on mining operations” he says.

Krbaleski says dealing with the COVID-19 pandemic remains the primary risk the state’s mining industry is dealing with. While the industry is largely resilient, Krbaleski believes ensuring investments maintain that resilience is important.

“The key one is just staying competitive. We’re competing against every other jurisdiction in the world. I think we’ve got a good (value proposition) today, but it’s on us to make sure that it remains attractive going forward,” he concludes.

This article will appear in the October issue of Australian Mining.

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