JOHANNESBURG (miningweekly.com) – Although productivity has been identified as the top business risk facing mining and metals companies globally in advisory firm EY’s ‘Business risks facing mining and metals 2014/15’ report, access to water and electricity – a new entrant, ranking tenth on the list – emerged as one of the biggest risks facing companies in South Africa.

EY Africa mining and metals sector leader Wickus Botha told Mining Weekly Online that if the survey had considered the risk analysis on a country-by-country basis, access to water and electricity would most likely have been in the top ten for South Africa too.

“Mines and the downstream industry are not running at their available capacity, as they do not have the necessary electricity to do so. As a result, expansion projects in the country are not being undertaken owing to [the] lack of reliable electricity [availability].

“This risk also posed a threat to the progress of the mandated drive to beneficiate in-country, owing to the energy intensive nature of this activity,” said Botha.

He maintained that South Africa should focus its attention on the development of alternative sources of energy, as he expected to see increasing reliance on renewable energy in the sector.

Renewable energy had begun to prove its viability and the cost of implementing it had also decreased, he noted.

To ensure the country’s continued economic growth, the availability of electricity remained the most important consideration for the South African economy going forward. “The economy cannot grow faster than it is growing without more reliable electricity [availability],” Botha stressed.

Similarly, water scarcity demanded a strategic and practical response. Companies that treated water risks as a strategic challenge would be better positioned in the future.

Meanwhile, the EY report revealed that productivity had declined across the mining sector globally, as well as across emerging markets, and would require complete business transformations to fully recover.

Productivity, which ranked second on last year’s list, was focused around the risk of improper cost management and cost control rather than capital productivity and efficiency.

The trend in productivity noted by EY is that more capital is being invested in mining, yet the output for every rand invested was not increasing at the same level.

Botha pointed out that a contributing factor had been that nearly all cost categories in the local mining and metals industries had increased at rates substantially higher than consumer and producer inflation indexes.

Many of the input costs were driven by “administered prices” such as electricity and water or by the international pricing of steel, oil and rubber.

He added that boards of directors and CEOs were now realising that regaining lost productivity and gaining new ground was critical for long-term profitability and required a whole-of-business response.

Companies had started to focus their energy on cost control and had taken out much of the costs that could be cut.

In future, however, the fundamental shift required to ensure productivity would be to integrate cost control with capital productivity, which included labour and equipment productivity.

UNDER-THE-RADAR RISKS
Of the seven under-the-radar risks, which included cyber attacks and information security, the threat of substitutes, pipeline shrinkage, fraud and corruption, competing demands for land use, climate change concerns – number seven, new technologies – could pose a risk for local companies in future.

Amid the constant pressure on margins and declining prices, the mining and metals sectors had been forced to look for innovative ways to cut costs and increase efficiencies.

To achieve this, companies had been leveraging technology to advance exploration, increase productivity, improve safety, discover new orebodies, improve recovery rates, remove waste and decrease energy use.

While there had been investment in research on innovative processes and “disruptive” technologies, Botha believed it could become an even more important risk to South Africa, as the country’s mining industry was lagging in terms of developing new technologies.

Although the mining industry invested significant capital and time into research and development, the amount of investment was relatively low compared with that invested by other industries, he said.

“Despite the need to identify and address possible future risks, the reality is that mining executives had a full agenda and had significantly high expectations from all stakeholders. This required them to balance the pressing needs and stakeholder demands, while also balancing the things that would render them fit-for-purpose in future.

RISK ROUNDUP
Capital allocation and access to capital, which was at the top of the risk list a year ago, remained a key issue at number two, while social licence to operate moved up from number four to number three.

Resource nationalism came in at number four in this year’s survey.