australian mining risk forecast 2020/2021 · 2020. 9. 4. · mining company – whilst 66 per cent...

Australian mining risk forecast 2020/2021

July 2020

KPMG.com.au

http://www.kpmg.com.au

2 | Australian mining risk forecast 2020/2021

© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation.

The COVID-19 lensEach year, KPMG International researchers survey a sample of global mining executives to uncover what risks are top of mind for them. The results, and KPMG’s analysis of them, form the basis of our firm’s annual Global Mining Risk Survey and this extract of the Australian specific risk forecast.

When we conducted the 2020 Global Mining Risk Survey in January this year, COVID–19 had not been broadly recognised as the global threat we now know it to be. Profound change has occurred since then and, as we’d expect, responding to the challenges of a global pandemic has driven the mining sector’s immediate planning, decision making, and risk mitigation actions.

The risks created by the COVID-19 pandemic have been broad and varied. Most obviously there has been the impact on the physical and mental health of the mining workforce and communities. There have also been challenges in managing mining sector supplier and liquidity risk. Then there are what might be thought of as less obvious issues, such as ensuring cyber risk is more closely managed given the increasing numbers of people working remotely. In turn, these factors have been cast against a background of global recessionary risk to commodity prices and ongoing market volatility.

Caron SugarsAustralian Mining Risk Assurance Partner KPMG Australia

Australian mining risk forecast 2020/2021 | 3



Mining sector resilienceThe Australian mining sector was uniquely advantaged to respond to the pandemic. The mining sector has historically been highly resilient and adept at managing cyclical shocks. The industry permanently operates with crisis management response plans in place, so companies were not starting with a blank sheet of paper. Further, the underlying assets of mining companies don’t typically deteriorate.

Indeed, the Australian mining sector was quick in its response to COVID-19. In the context of the pandemic, the sector was swift in gaining ‘essential’ status and a license to continue operating. It demonstrated agility by rapidly altering rosters, implementing world-class testing regimes. It has continued to operate through the pandemic, without any major negative impacts on core operations arising from site-based cases of COVID-19 (at the time of publication of this report).

A key theme of this year’s Australian Mining Risk Forecast is transition: the Australian mining sector now finds itself at a transition point. Not only does it need to closely monitor and manage the ongoing health crisis presented by COVID-19 but mining executives must also continue their focus on the medium to long term. They must consider the ongoing risks for the sector framed here. And while the global economy has changed, the challenges identified at the beginning of 2020 (when the survey was completed) remain relevant.

Inevitably, the leading risks identified – such as climate change risk, commodity price risk, and trade/geopolitical risk will continue to challenge Australian mining executives as we look to FY2020/2021 – and beyond.




Top industry risks We asked Australian mining executives to identify their five leading risks facing the mining industry; their collective responses provided the below results:

The five leading risks facing the mining industry - Australia 2020/2021

1

2

3

4

5

6

7

8

9

10

Regulatory and compliance changes/burden

46% Climate change and natural disasters

46% Commodity price risk

Global trade war38%

Economic downturn /uncertainty35%

Community relations and social license to operate

35%

31%

Ability to access and replace reserves 27%

Access to capital, including liquidity27%

Environmental risks, including new regulations

Health, safety and security risks

27%

27%

The top five risks as identified by executives from the international mining community were as follows:




International trendsManaging critical risks – in particular commodity price risk and macroeconomic risks – was top of mind for global mining executives in 2020 according to KPMG Risks and Opportunities for Mining – Global Mining Risk Report 2020.

The top three concerns were commodity price risk, credit risk, and currency risk named by 55 per cent of respondents as being the top concerns for their own mining company – whilst 66 per cent named these same risks as the leading concern for the mining industry.

Commodity prices and permitting risk once again occupied the number 1 and number 2 risks, respectively. Along with access to capital, community relations and social license to operate these were the top four risks identified by respondents for the second year in a row. Despite this consistency, there is a clear message from 75 percent of respondents identifying the need for the industry to better measure and report on success factors beyond financial results, based on the recognition of a broader range of stakeholders.

2020/2021

1

2

3

4

5

Commodity price risk

Political instability/nationalisation

Community relations and social license to operate

Access to capital, including liquidity

Permitting risk

https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/02/risks-and-opportunities-for-mining.pdf

https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/02/risks-and-opportunities-for-mining.pdf




Climate, environment and community dominate risk considerations These risks consider both the climate change impact on assets and operations (significant weather events, asset degradation) as well as the uncertainty surrounding society and government’s response to climate change. Whilst in previous years environmental risk has been captured in social licence to operate risk, the survey outcomes indicate that addressing climate change risk is now viewed, by Australian based miners, as a far broader imperative.

In addition to this context, Australian industry leaders are also aware that the short-term profits are not the only measure of success and that demonstrating sustainable value for all stakeholders must be a priority.

Indeed, ‘holistic’ is a term used with greater frequency today in discussing what success really means for mining companies. Climate change, modern slavery risk or social licence maintenance – all contribute to an acknowledgement by respondents that the industry needs to redefine success.

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.




Bushfire 2019/20 impacts

At the time the survey was conducted, climate change was front of mind for mining executives due to a range of factors, most notably the huge scale in the Australian bushfires of the summer of 2019/2020.

The bushfires particularly impacted mines in New South Wales, with poor air quality concerns precipitating temporary suspension of operations and lost production.

Proven climate change risks to the mining industry include cyclones causing mine shutdowns, rainfall impacting tailings dams and drought affecting water supply. Bushfires and heat waves affecting workers also remain a concern.

It is not just climate change itself but also government’s regulatory response that presents as a potential risk to the sector. Emerging initiatives such as the European Green Deal legislation package, the impact of the US 2020 election on the UN’s Paris Agreement, and domestic regulation changes all create uncertainty.

Social licence focus

Mining companies are under increasing pressure to demonstrate they are maintaining a valid social licence to operate, with investors announcing measures to hold companies to more stringent standards.

In the past, capital flows to the industry were primarily influenced by commodity prices. This remains true, but investors are increasingly rethinking how they deploy capital based on environmental, social and governance (ESG) measures.

Decarbonisation here to stay

The race is truly on to decarbonise mining. Two of the world’s largest miners have announced significant funding over the next five years for projects designed to take carbon out of their operations with aims to be carbon neutral by 2050 – these moves are driven by ESG and shareholder demand.

Community Sentiment Growing

An emerging risk is community sentiment, potentially exacerbated by global civil rights protests. This may have greater implications for diversity in employment; traditional owner acknowledgement and heritage protection, where community expectation may be broader than what regulation requires. The mining sector is experienced in community engagement with many having Reconciliation Action Plans and supporting programs which will be able to be leveraged.







Macroeconomic risk at a time of global uncertainty Macroeconomic risk factors – including the risk of trade war, global recession and commodity price risk – are always a factor in the mining sector and this year’s survey underscores this. COVID–19 will continue to influence all these factors as well.

Different commodities are facing different market pressures and price volatility with associated issues on cash flow and liquidity. Currencies are also experiencing significant short-term volatilities.

Broadly, the mining industry continues to be resilient – business continuity plans are in place, and there are positive signals coming from the sector in terms of how businesses are adapting.

Nevertheless, macroeconomic risk will remain a very carefully monitored brief. The rise of protectionism and the potential effect this can have on free trade globally can affect commodity prices. Of particular importance to Australian organisations is the forecasted slowdown in the growth of the Chinese economy in addition to changing geopolitical environments.

Health, safety and security always a priority Health and safety risk is inherent to the industry; this is the reason it is also one of the best-managed risks in mining organisations. Ensuring wellbeing, especially of those working on remote sites continue to be a priority in the industry with longer rosters being introduced to manage COVID-19 risks.

Security is less of a concern for mining companies operating in Australia, but with many organisations exploring and mining in jurisdictions where terrorism and general criminal behaviour is more prevalent, keeping staff secure and being able to extricate them at short notice is a growing focus.





Regulatory and compliance changes remain a riskRegulatory and compliance risk is a constant consideration for Australian mining executives and remains so in this year’s survey.

All Australian governments have been under rising pressure, from both domestic and international sources, to initiate regulatory reform. Following the release of its National Resources Statement in February 2019, the federal government tasked the Productivity Commission with examining the regulations affecting business investment in the resources sector in Australia. The Commission’s Resources Sector Regulation draft report (issued March 2020)1 considers how to streamline project approvals and launch new resource projects more efficiently while continuing to focus on managing risks to the environment and communities.

Supplementing the report, the Minister for the Environment announced an independent review of the

Environmental Protection and Biodiversity Conservation Act 1999. The discussion paper for the review has been circulated, with the final report scheduled for release in October 2020.

Further focus on issues such as compliance, modern slavery, whistle-blower legislation and tax avoidance has been applied after the Royal Commissions. The industry is likely to continue to see governance reforms and stakeholder pressure.

Mining executives and boards, faced with such a broad scope of changing dynamics, will need to consider how to stay across what is required of them. This challenge presents a good opportunity to start leveraging technology, like integrated governance, risk and compliance (GRC) systems, to understand priority areas and their interconnection.

Ability to access and replace reserves is growing more difficult Mining reserves are depleting and the capacity to replace them is a risk that will heighten as time goes on. Domestic exploration is essential for future growth, but over time it is likely that some Australian companies will consider expanding activities in foreign jurisdictions. Venturing out of domestic jurisdictions introduces a new range of risks, especially political and social. However, the opportunities offered by automation will increase the ability of Australian companies to mine anywhere in the

world from local shores. The desirability of this approach has increased due to the travel restrictions imposed to manage COVID-19.

For Australian-based miners, community expectations are driving a renewed focus on heritage. This may further affect access to some reserves and the ability to expand existing mining operations in Australia.

1 https://www.pc.gov.au/inquiries/current/resources#draft




Macro Views – the broad perspective of Australia mining executivesWe asked Australian mining executives to share their broad perspectives of the mining sector risks as they looked ahead to 2020/2021 – and beyond.

Optimism has decreased

Respondents were asked to state their level of optimism on the outlook for their organisation when compared to the prior year. Since 2019, respondents have become less optimistic, specifically about their own organisation, both in Australia and globally. Only 15 per cent reported feeling very confident, down from 40 per cent last year. With regard to the mining industry as a whole, zero responders reported feeling ‘very confident’, down from 13 per cent last year.

Most still reported a cautiously optimistic outlook though, with only eight per cent stating they feel ‘not very confident’ about the outlook for their organisation and four percent feeling this way about the industry outlook as a whole. Last year no responders provided a negative response in either category.

Technology disruption as an opportunity

Whether it’s due to shrinking exploration budgets, declining grades, depleting reserves, fewer major discoveries, or increased mining in remote/challenging locations – this year’s survey suggests there is clear recognition that a change in strategy is needed in order for mining companies to be more productive and efficient and to achieve longer-term sustainable growth. According to our respondents, innovation and technology transformation is expected to be a significant growth strategy.

One of the strongest messages from the survey was that only 12 per cent saw technology disruption as a threat. Innovation was ranked 19 as a risk and 85 per cent of respondents indicated that they viewed technological disruption as more of an opportunity than a threat, ranking it the second most important growth strategy after organic growth and before strategic alliances, mergers and acquisitions and attracting and retaining talent.




The value of talent continues to be appreciated

Whilst attracting and retaining key talent did not make the top 10 risks for the year, it did move up to 12th position, from 17th position. More interesting, however, was the increased value that respondents placed on the role of attracting and retaining key talent in achieving growth objectives over the next three years. This was recognised as one of the

top two strategies required by 27 per cent of our respondents, an increase from seven per cent. Accordingly executives are telling us that attracting and retaining key talent is equally as vital in achieving growth objectives as strategic alliances and, mergers and acquisitions which all tied for third place.

Looking ahead A significant evolution

As has been reflected in our Australian Mining Risk Forecast for 2020/2021, mining companies are accustomed to looking ahead – to planning and accounting for mainstream risks and, at the same time ESG and other non-financial risks. As these attract more focus, technological innovation is helping the sector rise to the challenge and help support organisations and Boards in understanding these risks proactively.

KPMG sees data and analytics as vital in helping organisations understand their current risks and provide signals on emerging trends and risks. The focus on culture in the mining industry, born through the strong management of health and safety, as well as an embedded approach to managing non-financial risks has helped the mining industry work through COVID-19 and is expected to see risk transformed into opportunity by this innovative sector.

The information contained in this document is of a general nature and is not intended to address the objectives, financial situation or needs of any particular individual or entity. It is provided for information purposes only and does not constitute, nor should it be regarded in any manner whatsoever, as advice and is not intended to influence a person in making a decision, including, if applicable, in relation to any financial product or an interest in a financial product. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

To the extent permissible by law, KPMG and its associated entities shall not be liable for any errors, omissions, defects or misrepresentations in the information or for any loss or damage suffered by persons who use or rely on such information (including for reasons of negligence, negligent misstatement or otherwise).

© 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Liability limited by a scheme approved under Professional Standards Legislation. July 2020. 526706609ENR

KPMG.com.au

Contact Us

Caron SugarsAustralian Mining Risk Assurance Partner KPMG Australia [email protected]

Travis McAuliffeAustralian Mining Risk Assurance Partner KPMG Australia [email protected]

Trevor HartGlobal Mining Leader National Mining Leader KPMG Australia [email protected]

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australian mining risk forecast 2020/2021 · 2020. 9. 4. · mining company – whilst 66 per cent...

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