Capital Allocation Challenges Mining Industry

Source:

"An Ernst & Young report has identified capital allocation as the foremost risk for global mining and metals companies."

An Ernst & Young report has identified capital allocation as the foremost risk for global mining and metals companies.

Mining-related skills shortages jumped to second spot on E&Y's Top Ten risk rankings, while cost management came in third and resource nationalism concerns were ranked fourth.

Global Mining & Metals Leader Mike Elliot noted, "Volatility across commodity prices, cash flow, risks appetites and availability of capital are driving massive capital allocation challenges for mining and metals businesses."

"The uncertain economic environment and massive changes to expected rates of return, level of gearing, taxes, and the cost of debt and equity, is challenging existing capital allocation benchmarks," he added.

As a result, the focus of mining and metals companies has shifted from growth by acquisition to more balance with organic growth.

Meanwhile, Canadian Mining and Metals Leader Tom Whelan said, "The skills shortage continues to worsen and addressing it should be key to companies' strategies."

During the global financial crisis, mining and metal companies made cuts to protect margins and cash. However, E&Y's Evgeni Khrustalev cautioned, "Disciplined cost saving initiatives implemented out of necessity during the crisis should be maintained during the recovery to achieve best returns on investment."

The same global financial crisis that hard hit base metals miners also resulted in shrinking government revenue globally. "Many governments are looking at altering the fiscal terms of economic rent for mining and metals projects in their countries in order to obtain a larger share of higher mineral prices and thereby repair fiscal positions," E&Y said.

"Innovative partnerships will be needed to demonstrate to these governments the value that mining companies bring by developing resource projects," he said. "At the same time, companies need to forge strong relationships with government to communicate their needs to facilitate the development of projects."

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