Commodity and macroeconomic top risks for global mining leaders

• Pressures on commodity pricing against backdrop of macroeconomic uncertainty.
• Markets reward strong ESG focus and strategy of social value.
• Miners see growth opportunities from technology and disruption.
• 75 percent of respondents support the need for industry to define success beyond shareholder return.

Attracting and accessing capital is an increasing risk for miners. Managing critical risks - in particular commodity price risk and macroeconomic risks - are top of mind for global mining executives in 2020 according to KPMG's annual survey, Risks and opportunities for mining - Global Outlook 2020, released in Perth today.

The KPMG report provides an in-depth sounding of risk outlook in the sector from more than 140 mining executives across the globe. It finds that, as in the previous year's report, commodity price risk, and permitting risk came in at number one and number two in the top ten global risks for miners.

Trevor Hart, Global and Australian Mining Industry Lead at KPMG said: "There is pressure on global growth driving some uncertainty with commodity pricing. This is keeping mining executives awake at night at the moment - and we have seen a stronger focus on financial risk management because of that. While we recognise the current presence and impacts of the COVID-19 virus outbreak we also see resilience: the mining sector is accustomed to dealing with commodity price volatility whilst risk management is at the core of mining industry operations."

Mr Hart noted that in this latest report, commodity price risk, credit risk, and currency risk were named by 55 percent of respondents as being the top concerns for their own mining company - whilst 66 percent named these same risks as the leading concern for the mining industry.

As a result he highlighted that in more uncertain times the industry would see a focus on going back to basics such as increasing productivity and managing costs.

"We can also expect to see an intensified focus on rate of return across the mining sector globally and in Australia," said Mr Hart. "That means tangible actions such as reprioritising technology spend - for example more judicious spend on automation - and a much stronger focus on capital spend. In other words, planning must deliver productivity and achieve a result that is lower down the cost curve."

He predicted that cash management would also become very important namely capex and opex - would continue to be managed closely in 2020 planning, including achieving growth through organic activity and focused R&D spend.

In other report findings, access to capital and liquidity risk jumped to third place (fourth 2019) this year with community relations and social license to operate dropping back to fourth place (third 2019).

At the same time, Mr Hart noted that 75 percent of mining survey respondents said the industry needed to redefine success using a more holistic group of measures that includes shareholder and broad stakeholder values.

"In the past, capital flows to the industry were primarily influenced by commodity prices. This remains true but investors increasingly rethink where they deploy capital and how companies use capital in terms of ESG measures," he said.

Interestingly, there were also two new entries to the risk concerns list for global miners being global trade war risk (eighth 2020/unplaced in 2019) and tailings management (tenth 2020/unplaced 2019).

Mr Hart said the other driver in the local and international mining sector was carbon.

"The race is on to decarbonise mining. It's not a fad - it's here to stay," he said. "The world's two largest miners have announced significant funding for projects over the next 5 years designed to take carbon out of their operations with aims to be carbon neutral by 2050."

Mr Hart said the significance of this investment spend and the targets being set reflected a new and intensified focus on the value of mining.

"They are being driven by ESG and shareholder demand - and will address the broader stakeholder concern question around 'who is performing best' in decarbonisation," he said.

"It is not just about what's produced but also about protecting the environment - a big part of that is reducing carbon footprint. Miners look at new development and new assets in terms of how to achieve carbon neutrality over the life of the mine. That is part of new mining development work that we didn't see in feasibility studies a few years ago," he said.

Caron Sugars, National Board Advisory Services Lead Partner and Mining Risk specialist with KPMG also spoke to the ESG and carbon risk theme. She said that whilst decarbonisation and climate change were not new, they had now jumped into the top ten mining risks. This was potentially due to recent events in Australia, changes to reporting requirements, and the increase in climate change related activism.

"This risk considers 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," she said. "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."

She suggested that addressing climate change risk is likely to see some commodities, like copper and battery minerals, increase in demand whilst others, like coal, decline however all miners will need to prepare for the uncertainty that climate change represents.

Ms Sugars said: "Fortunately, at the same time that ESG and other non-financial risks are attracting more focus, technology is rising to the challenge to support organisations and Boards in understanding these risks proactively."

"Data and analytics are helping organisations understand not just what risks are being managed, but also providing signals into how they are managed including factors like culture. This is enhancing the already strong management of health and safety and extending to broader non-financial risks," she said. "It is a significant evolution."