In just three short months with the onset of COVID-19, the mining sector has needed to redefine its principal risks. Leaders have refocused to ensure the health and safety of their workforce and the ongoing stability of their operations.
When KPMG closed its annual Global Mining Risk survey of executives just a quarter ago, ‘pandemic’ was not identified as a risk. Back then, the top risks included commodity price risk, access to capital, community relations, and a global trade war.
A quarter later and the global COVID-19 pandemic response is at the forefront of immediate mining sector planning, decision making, and risk mitigation.
The World Bank, OECD and UN are all reforecasting dramatic falls in economic growth for major economies of the world, with recent scenarios seeing China at essentially zero growth.
Depending on the COVID-19 status of each jurisdiction and the reaction of their governments, we are seeing very different laws in different states and across different countries. This means that operating in South Africa, Quebec or Peru is very different to operating in the Pilbara or Bowen Basin.
From a management and leadership perspective this means that a ‘one size fits all’ response won’t work.
KPMG has been working with clients in the sector – and whilst we haven’t had time to rerun our Global Mining Risk survey, I can share what we are seeing and how that translates into responses.
Inevitably, these responses centre on the wellbeing of people in what is first and foremost a health crisis, and then about the focus on maintaining operations resilience in light of an increasing economic crisis.
Broadly, there are eight key areas on which mining leaders are currently focused.
1. The physical and mental health of a critical workforce, their families and communities. The mining sector and the people who make it work have been acknowledged by all levels of government and the community as ‘essential’.
2. Operational resilience and maintaining production both at mine sites and business critical sites and at assets such as production plants, supply chains and IT infrastructure.
3. Clear, transparent and fast communication to stakeholders, particularly employees, communities, suppliers and government.
4. Managing key supplier risk and adapting as issues emerge, noting that this requires a very clear understanding of where heightened risk of bottlenecks or supplier failure might occur and contingency plans to manage those. Particular issues might be critical spares, aviation, and departure or destination ports.
5. Ensuring cyber risk is managed as increasing numbers of people work remotely, sharing data and access to business-critical systems.
6. Finance management, including managing liquidity risks and shocks; scenario model operating and capital cash flows; debt maturity profiles and covenants; potential equity support in ‘rapid raise’ scenarios; credit or force majeure risk position of major customers.
7. Understanding and managing global recession risk to commodity prices and currency volatilities, particularly as some commodities have seen significant and rapid decline in prices, driving a need for rapid ‘cost out’ to preserve resiliency of operation in declining price environments.
8. Looking to develop onshore shared service support where outsourced or offshore functions are in jurisdictions badly affected by COVID-19.
It’s worth noting that the resources sector permanently operates with crisis management response plans in place. While the nature of the crisis might vary, plans are adaptable and companies are typically not starting with a ‘blank sheet of paper’.
History has also shown that the mining sector is highly resilient. Its underlying assets don’t deteriorate; instead they drive the manufacture and construction of the goods our society needs. Managing cyclical shocks is in the sector’s DNA.
Furthermore, the last five years has seen good growth and margins in the mining sector. Significantly, this has been used to strengthen balance sheets, which provides the war chest needed at the moment.
As we have already seen, leaders can embrace and focus on increasing the use of technology to keep organisations operating. Areas to explore include opportunities such as equipment automation, or using robots for support functions.
Successful organisations are proving themselves to be nimble, focusing on what’s critical and eliminating complexity. Furthermore, leaders can look to foster the willingness to collaborate as an industry, work together, and find solutions.
The current situation has also seen asset values fall. This potentially presents medium to long-term buying opportunities.
Leaders should also consider using the current climate as an opportunity to resource up where it is most required. Ensure that the organisation is not capability starved where it needs it most, and bring in help where it is needed.
Finally, the sector will immediately benefit from large scale, systemic stimulus from global governments to help ensure that the resources sector can weather the current pandemic.
Image: Fortescue Metals Group Ltd.