Tài liệu Business risks facing mining and metals 2012–2013 pptx

Business risks facing
mining and metals
2012–2013
Organizations that succeed do so
because they are best able to optimize
the risk and reward equation for both
strategic and operational issues.
Contents
The Ernst & Young business risk radar for
mining and metals 3
Executive summary 4
The top 10 business risks 10
1. Resource nationalism 11
2. Skills shortage 14
3. Infrastructure access 17
4. Cost infl ation 20
5. Capital project execution 23
6. Social license to operate 26
Editorial — Prospects and perils:
facing up to political risks in mining and metals 28
7. Price and currency volatility 32
8. Capital management and access 35
9. Sharing the benefi ts 38
10. Fraud and corruption 40
Under the radar 42
Getting prepared 46
3
The business risk report Mining and metals 2012–2013
The risks closest to the center of the radar are those that pose the greatest challenges to
the mining and metals sector in 2012 and into 2013.
The Ernst & Young

business risk radar
for mining and metals
Up from 2011 Same as 2011
New entryDown from 2011
The business risk report Mining and metals 2012–2013
4
Executive
summary
5
The business risk report Mining and metals 2012–2013
On the surface, the top ten risks don’t look all that different
from last year, but below the surface there has been an absolute
shift that has made them signifi cantly different. The risks facing
the sector have become more extreme and more complex over
the past 12 months due to the fast changing investment and
operational environment. Two signifi cant contributing factors are:
1. Softening commodity prices which have seen mining and
metals companies taking on more risk relative to the short
term returns
2. Capacity changes in terms of skills and infrastructure which
have affected organizations’ short term commitment to capital
projects with life of mine of at least 10 years
Resource nationalism retains the number one risk ranking as governments seek to transfer
even more value from the mining and metals sector. Many governments around the world have
now gone beyond taxation in seeking a greater take from the sector, with a wave of
requirements introduced such as mandated benefi ciation, export levies and limits on foreign
ownership.
There is no doubt projects around the world have been deferred and delayed, and in some
cases investment withdrawn altogether, because of the degraded risk/reward equation. The
uncertainty and destruction of value caused by sudden changes in policy by the governments

of resource-rich nations cannot be understated. Mining and metals companies looking to
preserve value are actively negotiating value trade-offs with less politically sensitive policies
than resource nationalism. As this risk continues to grow in signifi cance, we don’t expect a
slowing in this trend. Indeed, mining and metals companies must continue to engage with
governments to foster a greater understanding of the value a project brings to the host
government, to better communicate the implications of changes in the risk/reward equation,
and to more effectively negotiate appropriate trade-offs that preserve the value to both the
companies and the governments.
A more complex and extreme
risk environment
“The bottom line is that if returns start to wane,
then there is a greater imperative for
organizations to tightly and more effectively
manage their risks to maintain an adequate
risk/reward balance.”
Mike Elliott
Global Mining and Metals Leader, Ernst & Young
The business risk report Mining and metals 2012–2013
6
Global skills shortage and infrastructure access retained second and third spots on the risk
rankings this year. Both these risks are more acute in more locations now than they were
12 months ago, highlighting the supply capacity constraints that have hampered the sector
for some time. Rapidly escalating costs over the past year, where rising prices have not
covered this impact, have brought further challenges for mining and metals companies,
pushing cost infl ation up from number eight to four on our risk rankings.
Sharing the benefi ts makes its debut at number nine this year. The relative prosperity of the
mining and metals sector at a time when many other sectors in the global economy are
struggling has seen this new risk emerge for mining and metals companies. Stakeholders
ranging from the government to employees, the local community and suppliers, feel they
are entitled to a greater proportion of value created by mining and metals companies. This

has forced companies to balance the expectations and the needs of their many
stakeholders. When they fail to do so, it results in strikes, supply disruptions, shareholder
activism and governments using their power to achieve their portion through resource
nationalism. Miners are willing to yield some returns on the appropriate transfer of risk to
stakeholders. However, many of the stakeholders, who want an increased share of the
mining and metals profi ts, are not taking on additional risk for their increased return,
leaving the mining and metals companies to carry all of the risk.
Rounding out the top 10 risks are cost infl ation, capital project execution, social license to
operate, price and currency volatility, capital management and access, and fraud and
corruption, with almost all of the top 10 risks more complex and more critical for mining
and metals companies now than they were last year.
So although we haven’t seen large changes in the ranking of risks year on year, the bigger
swings are evident over the medium term. Five of the risks have consistently remained
crucial risks over this period, while the remaining fi ve have fallen out of the top 10 table
altogether.
In a rising market, the returns have justifi ed taking on more risk. While the demand outlook
remains strong, the price peaks have passed and so there is a much greater imperative for
mining and metals companies to remain nimble and sure-footed in how they manage these
fast-changing risks in order to balance the relative risk/reward equations demanded by both
the Board and shareholders.
Top ten risks over fi ve years
2008 2012
01 Skills shortage
02 Industry consolidation
03 Infrastructure access
04 Maintaining a social license to operate
05 Climate change concerns
06 Rising costs (cost infl ation
)
07 Pipeline shrink

age
08 Resource nationalism
09 Access to secure energy
10 Increased regulation
01 Resource nationalism
02 Skills shortage
03 Infrastructure access
04 Cost infl ation
05 Capital project execution
06 Maintaining a social license to operate
07 Price and currency volatility
08 Capital management and access
new Sharing the benefi ts

10 F
raud and corruption

Remained in the top 10 over 5 years
7
The business risk report Mining and metals 2012–2013
The top 10 business risks for
mining and metals
010203
Resource nationalism
Resource nationalism retains the number one risk ranking with
many governments around the world going beyond taxation in
seeking a greater take from the sector, with a wave of
requirements introduced around mandated benefi ciation, export
levies and limits on foreign ownership.
The uncertainty and destruction of value caused by sudden

changes in policy by the governments of resource-rich nations
cannot be understated as projects around the world have been
deferred and delayed, and in some cases investment withdrawn
altogether because of the changed risk/reward equation.
Miners should continue to engage with governments to foster a
greater understanding of the value a project brings to the host
government and be better able to negotiate appropriate trade-offs
that preserve the value to both mining and metal companies and
governments. This includes encouraging governments to take a
broader view of the return from natural resource development, as
well as negotiating tax incentives and offsets.
Skills shortage
The acute skills shortage seen in Australia and Canada has spread
to more places during the past year, with projects in Indonesia,
Mongolia, Brazil, Chile, Peru and Mozambique all plagued by this
challenge. Strong commodity prices and confi dence in the
long-term sector fundamentals have reinvigorated investment in
mining and metals to quickly develop new projects or ramp up
production from existing ones. This increased investment is in turn
driving demand for skilled workers around the world and drawing
on the same global pool of talent. The risk is that this could slow
growth and increase costs.
Signifi cant risks associated with skills shortage include impact to
production, project delays, and increasing labor costs. Identifying,
attracting and retaining critical operational and construction skills
remains a top priority for the mining and metal sector. Innovative
approaches used by organizations include:
1. Differentiated employee value proposition — to retain
employees, companies are offering not only attractive
compensation but also individually tailoring non-fi nancial

benefi ts
2. Accessing non-traditional and underrepresented labor
pools — such as women and indigenous communities
3. Resourcing from other sectors — companies are hiring
resources from industries with similar and/or complementary
skills, such as oil and gas, and manufacturing
Infrastructure access
The long running minerals super-cycle has made lower quality or
remote deposits viable, with the lack of suffi cient infrastructure
being the primary obstacle to the development of these resources.
Governments are no longer the natural vehicle through which
infrastructure projects are funded, mainly due to their current
weak budgetary positions. This means that fi nancing has fallen to
the private sector. Large miners with balance sheet strength are
under increased shareholder pressure to restrict new capital
expenditure, and small miners often lack required fi nancial
strength to solely develop these projects.
The key infl uences on infrastructure fi nancing include:
• The changing role of government to planning, approving and
incentivizing fi nancing of infrastructure
• The rising number of foreign investors in infrastructure from
countries like China, Japan, Korea and India
• Funding from institutional investors including pension,
sovereign wealth and infrastructure funds
• The increasing focus on corporate governance which has seen
closer Board scrutiny of the return on investment which often
results in projects with large infrastructure needs being less
likely to be approved
To fulfi l infrastructure needs, changes need to be made to
procurement processes and risk allocation between government,

users, developers and funders. For this to be effective, traditional
views around construction risk, residual value, revenue/pricing
risk, capacity, operational control, credit risk and tax need to be
re-assessed. Unless the commercial risks can be adequately
addressed and the take or pay contracts be bankable, then
development of infrastructure will continue be slower and more
complicated than would appear necessary.
The business risk report Mining and metals 2012–2013
8
04050607
Capital project execution
There is a massive pipeline of projects in 2012–2015. At the same
time, there has been high delivery cost infl ation and heightened
macroeconomic uncertainty. This uncertainty has been putting
downward pressure on prices of mined commodities since 2H
2011, with mining and metals companies now reconsidering,
revising and prioritizing or sequencing previously announced
capital project plans to mitigate these factors.
Mining and metals companies are adapting to emerging capital
project risks by:
• Raising the bar on business case justifi cation and rigor —
there is a renewed focus on the integrity of data around
estimated project costs and benefi ts to aid/improve
management’s level of decision-making confi dence
• Prioritizing the investment pipeline to align with a changing
appetite for cost and cash exposure — as leadership teams
develop customized criteria to sequence their project pipeline,
prioritization considerations extend beyond return on
investment to strategic alignment, cash fl ow exposure and
delivery complexity

• Enhancing project controls to drive standardized delivery
against plan — project teams must embed the right project
control disciplines to drive delivery against plan in a
standardized and consistent manner
Maintaining a social license to operate
The consistent ranking of maintaining a social license to operate
within the top six risks over the last fi ve years demonstrates it is
an important element of doing business as opposed to being a
compliance exercise. While the reputation of being a company
which does the right thing can provide a competitive edge through
better access to capital and solid government relationships, it is
essential in being able to access the next project. Trends which
challenge companies include:
• Increased expectations — stakeholders such as governments
and communities want more from mining and metals
companies operating in their jurisdictions, from basic fi nancial
returns to benefi ts for the community and the country. To stay
ahead, companies need to be proactive, timely and transparent
in their dealings with these stakeholders
• Acquisition challenges — Acquisitive companies need to be
increasingly aware of the standards of their potential targets,
moving quickly to set clear expectations of how they do
business and build fi rm partnerships with stakeholders
• Changing how business is done — companies are changing how
they approach business by focusing more closely on building
strong partnerships with stakeholders and communities right
from the start so they are engaged and understand every
aspect of the project
Price and currency volatility
Equity markets are becoming increasingly sensitive to

macroeconomic news, and for many organizations increases in
commodity prices are often not fully impacting share prices,
whereas decreases are. The erosion of the gold premium is a
prime example. This is creating differing asset valuation
expectations, impacting the ability to complete transactions.
Companies’ operating costs are often not in their functional
currency, and therefore volatility in foreign exchange prices can
put extreme pressure on them. To combat this volatility, mining
and metals companies need to consider metals price and currency
hedging strategies, and hedging inputs to production. Scenario
planning could help them assess their ability to withstand price
shocks and capitalize on the current metal price cycle.
During periods of great volatility, mining and metals companies
most value fl exibility to vary the level of production at little or no
cost. Dynamic Discounted Cash Flow (DCF) and Real Option (RO)
modelling are providing decision-makers with enhanced cash fl ow
models that improve risk assessment and fi nancing options of
mining projects. Only a handful of mining and metals companies
are, however, implementing these techniques and generally seem
to be battling with scenario planning. We expect to see increasing
board level focus on currency and metal price volatility strategy
and management as they strive to recognize and exploit value
from volatility.
Cost infl ation
Cost infl ation in the sector is expected to intensify over the next
several years, due to a number of factors, including labor, energy,
ore grades, currencies, supplier constraints and taxes. In the
prevailing environment of global economic uncertainty, softening
commodity prices, higher input costs, and strengthening local
currencies in many mining and metals jurisdictions are increasing

the pressure on margins.
Companies are revisiting their capital expenditure plans as
spiraling capital costs threaten the viability of new projects.
Furthermore, high crude oil prices, wage infl ation and increasing
complexity are driving operating costs. In response, mining and
metals companies are reviewing their portfolios to identify
underperforming assets, with plans to shut down or divest high
cost and non-core assets. Industry consolidation, automation
technology, owner-operated mines and investment in energy
assets are some of the steps that companies are taking to lessen
the impact of rising costs.
9
The business risk report Mining and metals 2012–2013
Sharing the benefi ts
As the mining sector continues to fl ourish while other sectors
fl ounder, a wider range of stakeholders are looking for a greater
share in the perceived profi ts. These stakeholders feel entitled to a
portion of the value created by mining and metals companies and
balancing these varied and competing expectations is challenging.
• Governments are placing pressure on mining and metals
companies to take a greater role in supporting the broader
community through social and logistical infrastructure,
community developments, and local hiring and procurement
practices
• Local communities are not just looking for minimal disruption
but also to share the economic and social benefi t from local
mine operations. They have a lot of power to disrupt projects if
their needs and interests are not met
• Employees are seeking higher wages and greater workplace
benefi ts and can incite industrial unrest if they are not achieved

• Suppliers can charge greater premiums as mining and metals
companies are dependent on their goods and services to
increase production output
• Shareholders are expecting a greater return on their
investments for the perceived risk of owning mining and metals
stock, squeezing the profi ts already shared amongst the other
stakeholders
Fraud and corruption
Fraud and corruption remains on this year’s risk radar due to the
increased political risk we’ve observed in a number of key mining
and metals companies’ investment destinations, and also
increased regulation and enforcement activities. The effects of
fraud and corruption can impact a company’s reputation, social
license to operate and bottom line. Additionally, the extent of
fraud and corruption and the associated effect on both private and
public citizens of countries have led governments to implement far
reaching regulatory changes.
In response to new regulation and enforcement, companies are
actively changing the way they do business:
• Compliance monitoring — this is becoming crucial in itself and
additionally many companies are seeking assurance of their
compliance
• Third party liability — mining and metals companies are
substantially increasing due diligence initiatives around third
parties as part of their corruption gap analysis, which includes
specifi c anti-corruption provisions in their standard contract
terms
• Whistle-blowing — companies have been forced to become
active in encouraging internal whistle-blowing by providing a
credible alternative to external whistle-blowing

080910
Capital management and access
Boards in 2012 are facing an extremely complex and uncertain
environment within which to undertake capital allocation
decisions. The volatility seen on capital markets is raising the risk
that funding to the sector could become increasingly limited.
Rising cost infl ation and a volatile investment backdrop are
challenging the returns expected on major organic growth
programs. And an apparent undervaluation by the markets,
amidst increasing pressure for greater return of capital to
shareholders, is driving companies to revisit their overarching
capital allocation strategies.
The risk of sub-optimal allocation of capital can have a signifi cant
and long-lasting impact. Companies are responding to this risk by
building options and fl exibility into their capital agendas through:
• Opportunistic refi nancing
• Strategic divestments and reallocation of capital
• Innovative approaches to capex discipline
The challenge for mining and metals companies is to remain true
to their long-term strategy, while building in fl exibility to respond
to short/medium term opportunities and risks.
The business risk report Mining and metals 2012–2013
10
The top 10
business
risks
11
The business risk report Mining and metals 2012–2013
Resource nationalism continues to be the number one risk facing
mining and metals companies as governments go beyond taxation

in seeking a greater take from the sector. The uncertainty and
destruction of value caused by sudden changes in policy by the
governments of resource-rich nations cannot be understated.
We are observing three key trends of resource nationalism which
we will belie
ve will continue throughout 2012/13:
1. Imposition/increasing of royalties or mining taxes
Amendments to mining and tax laws can result in changes to capital
allocation based on a weaker risk/reward profi le.
The announcement in 2010 of a proposed new ‘super profi ts’
mining tax in Australia had a signifi cant ripple effect around the
world. Many mining and metals jurisdictions announced increases in
taxes and royalties during the course of 2011–12 and many looked
at Australia’s action as commercial cover for proposed changes. For
example, in March 2012, an Indian Government taskforce started
working on modalities for a new levy on minerals mined on forested
regions of the country. The proposal for a new levy followed
demands raised by several provinces in India for a new mineral
resource rent tax with a minimum of 50% on ‘super profi ts’ earned
by miners. The provincial governments had suggested modelling
the new resource rent tax along the lines of the Australian
proposal.
1

Other tax and royalty increases are being proposed and enacted
across the world in the resource rich emerging markets. After the
2011 elections, Peru enacted a new mining tax and royalty regime
that used as a template similar changes that occurred in Chile the
year before. These levies are based on net mining income with
certain adjustments, e.g., interest expense is not allowed as a

deduction.
During 2011 and for the fi rst six months of 2012, a number of
countries have announced or enacted increases to taxes or royalties
including Democratic Republic of Congo, Ghana, Mongolia, Peru,
Poland, and the USA, to name a few.
1 India working on mining tax, Mining Weekly, 20 March 2012
2. Mandated benefi ciation/export levies
Many governments are now seeking to have minerals benefi ciated
in-country prior to export. South Africa has announced a
benefi ciation strategy, as has Zimbabwe, Indonesia, Brazil and
Vietnam. In theory, this will capture more of the value-chain as the
products will achieve higher prices.
Changes to the risk profi le due to mandated benefi ciation include:
• The high cost of establishing refi neries or smelters if not already
established in the country
• The need for both low cost power and infrastructure for
benefi ciation plants — both of which are often in short supply in
these countries
• The need for skilled labor for value-added processing
• Loss of fl exibility in global supply chain
• Concentration of investment risk
• Relatively higher taxes on value add
• Less integration with customers supply chain
• Threats to existing business models where miners are forced to
move downstream
Typical of the reaction to mandated benefi ciation came from one
company which made the following comment on the changes to the
Indonesian export regime — while they were happy to commit
US$500m to Indonesia for a mine, they were not happy to commit
US$1.5b for a mine and a smelter as the returns did not justify that

much exposure to the country.
2
In order to better ensure in-country benefi ciation, governments are
imposing new steep export levies on unrefi ned ores. For instance
Indonesia, as part of its mining tax changes, has proposed a new
export levy of 25% on mining exports in 2012, increasing to 50% in
2013. The Indonesian Government said in announcing the proposal
that it is seeking to develop its mining sector, create jobs and turn
itself into a producer of higher value fi nished goods from an
exporter of raw materials.
2 Anonymous company quote to Ernst & Young contact
01
Resource nationalism
(same as 2011)
The business risk report Mining and metals 2012–2013
12
3. Retaining state or national ownership of resources
Governments are also seeking to ensure that they retain ownership
of their minerals, which is not a new phenomenon. While trying to
eliminate discussion about nationalization, South Africa, which
already has Black Economic Empowerment (26% participation), is
also canvassing the idea of the mandatory participation of a state
owned mining company. Indonesia has announced a plan to limit
foreign ownership of mines to 49% after 10 years. Zimbabwe has
already commenced its 51% indigenization laws, and Mongolia has
placed a 49% cap on foreign ownership of strategic mines. China
and India have restrictions on foreign ownership of certain minerals.
These changes in ownership laws can have a signifi cant impact on
the reward miners’ expect to receive for the risk they have taken.
When partial divestment is done part way through a mine life, the

mining company has paid for 100% of the investment, including the
upfront exploration, development, commissioning and early
operating risk, but will be giving up a percentage of the future
investment return. That can be the equivalent of a very high tax.
Even if they can sell shares to locals, the value of those shares will
likely be at a reduced market value as fewer buyers can afford an
interest so they may have to sell down ownership at a loss. There is
an increased need for project economics and modelling before any
investment is undertaken to factor in the probability of changes in
policy, e.g., how will forecast returns be affected if there is a 40%
chance the mining and metals company has to sell 49% of its
shareholding at a loss?
Capital, risk/reward ratio and the sell decision
The increasing spread of resource nationalism has an effect on
where mining and metals companies invest their capital. Mining and
metals companies are weighing up the risk-reward ratio and will
take into account any potential policy changes when modelling the
economics of any future projects. In the 2012 Capital Confi dence
Barometer survey undertaken by Ernst & Young, almost two-thirds
of surveyed senior mining and metals industry executives indicated
that they will invest in organic growth over the next twelve months.
This means they will be looking to invest capital in new, greenfi eld
sites or in expanding existing operations. In either case, they will
have a choice on the location of that investment and recent or
proposed changes in tax regimes will impact those choices. The
hurdle rates for those investments will have to take into account the
higher risk associated with resource nationalism.
Mining and metals companies will also be considering the impact of
resource nationalism on their existing projects. Changes to the
mining laws or tax regimes will lead to a re-evaluation of a mining

and metals company’s operations. New taxes or the prospect of new
levies will weigh into whether the company divests its interest or
sells down to maximize its investment return.
Mining and metals companies should evaluate current operations
just as they evaluate new investments and the risk reward ratios
have changed in those jurisdictions where resource nationalism is
occurring or trending. Companies will be working this into their life
of mine models.
The average global risk has increased for investment so the related
reward must be higher in order to make the requisite investment.
Mining and metals companies will make choices for future and
current investments across projects and countries based on the
expected returns as risk adjusted. Those governments which
increase their take will lower the returns and increase the risk for
mining and metals companies, and will jeopardize future foreign
direct investment.
Broader economic impact of mining investment
Governments are currently seeking a higher return on their natural
endowment but should consider a broader view of the return from
natural resource development. Governments will not only realize
royalties and direct mining taxes from the natural resource as it is
developed, but will also realize income taxes and other taxes such
as VAT on purchases of equipment and other property, ad valorem
taxes and payroll taxes. In addition, mining activities provide direct
mining jobs and indirect jobs through infrastructure development
and suppliers, and the associated income and payroll tax revenue
from those jobs. Hence, there is often a signifi cant ‘multiplier effect’
associated with the development of new mines.
13
The business risk report Mining and metals 2012–2013

Product of consultation
In many resource-rich countries, the capital investment can be
signifi cant. For example, in Peru, the Government is forecasting
investment into its mining sector of US$53b over the next fi ve
years.
3
As previously mentioned, a recent change of regime in Peru
led to an increase in tax on mining operations. In anticipation of the
regime change, organizations in Peru met with the new
Government, presented comparisons of the ‘government take’ in
alternative mining and metals locations, and discussed a range of
options to enhance tax revenues from the current and future
operations in Peru. The new levies were based on net income from
the sector and there was recognition that new revenues were
needed. In addition, many of the big mining and metals companies
in Peru have agreed to pay additional taxes over that agreed in
their stability tax agreements, as long as they are not
unreasonably high.
4
The inevitability of increased government take during a super-cycle
has led mining and metals companies to move from outright
opposition to changes in fi scal terms, to negotiating offsets. This
has been because the political weight behind an increased take has
been increasing but value restoring trade-offs are politically
achievable. Some of these offsets include:
• A more effi cient (profi t based) taxation system
• Removal of ineffi cient taxes
• Speeding up the development approval process
• Improving fl exibility of labor
3 Peru dangles its investment credentials, MiningnewsPremium, 23 May 2012

4 Peruvian miners brace for tax news, Financial Times, 25 August 2011
Mining and metals companies are looking at the government
consultation process as a means of preserving value as opposed to
just defending fi scal terms.
Corporate governance
Resource nationalism and political changes in resource-rich
countries creates further unpredictability for organizations
investing in long-term projects. There will be increased political
uncertainty in determining project economics, which increases the
overall cost of doing business and the related risk. In addition,
political changes have an effect on contract stability and often this
is not just a one-off event. Countries can make a series of changes
to their mining laws over a number of years.
As a result, the decisions about investments have become riskier,
which will require greater involvement by the board in tax matters
and tax planning. In 2009, the Ernst & Young Mining and Metals Tax
Survey found that only 65% of tax directors presented periodically
at the board level. We predict that with the increase in resource
nationalism, tax directors will be getting more airtime with the
boards of their companies, which will need to increase their focus
on tax considerations and implications on risk.
Steps mining and metals companies can take to respond to this risk:
• Invest in transparent relationships with host governments to
foster a greater understanding of the value of the project to
the host
• Align with the host government’s long-term economic and
political incentives and thereby become an invaluable part of
the infrastructure in the host country
• Focus on generating direct and sustainable benefi ts for the host
community through pro-active and well organized social and

community development programs
• Align with multi-lateral agencies, such as the World Bank, to
achieve a ‘prominent victim’ status in the face of mounting
resource nationalism
• Partner with state owned enterprises that have strong
Government-to-Government relationships
• Encourage direct government participation
“With the massive increase in resource nationalism, comes an increased need for tax directors to be
more involved in strategic risk decisions.”
Andy Miller
Global Mining & Metals Tax Leader, Ernst & Young
The business risk report Mining and metals 2012–2013
14
02
Skills shortage
(same as 2011)
Identifying, attracting and retaining critical operational and
construction skills remains a top priority for the mining and
metals sector in 2012. Continued sector growth with 136 new
projects planned or announced in the 2012 calendar year
1
once
again magnifi es and escalates the problem. However, the outlook
on investment is cautious, with companies prioritizing and
sequencing investment in projects, thus impacting skills demand-
and-supply dynamics. The scaling back or shelving of several
large projects during the year may provide some temporary relief
from the skills shortage. However, in this volatile environment,
it is increasingly diffi cult to forecast and plan future workforce
requirements, and this is why skills shortage remains the second

most critical risk in the mining and metals sector.
The risks associated with skills shortages are signifi can
t:
1. Impact to production output — there is a risk that insuffi cient
skills may limit current and/or planned output. According to BHP
Billiton, Australia’s resources industry needs an extra 170,000
workers in the next fi ve years.
2
In Canada, the Mining Industry
Human Resources Council’s 2010 National Employer Survey
reported that 40% of the Canadian mining workforce will be
eligible for retirement by 2014, taking with them an average of
21 years of mining sector experience each, and driving the need
for skilled workers to 60,000–90,000 by 2017.
3
2. Delay, downsizing or cancellation of projects — the shortages in
both skilled and unskilled labor contribute to project delays, the
impact of which is felt by both mining and metals companies and
contractors. Meeting contractual obligations will be diffi cult, and
the viability of projects will also be impacted as there is not
enough labor to successfully implement the number of planned
projects. In Canada alone, operations in 32 Canadian mines were
either suspended or shelved during 2009–2011.
4
Even the
larger mining and metals companies are experiencing the impact
of the skills shortage, e.g., rising skills costs was one of the
contributing factors that led to Newmont Mining writing off the
Hope Bay gold project.
5

1 Raw Material Group
2 Australian mining giant BHP Billiton estimates that the industry will need a further , Federal
Government Broadcast Alerts, 3 October 2011, via Factiva © 2011 Media Monitors Australia Pty Ltd.
3 />4 Canadian Mining Industry Employment and Hiring Forecasts, 2011
5 Newmont puts Hope Bay gold project on hold, />story/2012/02/01/north-newmont-hope-bay.html, accessed 17 May 2012; Newmont Mining posts
4Q loss on project writedown, http://fi nance.yahoo.com/news/Newmont-Mining-posts-4Q-loss-
apf-4285689275.html, accessed 17 May 2012
3. Global mobility — the current labor shortage within the mining
and metals sector necessitates a global approach to mitigate the
risk as there are often insuffi cient numbers and/or skills available
in the local market. Therefore, being able to attract and mobilize
key talent globally in a cost effective and effi cient way, whilst
ensuring compliance with local immigration and tax regulations,
becomes a critical requirement. This, however, does not always
receive local community and government support, and in some
cases government policies and requirements may in fact restrict
the ability to access and move talent globally.
4. Increasing labor costs — competition for scarce labor increases
employment costs and erodes production margins. In addition to
varying commodity prices, companies now have to contend with
an increasing cost base. According to Jac Nasser, Chairman of
BHP Billiton, the cost of doing business in Australia is increasing
due largely to higher wages in the country. The resource projects
in Australia cost around 40% more than the cost of a similar
project in the US Gulf Coast.
6
Companies that are able to plan ahead are using a number of
strategies to deal with skills shortages; both short and long term.
Some of the more innovative approaches we are observing are

as follows:
1. Differentiated employee value propositions
In this competitive labor market, talented employees have
choices, and therefore companies must differentiate themselves
from their competitors by developing compelling offers to attract
and retain the best talent. Ernst & Young’s work developing
employee value propositions for mining and metals companies
clearly shows that remuneration and career opportunity are
rated as equally important by employees and that there are a
range of other factors that infl uence their employment decision.
6 Nasser’s defence is all-out attack, The Age, 17 May 2012, via Factiva © 2012 Copyright John
Fairfax Holdings Limited
15
The business risk report Mining and metals 2012–2013
“There is no easy fi x to the skills shortage issue, but being creative and fl exible in your approach can
open up new pools of talent.”
Louise Rolland
Executive Director, Advisory, Ernst & Young
a. Attractive compensation
(includes remuneration,
incentives, benefits, allowances)
b. Non-financial benefits
(includes flexibility,
career development)
c. Individually tailored
Set remuneration at competitive
but not inflationary levels
Understand what is important Understand what is different
across workforce segments
Companies need to understand what is important to their

targeted workforce and be creative in providing not only an
attractive compensation but also a range of additional employee
benefi ts. In order to retain employees, companies need to
engage with them at multiple levels
7
and clearly communicate
the full range of benefi ts of employment with their company.
a. Attractive compensation
Companies are becoming increasingly focused on employee
related costs. Remuneration arrangements are being
reviewed and rebalanced to ensure they are fair and
competitive for the individual, while being affordable and
sustainable for the organization. In addition to taking a more
targeted approach to compensation design and provision,
companies are focusing on enhancing their employees’
understanding of the remuneration arrangements on offer,
and the purpose for which each remuneration element is
being provided.
b. Non-fi nancial benefi ts
Companies are also employing a range of non-fi nancial
benefi ts and arrangements to assist with workforce
recruitment, engagement and retention. One of these is
fl exible work schedules to enable employees to have a
positive work-life balance while ensuring operational
requirements are achieved. This is especially prevalent in the
development of FIFO/DIDO rosters. To provide greater
balance of time in home location with time on site, rosters
7 Attracting workers to the mines and retaining them, Ernst & Young, 2008
have evolved over recent years from 2 weeks on 1 week off to
9 days on 5 days off, to 8 days on 6 days off, and now to a

8/6/7/7 rotating roster.
8
In addition, companies are also
providing additional fl exibility such as career breaks, working
from home, the ability to work part-time and parenting leave
options as a means of attracting and retaining talented
employees. Other benefi ts that are typically being offered
include relocation assistance, in-house and online education
alternatives for career development, and free or subsidized
childcare facilities.
c. Individually tailored employee experiences
In addition, mining and metals companies are tailoring their
attraction and retention strategy so that they are aligned to
employees’ geographic location, nationality and life stage who
may have different needs and expectations. Greater
sophistication in profi ling the market will better enable
Human Resource Directors to respond to the threat that labor
shortages pose to their company’s competiveness. Leading
organizations are utilizing predictive modeling techniques to
tailor their offerings to target different labor segments and
better match job roles with candidate preferences. A key
trend emerging is the increased importance both candidates
and employees place on career development and progression
as a driver of attraction and retention. Nowhere is this more
pertinent than in the mining and metals sector where a lack of
clear career pathway and opportunities are often cited as a
reason for leaving.
9

8 8/6;7/7: Example of rotating roster where working 8 days on/6 days off and 7 nights

on/7 nights off
9 Career and life survey, Ernst & Young
The business risk report Mining and metals 2012–2013
16
Steps companies can take to respond to this risk:
• Source skills from aligned sectors and a broader demographic
• Account for demographic and diversity factors when making
investment decisions
• Initiate programs that encourage semi-skilled and retired
workers to re-enter the work-force
• Target initiatives to retain critical skills held by older workers
close to retirement
• Create employment packages focused on career development
opportunities
• Implement early labor scheduling and sourcing within mine
planning
• Develop sustainable skills development programs to fi ll
these gaps
• Develop strategic alliances with institutions and communities
• Target initiatives to optimize productivity
• Substitute capital for labor through innovation
Steps mining and metals companies can take to respond to this risk:
Five things that leading companies do well when attracting and retaining staff
1. Get the employment offer right and effectively communicate
and reinforce it
2. Develop effective career pathways and well-aligned employee
development programs
3. Build internal capability to effectively manage people
4. Understand employee needs and the markets in which they
reside for effective workforce planning

5. Execute well across attraction and recruitment, and
development and progression
2. Accessing non-traditional and under-represented labor pools
Women and indigenous workers are two signifi cant talent pools
that are not yet fully leveraged by the sector. Further, there are
skills and experience in other sectors which could be effectively
leveraged into mining and metals organizations. With policies
and practices catered to address the needs and requirements of
these specifi c groups, the sector could potentially increase the
available talent pool.
Indigenous engagement is crucial since indigenous communities
represent a large source of labor close to mining and metals
operations, and are often one of the fastest-growing
employment pools in the country. To utilize this resource pool,
many companies have set a minimum target to employ
indigenous workforce at mine sites, and governments are
implementing incentive programs for these communities to gain
the appropriate skills to enter mining-related employment, e.g.,
the Canadian Indigenous Skills and Employment Partnership.
10

This benefi ts not only the indigenous communities, but also
contributes to the companies’ social license to operate.
The effective participation of women in the sector is currently
low — in Australia, women represent only 18% of the workforce in
mining, as opposed to 45% of the total workforce,
11
and in
Canada, 14% of the mining labor force, as opposed to the
country’s average participation rate of 47%.

12
The participation
of women in the sector is often limited due to issues such as the
lack of part-time work in the sector, a culture of long hours,
10 Attracting workers to the mines and retaining them, Ernst & Young, 2008
11 Attracting workers to the mines and retaining them, Ernst & Young, 2008
12 Canadian Mining Industry Employment and Hiring Forecasts 2010, Mining Industry Human
Resource Council
remote locations of mines, family responsibilities and the
extended problems of working in a male-dominated environment.
In many countries, formal programs are now in place to increase
the national participation of women. For example, the Federal
Government of Australia’s policy to increase female participation
in mining includes tax deductibility of work-related child care
expenses, fringe benefi ts tax removed from employer sponsored
childcare, and education programs aimed at employers to inform
on gender equity, amongst others.
13

3. Sourcing workers from other sectors
The shortage of mining and metals skills has prompted some
companies to consider resources in other sectors with similar
and/or complementary skills, such as oil and gas, engineering,
construction and manufacturing. Targeting resources in these
sectors has created a widening resource pool of both technical
(e.g., electrical trades, fi tters and turners) and professional (e.g.,
civil and mechanical engineers) skills. Further, the relative growth
of mining and metals versus other sectors may also provide more
immediate access to resources due to slowing down and
contraction within these other sectors. For example, in August

2011, BHP Billiton established an online portal to take
applications from the 800 workers affected by a company’s
decision to cut jobs in Illawarra, Australia. In the wake of the
US$9.5b capital expenditure plan, BHP Biliiton is hiring from
allied sectors for its operations in Illawarra, Queensland and
Western Australia.
14

13 Gender pay equity and associated issues for women in mining — Survey Report, The AusIMM,
/>accessed 24 May 2012
14 Sacked steel workers wanted in WA, Australian Broadcasting Corporation (ABC) News, 24 August
2011, via Factiva © 2011 Dow Jones & Company, Inc.
17
The business risk report Mining and metals 2012–2013
03
Infrastructure access
(same as 2011)
While prices have moderated over the past year, they remain
above historical averages driven by economic growth in the
rapidly developing economies. This continues to challenge the
mining and metals sector with its supply response. The need
to expand existing production or develop stranded deposits
is keeping infrastructure access in the top three sector risks.
Indeed, global mining capital expenditure is expected to grow 14%
in calendar year 2012. This is being driven by a range of mining
development projects in developed economies like Australia
and emerging markets of China, and Africa.
1
Resources sector
investors from countries like China, Japan, Korea and India have

emerged as new infrastructure sector investors in the last few
years, in addition to traditional funding from OECD countries.
For example, Japanese fi rm Mitsubishi Corp is championing the
Oakajee Port and Rail development in Australia
2
and Chalco
and Rio Tinto are developing the Simandou iron ore project in
Guinea, Africa.
3
One of the clear impacts of the long running minerals boom has
been that resource deposits long classed as marginal or
uneconomical have gradually become more viable. Typically these
deposits have been of lower quality or remote from existing supply
chains and thus the lack of suffi cient infrastructure, either logistics
or secondary processing, has been the primary obstacle to rapid
development of these resources. Speed is seen as essential in
developing these deposits as there are only so many of these
standard assets that will be developed. Remoteness naturally brings
additional challenges in terms of cost, risk and scale of development
of the required transport, utilities and supporting infrastructure. We
see a real divide in the approaches of individual organizations:
• The tier one mining and metals organizations have the balance
sheet strength to proceed with integrated mine/logistics
developments but are under shareholder pressure to restrict new
capital expenditure
• The smaller mining and metals oganizations struggle to fund
large sole use infrastructure developments
1 The global mining machinery handbook, 14 March 2012, Morgan Stanley
2 accessed on 20 June 2012
3 Chinalco sets up consortium to develop Simandou iron ore project,

Xinhuanet.com, 29 November 2011
The old paradigm was that governments tended to fund larger
logistics networks and then develop regulated tariff structures on
an open access basis. However, the current poorer condition of
government fi nances globally means that direct investment in
mining and metals related infrastructure is of lower priority than it
has been in the past. Those organizations without the balance sheet
strength or available fi nancial resources are therefore faced with
two options:
• Collaborate with similar sized competitors or larger off-take
customers to jointly develop the required infrastructure. For
example, Sundance Resources, which is developing the Mbalam
iron ore project in West Africa, is collaborating with regional iron
ore developers Core Mining and Equatorial Resources to develop
the infrastructure, and is also the subject of a takeover offer by
Hanlong Mining, a Chinese company
4
• Where competition regimes exist, seek access to the existing
privately developed networks (the Pilbara iron ore rail network
access dispute between iron ore miners in Western Australia is an
example of this process)
5
A key issue in structuring transactions for pivotal supply chain
infrastructure is control: control over the operational protocols and
expansion profi le gives an organization a signifi cant advantage over
its competitors in setting the speed with which product is delivered
to the market. Negotiations over joint development agreements
and third party access terms are typically long and complex as the
control issue is dealt with. Anketell Port in Western Australia and
the Wiggins Island Rail expansion in Queenland, Australia are both

examples where negotiations on control have been extensive and
have delayed the fi nalization of project delivery. Our view is that a
signifi cant portion of the synergistic value that would be generated
in a more cooperative approach is being lost.
4 Sundance Resources regulatory fi lings to Australian Stock Exchange in 2011 and 2012
5 Rio Tinto completes formation of Simandou joint venture with Chalco, Rio Tinto press
release, 25 April 2012
The business risk report Mining and metals 2012–2013
18
We expect the key infl uences on the fi nancing of infrastructure
to be:
1. The changing role of government
The role government plays in infrastructure development continues
to evolve. We are seeing three trends emerge:
• Reduction of direct government funding allocated to the
development of supporting infrastructure driven by global
pressure on government budgetary positions
• Increased pro-activity from governments in the planning and
approval processes to both enhance the effi cient development of
the necessary infrastructure (avoiding wasteful duplication of
supply chains), and to preserve effective competition for valuable
rail and port rights. In the developing nations, the focus is
typically on the fi rst of these issues
• Provision of incentives for the private sector to fi nance and
provide necessary infrastructure either through tax incentives,
orderly risk transfer, or project approvals
2. Increasing infl uence of foreign customers
We are observing a continued infl uence of Chinese, Indian and
Korean investors in infrastructure development. These companies
tend to have government backing (in terms of funding and strategy)

and tend to deal directly with local governments. They look to
partner with junior mining and metals companies and local
government in developing projects and it is common for them seek
pit to port control and off-take commitments in return for otherwise
unavailable debt and equity funding. Junior mining and metals
organizations, while apprehensive over surrendering logistics
control, typically have few other viable funding options and thus
there is substantial fi nancial pressure to agree to accept those
terms and conditions.
3. New sources of infrastructure funding from institutional
investors
Pension, sovereign wealth and infrastructure funds have emerged
as a new source of funding, with a preference to fund projects
where there is limited un-pooled commodity risk. Pension investors
are extremely reluctant to take raw usage risk. These investors will
typically require material greenfi eld or brownfi eld expansions to be
supported by take or pay contracts from a bankable mix of mining
and metals organizations to be attractive. We note that third party
fi nancial investors do not benefi t directly from the synergies that
accrue to producers for control of the supply chain and thus may
require a yield premium. This further reduces the viability of
projects, and biases against resource developments without solid
logistics infrastructure or sponsored by tier one organizations.
Mining and metals companies are increasingly looking at
partnerships to provide additional funding sources. Whilst these
models can introduce a broad range of additional risks, increase the
complexity of the process and include additional development
challenges, in some cases they can provide a viable alternative.
4. Financing market challenges and ongoing volatility
The global fi nancial crisis of 2008 resulted in increased debt

pricing, tightening of lending covenants, reduced lending tenors
and a signifi cant contraction amount of bank debt available to
fi nance infrastructure projects. There has been a consequent
adjustment in the banks participating in the infrastructure project
fi nancing market. The impact of the departure of a number of well
known European banks from this market has been partially offset
by increased participation from Asian and Canadian based lenders.
However, for a robust project with an appropriate commercial
structure, debt funding remains a viable funding option as shown
in the Wiggins Island Port project in Queensland, Australia. The
current volatility in fi nancial markets and also the upcoming
introduction of Basel III means the current challenges for non-
recourse project fi nance structures to secure funding are likely
to continue.
5. Increased focus on corporate governance
Boards are placing greater scrutiny on where their investment
dollars are spent. This is being driven to some degree by the poor
condition of the global funding markets and the consequent
limitations on the terms, availability and pricing of capital. This has
triggered further internal competition for investment capital
between business units. Boards are thus focusing on projects with
lower risk and capital usage profi les. Projects with substantial
infrastructure development tasks have higher capital requirements
and tend to face lower overall returns. This means, in some
instances, projects are being delayed in order to ensure more
robust analysis, justifi cation and scope rationalization prior to
receiving approval. In addition, we are seeing signifi cant changes in
the relative cost of developing projects — reduced productivity,
changing sovereign risk profi les and the level of competition for
skilled labor and materials are all impacting on the viability and

priority of projects across the globe. The Minerals Council of
Australia recently cited that “low productivity growth and rising
cost structures in Australia have contributed to deteriorating
international competitiveness over recent years.”
6
6 Boom under threat from higher costs, Australian Financial Review, 30 May 2012
19
The business risk report Mining and metals 2012–2013
“Changing market conditions will force resource producers to amend infrastructure development plans.
Given the softening commodity prices, the cost curve will play a more critical role in determining which
projects will proceed and most importantly when they will be developed. ”
Neal Johnston
Partner, Infrastructure Advisory, Ernst & Young Oceania
Steps mining and metals companies can take to respond to this risk:
• Consider the extent to which infrastructure defi cits may impact
on enterprise value
• Understand the return on all capital expenditure, including
infrastructure, and consider appropriate fi nancing
• Look for other stakeholders to co-develop a solution with shared
benefi ts
• Investigate partnerships with other potential stakeholders in
expanded infrastructure to innovate fi nancial arrangements
including off-take
• Improve mine planning to assist in assurance over optimal levels
of take-or-pay commitments
Outlook
Infrastructure blockages remain prevalent in rail and port
infrastructure supply chains and are increasingly impacting mine
supporting infrastructure and power and utilities networks due to
the remote development locations.

The current uncertainty over global fi nancial markets has added
additional risk to the process of pit to port mine development. A
downward trend in resource prices would force an immediate
reassessment of marginally economic deposits, so the need for
rapid development while the price environment remains benign is a
key concern for all mining and metals organizations. The task then
is unlocking the value of co-ordination and collaboration between
organizations so that the full infrastructure cost profi le is effi ciently
allocated and funded.
With governments less able to fund supply chain infrastructure as it
has in the past, a new paradigm has formed whereby the private
sector needs to play this role. This necessitates changes to the
procurement processes and risk allocation between government,
users, developers and funders. For this to be effective, traditional
views around construction risk, residual value, revenue/pricing risk,
capacity, operational control, credit risk and tax need to be
re-assessed. Unless the commercial risks can be adequately
addressed and the take or pay contracts bankable, then
development of infrastructure will continue to be slower and more
complicated than would appear necessary.
The business risk report Mining and metals 2012–2013
20
(Up from 8 in 2011)
04
Cost infl ation*
Over the past decade as the sector and its suppliers have
struggled to increase supply, cost infl ation has re-emerged
as a major risk for mining and metals companies globally. It is
estimated that the sector experienced cost infl ation of between
10% and 15% in 2011, with overall cost infl ation averaging

roughly 5–7% in the last 10 years (this equates to a doubling
of costs every 10–14 years).
1
Cost infl ation in the industry is
expected to intensify over the next several years due to a number
of factors, including labor, energy, ore grades, and taxes.
Subdued demand and low commodity prices, while costs
continue to rise
According to Rio Tinto CEO Tom Albanese, softening commodity
prices, higher input costs, and soaring Australian and Canadian
dollars are pressuring margins.
2
Corroborating this view, several
mining and metals organizations have cited the twin evils of rising
costs and lower commodity prices as the main causes for recent
declines in profi ts. Take for example aluminium and nickel
producers — these commodities have witnessed the most signifi cant
drop in prices since August 2011, and given their nature, are
known to incur very high operating costs:
• UC Rusal reported a 91.7% drop in net profi t for 2011 due to
rising costs and lower prices, with aluminium trading near its
marginal cost production
3

• Alcoa recorded a loss from continuing operations of US$193m in
4Q11. In 1Q12, the aluminium producer reported a 70% y-o-y
drop in income from continuing operations to US$94m
4

• BHP Billiton’s Stainless Steel Materials (nickel) business reported

a 99.7% y-o-y drop in earnings before interest and taxes for the
half year ended 31 December 2011,
5
partially a refl ection of a
35% drop in nickel prices through 2011
• In 1Q12, Vale’s nickel unit reported a 29% y-o-y decline in
operating revenue due to low nickel prices
6

* Renamed from ‘Cost management’ in 2011 as it better refl ects the infl ationary environment
1 Cost infl ation is major theme for metals production: Deutche Bank, Commodity
Online, 16 April 2012
2 Commodity prices spark Rio Tinto warning, Australian Broadcasting Corporation (ABC)
News, 28 November 2011 via Factiva (c) 2011 Australian Broadcasting Corporation
3 More pain looms for aluminium, The Australian Financial Review, 13 January 2012
4 1st Quarter Earnings Conference, Alcoa Quarterly Earnings Presentations, 10 April 2012
5 BHP Billiton Results for the Half Year Ended 31 December, BHP Billiton press
release, 8 February 2012
6 Performance of Vale in 1Q12, Vale fi nancial performance, 25 April 2012
Companies revisit robust capital expenditure plans
The period of record-high commodity prices extended from 2H10 to
1H11, masking the real impact of rising costs, as the mining and
metals sector enjoyed large profi ts. During this period, mining and
metals organizations implemented signifi cant capital investment
plans and also increased production to cash in on the period of
premium pricing. As a result, the supply of raw material, labor and
equipment to the industry has tightened considerably, pushing up
operating and capital costs alike.
In early May 2012, AngloGold Ashanti approved capital investment
for the Kibali gold mine in the Democratic Republic of Congo (DRC),

which it is developing with project partner Randgold Resources.
Total capital expenditure for the project (including contingencies)
has increased to US$2.2b versus the 2010 feasibility study
estimate of US$1.4b. Though Kibali’s mine design and mine
schedule has been optimized since the original 2010 feasibility
study, this 55% increase in capital expenditure highlights rampant
capital cost infl ation across the mining and metals sector.
7
Capital cost infl ation without a concurrent increase in underlying
commodity prices is forcing industry players to revise their capital
expenditure targets. Large and small scale players, irrespective of
commodity, are succumbing to capital cost pressures and this is
likely to result in delays to new supply across all sectors within the
industry. This slowing of the supply response may help sustain
above average pricing and thereby attract more development.
Crude oil prices, wage infl ation and increasing complexity
drive operating costs
Operating costs continue to increase on the back of high crude oil
prices and wage infl ation. The cost of mining consumables and
transport is closely linked to the price of oil, which has been on the
rise since 2010. Oil prices continue to trade at around US$100/
barrel, and rising tensions between Iran and the Western economies,
together with supply concerns in Africa, present major risks to oil
prices in the medium term. Wage infl ation is also rife across the
sector, as employees seek to share the profi ts. Several mines across
the world were hit by labor strikes for higher pay in 2011, triggered
by the record-high commodity prices and near-record profi ts that
sector players experienced between 2H10 and 1H11.
7 AngloGold Ashanti Q1 Earnings Double to US$429m; Approves US$1.9bn Growth Projects,
Marketwire, 10 May 2012

21
The business risk report Mining and metals 2012–2013
Operating environments for mining and metals companies are
becoming more complex, posing both physical challenges (deeper
underground mining, remote locations etc.) and political challenges
(safety concerns, regime instability etc.). More complex operations
generally mean more costly operations. While physical challenges
can be addressed by investing in expensive new technology and
infrastructure, political challenges bring with them increased and
constantly changing safety and environmental reporting, causing a
substantial increase in compliance costs.
Declining ore grades and consequently higher production costs are
a re
ality that several existing mines are struggling with globally.
Similarly, miners are going deeper underground as higher prices
allow — a costly affair in comparison to traditional open pit mining.
So although the profi ts are there, the same margin is not being
realized.

Mining and metals companies are increasingly investing in new
regions as desirable mining projects become harder to fi nd.
However, much of this potential new supply is located in remote
areas — a physical challenge that translates into even higher costs
than the general levels the industry is facing:
• Consumables — due to the lack of access to national power grids,
many
remotely-located projects are forced to rely on diesel
generators to power their operations. Agnico-Eagle Mines’
Meadowbank mine in Nunavut (Canada) uses up to 60m liters of
diesel annually, making energy one of its biggest cost pressures

8

• Labor
— mines located in remote areas struggle to hire and retain
skilled staff, with labor often cited by CEOs as a top cost pressure.
In order to attract and retain skilled labor to remote locations,
companies are forced to pay increasingly competitive salaries and
rely on fl y-in fl y-out labor pools.
• Lack of infrastructure
— the lack of roads, rail, power, water and
other in
frastructure adds to the development costs of mine
projects in remote areas. Additionally, costs specifi c to social
infrastructure are increasing
8 Canada’s Nunavut awaits its day in the sun, Reuters News, 2 April 2012
The increasing costs and falling revenues of remotely-located
projects are threatening to make them unviable. For example, a
signifi cant number of upcoming and operating gold projects in
Canada’s Far North region have been written-down partially or
shelved altogether for this reason. Growth strategies are
increasingly shunning the additional cost burdens of developing
greenfi eld projects in favor of brownfi eld expansions at exiting sites
where manpower, resources and infrastructure are already in place.
The currency impact
Industry-wide cost infl ation is being compounded by strong
currencies in most resource-rich countries. Since late 2008, the
Australian dollar has strengthened by over 60% against the US
dollar; the currency global commodities tend to be priced in. The
Canadian dollar, Chilean peso, Brazilian real and South African rand
have all moved similarly. This has pushed up the relative cost of

wages, power and other local goods in these countries.
How is the industry responding?
Cost infl ation, in a period of softer commodity prices, is forcing
mining and metals companies to either re-evaluate, shutdown or
divest high cost and non-core business units. Several companies are
reviewing their portfolios to identify underperforming assets.
Energy-intensive aluminium is already witnessing multiple
shutdowns and closures in the industry. A number of companies are
opting to divest their downstream aluminium assets where China
has excess capacity, while retaining upstream assets where
demand, particularly from China, is expected to remain strong.
Aluminium major Alcoa has closed substantial volumes of smelter
capacity, while Rio Tinto is divesting parts of its aluminium
business.
9
There has also been re-evaluation in the nickel sector,
with BHP Billiton cutting production and Kagara Mining entering
voluntary administration.
10
9 Rio Tinto to divest US$8bn of aluminium assets, The Financial Times, 17 October 2011; Alcoa Sees
Aluminum Cuts as Production Gains: Commodities, Bloomberg, 10 April 2012
10 Western Areas buys Kagara nickel mine, The Australian, 2 March 2012; BHP to make fi rst job cuts
since GFC as nickel dives, The Australian, 2 February 2012
“Cost infl ation is a risk that keeps growing, and continues to threaten profi t margins and the viability
of projects.”
Paul Mitchell
Global Mining & Metals Advisory Leader, Ernst & Young
The business risk report Mining and metals 2012–2013
22
Rising costs are also driving consolidation within the industry for

synergies, economies of scale and greater negotiating power.
Larger companies tend to be in a stronger position to negotiate
better terms with contractors and suppliers. Interestingly, some
sector players are beginning to forge collaborative relationships
with their contractors and suppliers, with the aim to achieve greater
savings and increased productivity. For example, to identify
opportunities for waste removal from the supply chain, Vale’s
procurement team holds collaborative workshops not only with
other functions within the company, but also with suppliers. Vale’s
“collaborate to innovate” workshops have helped save costs worth
roughly US$500m over a span of just three years.
11
The category
management approach is also gaining popularity with procurement
teams, whereby the relationship between a miner and its suppliers
moves to one of collaboration, rather than the traditional
adversarial relationship. Such an approach generally entails the
exchange of information, sharing of data and joint business
building, with common turnover, profi tability and cost-saving
targets that mutually benefi t the miner and supplier/contractor.
Companies are increasingly turning to technological solutions to
mitigate wage infl ation. The high cost of supporting a fl y-in fl y-out
workforce is pushing companies to invest in automation. Rio Tinto is
11 Procurement Teams Recognized for Innovation, MyPurchasingCenter.com, 28 September 2011
committed to this solution with plans to spend US$483m to make
its trains driverless, a decision that follows last year’s move to put
150 automated dump trucks into its Pilbara mines in Australia. The
company’s automated production drills, loaders and haul trucks will
be supervised from a remote operations center in Perth. Rio Tinto
could save an estimated US$72m per annum, cut its workforce by

600 and reduce costs by 30 cents per tonne of iron ore if 50% of its
trucks are automated.
12
Fortescue Metals Group and BHP Billiton
are also moving in the direction of driverless truck technology.
Companies are also focused on reducing energy-related costs by
investing in energy projects and even taking interests in power
assets. Furthermore, capital cost overruns have highlighted the
need for more robust systems to improve forecasts and project
controls. To lower their cost base, companies are increasingly
procuring equipment from developing countries. A switch to
owner-operated mines could also help companies save costs. BHP
Billiton has acquired part of Leighton Holdings’ HWE Mining division
to bring its Pilbara iron ore operations inhouse rather than hire
outside contractors. Discounting estimated contractor margins of
5% to 7%, the miner’s cost base in the Pilbara will reduce by roughly
US$55m to US$77m per annum (60–90 cents per tonne of
iron ore).
13

12 Rio high in an empty driver seat, The Age, 6 April 2012
13 BHP turns owner-operator in US$735m buy, The Australian Financial Review, 10 August 2011;
Completion of the Acquisition of HWE Mining, BHP Billiton press release, 30 September 2011
Steps companies can take to respond to this risk:
• Focus on sustainable cost reduction programs
• Divestment in non-core assets
• Review of capital tied up in high levels of pre-stripping, advance
development and stockpiles
• Consideration of the use of contract mining vs. sale or leaseback
• Review of supplier contracts

• Outsourcing
• Creation of strategic joint ventures to optimize economies
of scale
Steps mining and metals companies can take to respond to this risk:
23
The business risk report Mining and metals 2012–2013
The current period is shaping as a time of great opportunity,
and great challenge, for mining and metals companies delivering
major capital investment pipelines. A massive pipeline of
committed projects requires delivery during the 2012–2015
period. Competition for resources to execute remains as acute
as ever. Announced investments across the global mining and
metals sector totalled US$676b at the end of 2011 — an immense
20% y-o-y rise.
1
Mining and metals leaders are increasingly aware
of global macro-economic trends and are actively shaping their
delivery strategies accordingly.
These trends stem from heightened global economic volatility and
continuing deliv
ery cost infl ation:
• Uncertainty around the rate of growth in demand for metals and
energy from the ‘growth engine’ economies
• Uncertainty as to the price for key commodities, impacting
economic hurdle rates for capital investments
• Uncertainty as to regulatory obligations impacting environmental,
labor and taxation requirements
• Increasing delivery costs resulting in frequent and substantial
cost variances on recent capital projects
This uncertainty has been putting downward pressure on prices of

mined commodities since 2H11 and has placed emphasis on the
increased need for effi cient project selection, planning and
execution to ensure good returns in times when margins are
already under pressure. Established producers have a vested
interest in moderating the supply response during a period of
premium commodity pricing for as long as possible rather than
supplying sooner but eroding their premium.
1 E&MJ’s Annual Survey of Global Mining Investment, 20 Jan 2012, www.e-mj.com
05
Capital project execution
Commodity price trend
In view of the volatile macroeconomic environment, not only have
the new project announcements slowed in 2012, but mining and
metals companies are now reconsidering, revising and prioritizing
or sequencing previously announced capital project plans. About
47% of the mining and metals companies polled by Citigroup during
1Q12 are considering lowering their capital expenditure budgets,
compared with 18% that were considering lowering their budget in
4Q11.
2
Companies are now exercising caution in laying out capital
expenditure plans:
• BHP Billiton is reportedly revisiting the sequence of its capital
expenditure plans to maximize value and reduce risk as it faces
the prospect of lower cash-fl ow generation from its projects.
While the company is expected to reach a decision on several
major projects including Olympic Dam and Port Hedland in
Australia by the end of 2012, it is now unlikely that it will spend
the reported US$80b in capital expenditure by 2016
3

• Rio Tinto has announced that it is carefully evaluating projects
and that some growth opportunities may not be developed
4
• Vale’s overall budget for capital expenditures on project execution
for 2012 is 12.9b, compared to US$17.5b in 2011. In view of the
risks associated with the execution of projects, the company has
said that it may revise the estimates of their projects’ expected
capital expenditures and estimated start-up dates
5
2 Signs of Fatigue in the Commodities ‘Supercycle’, The Wall Street Journal, 23 May 2012
3 BHP Billiton pulls back from US$80bn spend,” The Telegraph, 16 May 2012; BHP moves to ease
worries over mega project spend, Reuters, 2 May 2012; BHP Billiton tweaking capex plans, CEO says,
, 15 May 2012
4 Rio Tinto reaffi rms confi dence in demand outlook , , 9 May 2011
5 Vale announces investment budget for 2012, Vale press release, www.vale.com
(same as 2011)
The business risk report Mining and metals 2012–2013
24
The metals and mining community adapts
Leading mining and metals companies are adapting to emerging
capital project risks by raising the bar on business case justifi cation,
prioritizing investment pipelines and enhancing the level of project
control expected of delivery teams.
• Raising the bar on business case justifi cation and rigor
Business cases are made or broken on the back of estimated
costs and benefi ts and there is now a renewed focus on the
integrity of this data. Projects are being asked to declare
transparent estimation methodologies, benchmark against
historical performance and stress-test their numbers for a range
of anticipated delivery scenarios. Improved rigor in underlying

business case data substantially improves management’s level of
decision-making confi dence.
Every project faces a unique array of delivery risks but not every
business case factors these in. Project teams that holistically
assess and, in turn, align contingency allocations to each project’s
unique risk profi le are ensuring business cases accurately defi ne
the likely capital outlay required. Clearly declaring underlying
assumptions and arranging peer review validation builds rigor in
business case planning. A key assumption, and risk factor, is the
impact of price volatility — scenario modelling will identify the
critical price-points for future business case review.
Every business case needs an owner who can vouch for,
champion and be accountable for the delivery of the identifi ed
benefi ts. Companies that establish clear and single-point business
case ownership can align delivery performance with an
individual’s key performance indicators (KPIs) and a business
unit’s capacity and budget forecasts.
• Prioritizing the investment pipeline to align with a changing
appetite for cost and cash exposure
Mining and metals companies are making the hard call to
prioritize their capital expenditure. As leadership teams develop
customized criteria to sequence their project pipeline,
prioritization considerations extend beyond return on investment
(ROI) to include strategic alignment, cash fl ow exposure and
delivery complexity.
The assessment of strategic alignment requires mining and
metals companies to determine how mega-project investments
align to the company’s long-term (often multi-decade) business
plans. It is on this planning horizon that a broad range of strategic
considerations come into play, such as which projects:

• Will drive performance against key analyst measures such as
US$/tonne, market share and reputational value?
• Will establish the growth option infrastructure to support
business-building investments into the future?
• Will support the diversifi cation of risk, price and currency
exposure?
• Are aligned to commodities that the company seeks to grow,
stabilize or exit?
• Are aligned to the company’s view of core business whereby
the owner’s team may be seen as an investment manager,
construction manager and/or operator?
• Offer a superior value proposition to comparable acquisitions?
• Have access to high performing and cost effective suppliers to
undertake design, fabrication and construction?
• Will best leverage technologies suited to cost-reducing
engineering design, offshore module fabrication and access low
cost construction labor?
The projects that pass these tests will typically be sound
candidates to advance towards the front of the pipeline queue.
The assessment of cash fl ow exposure is particularly relevant as
leaders adopt an increasingly conservative decision-making bias
and seek to optimize liquidity. While mega-projects will be brought
forward on the merit of their individual business cases, many
companies will have a diminished appetite for running multiple
cash-intensive investments in parallel and some will seek to
actively decelerate expenditure rates. Increasingly, cash-intensive
mega-projects will be advanced in series and projects with long
ROI payback periods will face critical review.
The assessment of delivery complexity considers alignment to
existing company capacity, capability and proven technical

solutions. Innovation will continue to play a critical role in
improving effi ciency and effectiveness; however, this will be
balanced against the predictability of proven solutions. Similarly,
brownfi eld expansion projects (where there is proven cash fl ow
from an existing asset and existing operational infrastructure),
may be advanced in favor of greenfi eld development options.
25
The business risk report Mining and metals 2012–2013
“The focus is shifting from a rapid increase in production capacity to careful evaluation of capital projects
in an environment of heightened volatility.”
Claus Jensen
Advisory Partner, Ernst & Young Oceania
• Enhancing project controls to drive standardized delivery
against plan
Having put forward robust business cases, and effectively
prioritized capital expenditure, project teams must embed the
right project control disciplines to not only drive delivery against
plan, but to do so in a standardized and consistent manner.
In light of the rapid labor and equipment cost infl ation facing
delivery teams globally, the objective of these project controls is
not necessarily to reduce absolute cost — rather, project controls
emphasize thorough planning, and controlled change and
performance accountability to deliver predictable outcomes.
Financial predictability of the results generated from capital
investments is the ultimate strategic objective of any corporation.
However, this can only be achieved when projects apply proven
value engineering initiatives, are subject to stage-gated
independent review against business case requirements, and are
controlled by robust cost, schedule, risk and interface
management processes and tools.

Well managed projects invest in upfront planning, leverage and
standardize leading tools and processes, and are governed with
an emphasis on timely and informed decision-making. Roles and
accountabilities are agreed between project, program, owner and
contractor teams with a quantitative focus on performance
monitoring. To embed these practices across their project
portfolio, many leading companies have developed independent
project and program delivery teams, separate from the
underlying asset, whose specifi c mandate is to drive project
management enhancement.
Key value initiatives gaining traction across the mega-project
landscape include program-level delivery optimization and
strategic third-party engagement. Program-level optimization
identifi es cross-project synergy opportunities including
standardization, replication, continuity and scale-driven leverage.
Strategic third party engagement drives mutual and sustainable
commercial value by aligning category planning, vendor
selection, contracting model confi guration (including EPC/EPCM
models) and incentivization frameworks to the requirements of
the project delivery environment. Moreover, they apply
sophisticated approaches to allocating associated risk and
rewards to the contracting entity best placed to manage project
delivery risks. Additionally, innovations such as equipment
automation and the remote control of certain mine operations
from a distant location are increasingly being explored across the
sector as further avenues to realize project and operational value.
Stage-gated reviews provide a periodic interval to assess progress
against plan and formally approve progression to the next project
phase (including release of associated funding). While continuing
to provide an opportunity to review lessons learnt and revise

next-phase planning, a cost-centric management agenda will
drive particular focus on phase-by-phase performance against
budget and benefi t realization plans. Projects that demonstrate
signifi cant variance against plan are increasingly likely to face
substantial corrective planning or the potential of discontinuation.
A similarly focussed approach should be anticipated for material
change requests and contingency draw downs.
Steps mining and metals companies can take to respond to this risk:
• Rigorous portfolio management and greater scrutiny around
project selection, prioritization and management is vital
• Operationalize knowledge management through incorporating
learning, technological advancements and benchmarks into all
procedures and databases
• Implement an effective risk management process where there is
a clear line of sight between project, portfolio and strategic risk
management such that objectives are supported by appropriate
tactics that address all potential project threats
• Ensure project and supply chain performance is monitored and
managed by aligning owner and contractor teams alike through
pragmatic contracting strategies and incentive programs
• Implement advanced assurance frameworks that provide
independent review and oversight over project performance.
This helps to proactively identify and manage challenges before
they become issues