Risky business - managing risk and reward
It may carry the tag of being laborious and bureaucratic, but risk management can make or break a mining company. Melanie Rutherford speaks to John McVeigh from global risk management consultancy MYR Consulting about the issues surrounding risk in the mining industry, and how companies can best manage these for growth and longevity.
For any company in any industry, risk management is something that most would rather not have to think about. But with a constant need to weigh up risk and reward, for the mining sector the issue is especially pertinent. Risk management has earned a reputation for being a laborious, bureaucratic process that only larger companies need consider. However, not only can it be a simple process, but it can also mean the difference between failure and success for a mining company of any size and stage of operation.
A good risk management framework will run through every level of a company, and ensures that long-term, strategic decisions, as well as those made in day-to-day operations, are made objectively and with specific goals in mind. ‘That could be on anything from financing a new mine start-up to getting your water level down below the surface for a larger operation,’ says John McVeigh, Managing Director of global risk management consultancy MYR. ‘It gives CEOs more confidence in their managers as well as their operations guys. If geotechnologists out in the field know what the company is trying to achieve – even if the goal is as simple as raising capital – they can support that, whether it is by getting samples or talking to locals about an operation. Essentially, risk management improves communication and increases capacity for more objective, and therefore better, decision making.’
For junior mining companies, implementing such a strategy can speed up the process from exploration to operation, and help secure vital funding. ‘A mine with a risk management strategy in place is a much better investment,’ says McVeigh. ‘It sends stakeholders a clear message that the company is aware and in control of potential issues, and that it is in a position to respond should unexpected events occur.’ And with evidence of capital and commodity price forcing many junior mining companies out of business, this can mean the difference between survival and demise. ‘If a potential stakeholder is on the edge of an investment decision and is faced with two companies of the same profile, one with a risk management framework in place and the other without, it goes without saying that they’d go for the company with a structured approach to decision making,’ says McVeigh.
All very well on paper, but what about in practice? McVeigh, who has consulted on mining projects around the globe, explains that the same principles apply to any project, whether the threats to a company’s objectives are environmental, cultural, infrastructure or geopolitical issues.
‘A company that embeds risk management in its decision making processes will ensure it remains within its predetermined risk tolerances,’ says McVeigh. ‘This provides transparency and greater certainty to all stakeholders, and should have particular appeal to investors and financiers.’
An ongoing process of risk assessment against strategic, business and operational objectives should be core to all major investment decisions. From the strategic decision to grow by investment, to developing investment pipelines and managing the investment process, all the way through to project execution, there should be maintained and regularly updated risk registers that include implemented and actionable controls for risks. If, at any stage, risk tolerances are exceeded, the investment should be suspended until controls can be implemented to reduce the risk to an acceptable level.
While this seems like common sense, it is a discipline that resource companies searching for growth all too often ignore – resulting in what is a preventable loss of shareholder value and the company’s reputation.
The process does not need to be complicated. In fact, the less complex it is, the greater the buy-in by stakeholders. The focus has to be the top five to 10 risks to the objectives of each stage of decision making. Importantly, however, the assessment needs to be re-addressed upon any significant change in the external or internal environment. For example, deterioration in the political situation in a West African country should be addressed within a structured risk assessment framework. If the risk cannnot be sufficiently mitigated or if the company is not prepared to raise its risk tolerance, the investment should be suspended.
Furthermore, the whole process, from investment decision-making through to project execution, should never lose sight of the overall business objectives. Australian mining company Wolf Minerals, which recently started mobilisation at its Hemerdon tungsten and tin project in Devon, UK has adopted a broad but integrated approach to risk management. From an initial position two years ago, when it was solely focused on securing funding, the company began asking the broader questions of ‘what are we trying to achieve?’ and ‘what is going to stop us from starting mining operations?’ This brought up issues concerning, among other things, the environment, local laws and possible community backlash, which Wolf Minerals has started to address by implementing a risk management framework that includes adequate internal controls. This is the very thing financiers will want to see prior to providing the funding to commence operations.
‘The company is then in a position to more accurately articulate some of the risks involved and the controls around them, as proof to investors of where it was going to be over the next two years,’ says McVeigh. ‘Without this foundation, something in your operations will start to undo and you won’t have capacity to catch it and get it back on track.’ McVeigh also stresses the importance of aligning the system with the business life cycle, to look only at threats to individual goals such as commencing operations, as opposed to looking at the business as a whole. ‘Don’t start thinking about everything from oil price to your capital in the bank to how many people you’ve got ready,’ warns McVeigh. ‘Break it down, make it timely. Look at day-to-day business decisions instead of at what you’re going to do in five years’ time if oil prices drop through the floor. Otherwise, people in your organisation will simply pay lip service to it and concentrate on their main priority for the day.’
It is also important, says McVeigh, to create a framework that takes into account all elements of the business cycle. ‘While strategically important, the possibility of a drop in commodity prices or a lack of access to capital over the next five years is not relevant to the risks of starting up operations. Break it down, look at risks at all levels of the business cycle and make it relevant to all people in your organisation.’
Proper risk assessments allow for pre-emptive decision-making that can mean the difference between success and failure, a good example of the latter being Cuadrilla’s recent shale gas exploration in Sussex, UK, which immediately drew negative press coverage and subsequent protests by local environmental activist groups. ‘Experience was essentially brought over from the USA, which is a larger and much less densely populated country,’ says McVeigh. ‘They didn’t consider the extent of community oppositon to fracking in populated areas – in the UK, the impact on local communities is likely to be much greater.’
Had a risk management approach to shale gas exploration been taken that looked at the local environment and how to go about educating its people to get them onside, he says it could have been a very different story. ‘It might only have taken a month of work to increase local positive sentiment and consent,’ says McVeigh. ‘Instead, action groups are effectively closing down Cuadrilla’s decision cycle, and every time something new is tried to improve the operation, the groups find a new way of stopping it. By effectively managing risk, those decision cycles can be much faster.’
This case aside, McVeigh believes that many participants in the oil and gas sector have a good approach to incorporating risk management frameworks across their businesses, which allows them to positively engage with external stakeholders. While risk may not be completely removed, it can be effectively mitigated, and a few small steps early on can ensure large leaps forward in the future. McVeigh says, ‘Exploration and start-ups in the mining industry need to adopt a more structured approach to decision making to encourage investment and overcome Government and community concerns at an early stage.’
For further information, email John McVeigh, John.McVeigh@myrconsulting.com