Risk and insurance in the global mining industry

May 2012  |  TALKINGPOINT  |  SECTOR ANALYSIS

financierworldwide.com

 

FW moderates an online discussion focusing on risk and insurance in the global mining industry between Jimmy Daboo at KPMG and Andrew Chester at Marsh.

FW: Reflecting on the last 12-18 months, could you outline some of the major challenges faced by the mining industry, such as supply chain security, political risk, terrorism, natural disasters and environmental issues?

Daboo: Cost pressures persist, partly as a natural consequence of higher commodity prices and partly due to capacity constraints for the limited number of major contractors that are able to deliver the ever-increasing pipeline of development projects. Ever-increasing regulation as well as the approach to compliance demanded in some countries, especially around environmental practices, is making companies focus very hard on being able to demonstrate compliant behaviour and an attitude positively supportive of local social expectations.

Chester: The effects of the Queensland floods at the back end of 2010 had an extensive impact on the mining industry. We saw supply chain challenges regarding the supply of fuel, piping and pumps to remove water from the pits, as well as a strain on infrastructure including railways and ports. We have also seen challenges regarding the supply of key consumables. There was a big increase in the spot price for tyres, as a consequence of the concern around the Japanese tsunami and earthquake, where many of these tyres are manufactured. Mining operations tend to be in the most remote and inhospitable of areas of the world and that adds to a general susceptibility to natural catastrophe exposure. The mining industry is also increasingly exposed to potential political risk events. The expanding geographical reach of mining companies brings greater exposure to host government actions and such intervention has increased substantially in recent years. The economic crisis has led to the introduction of new taxes and royalties on mining companies and we have seen levies introduced in Chile and many parts of Africa, as well as being proposed in Australia. Some countries are looking to replace lost revenue by nationalising mineral assets which can lead to the imposition of resource rents, affect royalty rates, increase the control of foreign participation, and result in the introduction of new mining codes. The mining industry is arguably more vulnerable to government intervention than almost any other.

FW: What impact is ‘resource nationalism’ having on the global mining industry? How are companies responding?

Chester: Resource nationalism is moving to the top of some government agendas and some countries are threatening to negotiate existing tax liability agreements. This obviously increases the challenges that mining companies face, particularly those doing business in some of the emerging markets. For the mining companies that have invested in some of these markets, the level of taxation is undoubtedly having an impact on project profitability. At the same time it means that mining companies are looking hard at where to situate their future activity. Generally speaking, mining investment is becoming increasingly mobile and to maximise investor returns and manage political uncertainty, companies are engaging more consistently in risk management modelling when choosing which jurisdictions to invest in.

Daboo: Resource nationalism is once again high on the agenda, driven by, amongst other things, high commodity prices and stress on government budgets. This can range from countries changing tax and royalty regimes, sometimes retrospectively, to full nationalisation of resources. The armoury of tools mining companies have to deal with the threat of tax changes are limited to lobbying and ultimately redirecting investment to preferred countries. As for nationalisation, unless government-to-government pressure can be brought into play there is little that individual companies can do. That's where the competitive advantage claimed by companies operating in particular countries is really tested.

FW: To what extent are mining risks amplified when operating in frontier emerging markets?

Daboo: There is no doubt that operating in 'frontier' markets amplifies the risks mining companies face. Evolving laws and regulations with little precedent of practical application, the often bureaucratic and unpredictable attitude of civil servants to compliance, the different attitudes to personal safety and a propensity to corruption, all make maintaining a 'licence to operate' more difficult. And this is on top of the everyday difficulties of getting people and equipment to the right place at the right time.

Chester: Mining risks are greatly amplified when operating in emerging markets. One of the key strategic responses is ‘sustainable development’. Gone are the days where an investment could be made purely in mining an asset, making arrangements with the government with regard to royalties, and then exporting the minerals. All stakeholders are now looking much more closely at the sustainable nature of projects, which may include the provision of water, electricity, healthcare and education, for example. In order to combat the risks faced in these frontier emerging markets, the need for a sustainable long term relationship, good communication, a good relationship with government, and the ability to support the community on an ongoing basis, are of paramount importance.

FW: In general terms, what steps can mining companies take to manage the raft of risks and threats they face in the current climate? Is contingency planning essential?

Chester: The mining industry understands the need for comprehensive enterprise risk management. Business continuity planning is essential: the need to understand the event risk exposures that the company has in a particular geography is of significant importance; as is the development of the risk register to include these types of exposures. The major exposure that a number of mining companies have is associated with the operational nature of the company but also can include political risk, supply chain and environmental exposures. We’re seeing a greater emphasis on the comprehensive enterprise risk management approach. There is a clear need to understand event risk exposures and to have business continuity plans in place to account for those event risk exposures. Risk managers, together with risk committees and boards of directors, are spending a lot of time analysing these exposures and developing contingency plans in order to be able to deal with them. 

Daboo: When mining companies face such a wide range of risk, having a comprehensive, embedded and operationalised risk management process is vital. The 2008 financial crisis and Macondo has taught us all that you cannot safely ignore black swan events and that planning how to react to 'the big one', even if you think you have reduced the likelihood of it happening to a minuscule level, is survival-critical.

FW: Are mining companies and their board members taking full advantage of the insurance solutions available to them? What recent developments have you seen by way of product offerings, coverage terms and policy pricing?

Chester: The insurance market provides a comprehensive selection of risk transfer products and board members are indeed taking full advantage of them. In terms of coverage and policy pricing, it is fair to say that insurers consider the mining industry to be genuinely exposed to risk. There is a greater desire to analyse and understand the natural catastrophe exposures that exist, coupled with the fact that rising commodity prices mean that the levels of self insurance that insurers and re-insurers are looking for mining companies to take up is changing. There is much more analysis of contingent business interruption exposures with regard to the use of third party railways and ports. A lot of new mining projects are utilising new techniques. They are now mining underneath ice, underneath lake beds and also much deeper underground. These particular techniques require much more risk assessment and underwriting assessment than previously, and insurers currently have a limited appetite for the underground exposures that exist. We anticipate that mining companies will want to take greater advantage of the risk transfer options available in respect of their environmental exposures. Environmental and associated business risks arise throughout the lifecycle of a mining operation, including transportation, construction, development, mining, processing and the closure or restoration of sites. 

FW: Has it been a challenging year for underwriters and reinsurers? How has this affected their dealings with the mining industry?

Chester: It has been a challenging year for underwriters and re-insurers as a whole, but a particularly challenging few years for those underwriters that expose themselves to the mining industry. In particular, natural catastrophe events around the world have affected their dealings with the industry. Mining companies have had to become more transparent in terms of describing the risk management programmes they have in place. This includes being able to demonstrate the fact that they have developed, as far as is possible, best practice across their business; show continual improvement in the risk management that they have been employing; and be capable of describing the investments that have been made in their risks to reduce their exposures. Companies now need to be able to describe the risk governance structure that exists within their organisation. They need to describe the link between the risk manager and his team, and the practices they are employing around the world, including the use of event risk programmes, and the use of internal audit functions. Overall, over the last few years the industry has improved in its ability to describe what it is doing and how it is doing it. Insurers and re-insurers are taking a particular interest in this, and it goes a long way in raising their levels of comfort in doing business with mining companies.

FW: What trends do you expect to dominate the risk profile of global mining companies for the remainder of 2012?

Daboo: For the rest of 2012, I think it will be 'more of the same' for mining companies. With economic returns on key decisions taken today often taking decades to materialise, stability is important to the mining industry, to all who use its products and to governments that rely on the industry's economic rent. But uncertainty, be it macroeconomic, tax and royalty regimes, the lack of major contractor capacity or the apparent preference of shareholders for cash today over long-term investment, increases, which makes long-term planning almost impossible. This is not good for any of the industry's stakeholders.

Chester: We expect that overall there will be a continued focus on the geographies that mining companies are working in, the new techniques that are being employed in order to extract ore, the quality of relationships that the mining companies have with their host governments, and the need to be able to continue to evidence sustainable developments for local communities. There is a concern within the industry about the quality of labour and the need to expand the breadth and level of expertise that is being employed. Many companies are fighting for the same skills and having to pay accordingly. Although the risk profile will not necessarily attract new risks per se, existing exposures are likely to be amplified, depending on the types of techniques that are employed, the geography in which operations are located, and the nature of the relationship with host governments.

 

Jimmy Daboo is a partner at KPMG and is the global head of assurance for the Energy & Natural Resources sector. Mr Daboo is an acknowledged leader on accounting issues in the extractive industries with deep knowledge of IFRS, US GAAP and UK GAAP. He has significant international oil and gas and mining industry experience and has lived and worked in many parts of the world, including the UK, the Netherlands, Australia, the USA, Nigeria, sub-Saharan Africa and Latin America. He is also KPMG’s lead spokesperson on reserve reporting. Mr Daboo can be contacted at +44 (0)20 7311 8350 or by email: jimmy.daboo@kpmg.co.uk.

Andrew Chester is chairman of the Global Mining Practice at Marsh and managing director/head of Marsh’s international placement arm (Bowring Marsh) in the UK and Ireland. He has over 24 years of experience within the international mining and heavy industrial industries, specialising in the placement of global and single-territory Property and Casualty programmes. He is also responsible for Marsh’s risk advisory and insurance placement strategies for mining clients around the world. Mr Chester can be contacted on +44 (0)20 7357 3774 or by email: andrew.chester@marsh.com.

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THE PANELLISTS

 

Jimmy Daboo

KPMG

 

Andrew Chester

Marsh


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