March 12, 2007

Embedding risk management company-wide remains key challenge for mining sector

The world's largest mining companies believe embedding risk management throughout their organizations is the key challenge in this area over the next three to five years, says a new survey by Ernst & Young.

In Attitudes to Risk in the Global Mining Sector, the consultants queried most of the top 40 global mining companies, including major Canadian mining firms, regarding their attitudes to risk. Although mining companies have a more comprehensive risk coverage approach compared to the general corporate sector, establishing a "risk culture" remains a challenge.

The scope of mining companies' formal risk assessments is considerably broader than in the general corporate sector, says the report. The global nature of mining operations brings with it an inherently higher level of risk. Consequently, a comprehensive, highly developed risk management framework is an accepted part of how the industry operates.

Even so, 55% of mining companies say some key risks are not being actively managed, including 18% that reported their environmental risks were under-managed. So while the risk processes are embedded in the business, there may be some complacency when it comes to actively managing the risks, says the study. Among the survey respondents, 29% named embedding risk management as the key future challenge.

"Operationalizing risk management is the single biggest challenge facing mining companies," said Ian Slater, Canadian mining leader for Ernst & Young. "The nature of the mining business is inherently risky, so to be successful companies have had to be proactive in dealing with risk-in terms of both minimizing threats and maximizing opportunities for competitive advantage," he explained.

In addition to environmental risks, operational risks, strategic risks and technology risks were cited as the leading "gap" areas where risks are not being actively, or formally, managed. Failure to manage key environmental risks, says the report, can result in higher fuel costs due to carbon taxes and/or delays or cancellation of projects. Overall, says Ernst & Young, dealing with the gaps represents a significant challenge if the mining sector is to continue to prosper when commodity prices eventually decline.

In order to address the gaps, the report says mining companies should integrate and align existing processes to their strategy. They should seek to fill the shortfalls and to ensure that they have embedded risk management practices, aligned and integrated with strategy, throughout their organizations

"They need to ensure their culture supports their organization's risk appetite and the level of risk in the sector," Slater noted.

The survey also found that:

* 61% of respondents feel the level of risk has increased;

* Nearly twice as many companies in the mining sector as in the general corporate sector (71%, compared with 37%) say their company's attitude to risk is to embrace it;

* CEOs, CFOs and the wider Board now have greater accountability, involvement and focus on risk; however, there are fewer Chief Risk Officers (CROs) in mining companies compared to the general corporate sector as these roles are incorporated in the roles of business unit managers;

* Nearly one-third of mining companies (compared to just 10% in the general corporate sector) believe investment in risk management will increase 40% or more in the next three years; and

* Only half the mining companies surveyed have a specific policy on communicating risk management to major investors and other stakeholders, even though previous surveys have indicated that investors apply a penalty if they think risk management is insufficient.

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