KPMG’s Australian Mining Risk Forecast for 2021-22 is defined by two themes, one representing a challenge for the industry and the other an opportunity.
Surging commodity prices are usually associated with ‘boom’ times in the Australian mining industry.
But what might come as a surprise to many observers of mining, commodity prices (and their historical volatility) remain the KPMG survey’s number one risk in the industry after again topping the list in 2020-21.
Commodity price risk kept its position despite gold being in record territory (in Australian dollar terms) last year, and iron ore and copper reaching never-seen-before heights in the first half of 2021.
However, KPMG points out that commodity prices are not only a risk for mining companies, but also an opportunity.
The latest report finds that the general situation and outlook for commodity prices has rarely been stronger, although there are exceptions.
Iron ore, gold and copper are joined by lithium and rare earths as commodities enjoying price surges, with government stimulation credited as a key spur of the upward trend.
KPMG Australia head of mining Nick Harridge explains the commodity price environment, warning that there are risks that mining companies must consider despite their surging values.
“Whilst it may be surprising during these times to see commodity price risk reclaim top spot on the list, industry veterans will be very aware of the cost blowouts and inefficiency that can creep into systems and practices during upswings,” Harridge says.
“The risk here is that it leaves companies vulnerable when commodity price momentum shifts direction.”
Commodity price risk may have kept its top position on the list, but Harridge notes that operating costs fell from this year’s top 10.
“Depending on where prices go over the next 12 months, we believe the operating costs risk may emerge with renewed focus and we suggest Australian miners be alert to that,” Harridge says.
“In addition, we believe now is the time for mining companies to maintain rigour on updating and improving the efficiency of their operations, even though the imperative may not feel urgent.
“Maintaining discipline and streamlining processes today will deliver a stronger position when times change.”
Community relations and social licence is this year’s biggest mover on KPMG’s risks leaderboard, jumping four spots to second.
Last year’s community and public outcry after Rio Tinto destroyed rock shelters of exceptional significance at Juukan Gorge near its Brockman iron ore mine in the Pilbara highlights the importance of managing this risk.
In response to the backlash from key stakeholders, Rio Tinto took responsibility for the destruction, overhauled its company board and launched an extensive program to regain community and social trust.
KPMG Australia partner and mining risk & governance lead, Caron Sugars, believes that maintaining a social licence looms as an ever more complex problem for executives to deal with.
“This is further complicated by the increased risk related to the need for diligent management of sites with cultural heritage significance and the fact that community groups, activists and investors have also joined the push for mining companies to take greater responsibility for the land and the people impacted by their operations,” Sugars explains.
The KPMG Risk Forecast found that 88 per cent agreed it is important for mining companies to have a clear and measurable ESG (environmental, social and governance) statement. At the same time, 64 per cent noted that investor ESG expectations and measures are not clearly understood.
Unlike most industries, Australian mining overcame many of the problems caused by the COVID-19 pandemic by being considered an essential industry.
But the pandemic still served as a wake-up call for how the mining industry can change the way it operates in response to the threat of border closures and supply chain disruptions.
At the time of writing, COVID-19 was still causing havoc in Australia and around the world, and there are fears this iteration may not be the only global health concern in the foreseeable future.
Sugars reinforces that global health experts warn that the next pandemic is a case of ‘when’ and not ‘if’.
“Executives understand how swiftly theory can become a reality,” Sugars says.
Trade wars are causing just as much uncertainty as the pandemic and have proven equally as persistent in the past 18 months.
The US-China trade war owned much of the focus in this way during 2020. But as KPMG points out, the departure of the Trump Administration late in the year has diffused much of the geopolitical debate between the two power nations.
Enter Australia, which has struggled to maintain strong relations with China in 2021, leading to trade barriers, tariffs and restrictions on many of our key exports.
“The global trade war situation is arguably an even more complex scenario to grapple with (than COVID-19),” Sugars says. “In KPMG’s Global Mining Risk Survey March 2021, it wasn’t considered a top five risk factor but here in Australia it is looming larger.”
With the ongoing threat of these factors, KPMG believes it is not a surprise that global trade war, global pandemic and uncertainty made up the top five risks on this year’s list.
An emerging feature of the risk landscape, according to KPMG, is the importance of critical minerals. This also represents an opportunity for Australian mining companies.
As manufacturing of renewable energy technologies ramps up, Australia’s rich critical minerals reserves have elevated the potential of the country to become a dominant force in the critical minerals supply chain.
For example, Australia is the world’s top producer of lithium, rutile and the second largest producer of zircon and rare earth elements.
The Australian Government recognised this opportunity by launching its Resources Technology and Critical Minerals Processing Road Map in March to fortify the country’s position as a key supplier in this market.
“We are already witnessing a shift in demand for these critical minerals as they will play a key role in the global move to zero carbon,” Harridge says.
“We believe copper, nickel and rare earths will continue to see surges in demand because of their use in renewable energy infrastructure and batteries.”
Harridge and Sugars both agree that in risk terms, the challenge for modern mining companies is to ensure that as a producer of these metals Australia could collaborate constructively with industry to do its part in ensuring the world can access the resources needed to keep pace with the transition to a low carbon world.
This story also appears in the August issue of Australian Resources & Investment.