Risk management critical in cyclical sectors

By Boniface Mwila

As the commodity price slump drags on, Zambia shares the inevitable pain with the world’s other resource-dependent economies – and is especially hard hit by its ‘mono-commodity’ status as a nation so dependent on copper. The low copper price – which is leading to the closure of some Zambian mines – is also affecting the value of the kwacha and hence the health of the whole economy.

Taking a step back from this very challenging environment, however, it needs to be remembered that the minerals sector has always been highly cyclical; so, while the downtimes are tough and often traumatic for especially developing economies, the occurrence of such slumps should be no surprise.

The question, then, is how do mining companies prepare themselves for these regular occasions, even if their precise timing is difficult to predict? For commodity prices must certainly rank as one of the key risks to the performance and survival of any mining project.

The answer lies in risk management – a field well recognised by everyone in business, but not necessarily well observed in practice. When times are good, companies prioritise volume output and returns are often very good, but there is seldom a thought for putting much aside for the inevitable ‘rainy days’.

The key to managing risk is effective scenario planning as a significant component of the company’s strategic business plan, from the earliest possible stages to the end of life of the mine’s operations. Usually, these scenario plans are then revised and updated regularly which forces the mine to look carefully at all the modifying factors that stand in the way of the company’s resource being maintained as an economical  reserve – including the geological, geotechnical, environmental, social, legal and financial considerations that must constantly be addressed, as well as the ever-growing issue of water control and conservation in the context of climate change.

Staying in the lowest cost quartile of producers in your sector makes a mine more resilient to commodity prices fluctuations, but there comes a time when market prices simply don’t support the optimal cost structure of the operation.

This is where scenarios come into their own: looking in advance at the range of possible scenarios that a mining project could (and probably will!) face over its lifetime allows investors and management to consider the best possible responses. It is a process requiring detailed technical input, so that future corporate strategy options can be based on real data and credible predictions.

Multi-disciplinary teams with experience in the particular commodity must be harnessed to ensure that predictions about one part of a mining operation are not made in isolation from others. We at SRK Consulting regard this interdisciplinary approach – combined with our quality standards – as a key aspect of the value we offer.

Tough times generally mean tightening up on expenditure, and cutting budgets will have knock-on effects across the mine. This is not a process that should be embarked upon in a hurry, or without due regard for unintended consequences – and yet so often that seems to be exactly what happens.

As Zambia reels from the recent closing of some copper mines, the message is clear. The country’s mining sector needs to be planning ahead, and developing a range of carefully considered scenarios that can be implemented quickly in response to changes in the market. This will allow companies to manage their costs carefully and give them room to manoeuvre when commodity cycles hit rock bottom.


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