Capital allocation tops tax on mining’s risk list

Despite the attention the mining tax debate has gained in Australia, the biggest challenge facing miners is capital allocation

Resource nationalism is rapidly becoming a greater strategic business risk for mining and metals companies, Ernst & Young global mining and metals leader Mike Elliott says.

“The proposed resource super profits tax in Australia is the highest-profile example, but it is part of a broader and concerning global trend,” he adds.

“Quebec in Canada, as well as India and China, have all increased royalty rates in recent months.”

Commenting on Ernst & Young’s annual business risks survey for the resource sector, Elliott says: “Many mineral-rich countries are seeking to extract greater economic rent for the right of a mining company to exploit resources.” Resource nationalism jumped from ninth on the list of industry concerns last year to fourth position.

Despite the attention the issue has gained in Australia, the biggest challenge facing miners is capital allocation – the investing of capital for an acceptable return. “Volatility across commodity prices, cash flow, risk appetites and availability of capital are driving massive capital allocation challenges for mining and metals businesses,” Elliott says. “Capital allocation was not such an issue 12 months ago – it has gone from below the radar to become the biggest current strategic business risk for the sector.

“The uncertain economic environment and massive changes to expected rates of return, level of gearing, taxes and the cost of debt and equity is challenging existing capital allocation benchmarks.”

The 2010 top strategic business risks in the mining and metals sector are (previous positions in brackets):

1. Capital allocation (17 in 2009)

2. Skills shortage (6)

3. Cost management (1)

4. Resource nationalism (9)

5. Maintaining a social licence
to operate (4)

6. Infrastructure access (7)

7. Access to secure energy (8)

8. Access to capital (3)

9. Price and currency volatility (11)

10. Climate change concerns (5)

Damon Frith

BRW

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