License to operate the top risk in 2020

License to operate and geopolitical risks are now regarded as the major risks for the extractive sector. Image credit: WhyAfrica

By LM Louw

09 November 2020 – Covid-19 has altered the operating environment for the extractive sector. It is hardly a surprise that “the license to operate” is the top risk in 2020.

The world was in turmoil and on the cusp of significant change even before the onset of Covid-19. The virus has accelerated and intensified the process though. As companies in the extractive sector  move into a new era of AI and tentatively take the first steps into a post-Covid-19 world, they do it in a higher risk environment than before, with the added risk of new laws and regulations. Each country in the world has managed their health and economic crisis differently, and the full picture has yet to unfold. What is certain, nonetheless, is that most countries in Africa will relook the benefits of extractive industries like mining, oil and gas extraction, and forestry. There is a growing movement agitating for more social and environmental accountability, and with several elections looming, this factor on its own has the power to swing votes. This is applicable especially in countries where the local population has not yet realised the benefits of large-scale mining.

It is therefore not surprising that geopolitical risk is now regarded as one of the top risks by global mining companies that took part in a survey recently conducted by EY. According to the report the themes of license to operate and disruption run through this year’s risks, as social responsibility and broader stakeholder demands intensify alongside the need for digital transformation, greater risk taking and innovation.

The report, titled the Top 10 business risks and opportunities-2020, states that 44% of the respondents lists “license to operate” at the top of the list of risks in 2020. “The extended period of elections and resultant government changes has brough uncertainty to the political environment which has created volatility in the commodity markets. In addition, the sector is facing greater scrutiny from end consumers, demanding a transparent ethical supply chain as well as a lower carbon footprint. Shareholder activists are also driving many miners, particularly those with coal assets, to reshape their portfolios by either reconfiguring existing operations or executing divestments.”

The future of the workforce has moved from the 7th highest risk last year, to what the mining companies regard today as the second biggest risk to business. According to the report companies are grappling with understanding what the workforce might look like in the future, and whether they are going to attain these skills by building them or buying them. Digital effectiveness remains in the top three risks. The question is whether it is more of an opportunity than a risk? Nevertheless, the one issue miners are challenged with is how to better manage data to extract value from it.

The other risks mentioned in the EY report, in order from high to low, include:

  • Reducing carbon footprint
  • High impact risks
  • Maximising portfolio returns
  • Cyber
  • Replacement of production
  • Innovation and
  • Rising costs

What is clear, is that mining companies need to rethink the way in which they do business. They can no longer purely focus on shareholder return. Rather, the bottom line should benefit the wider community and mining companies should therefore focus on shareholder.

The EY report states: “Miners need to think more broadly about how to maximise their returns and adopt new approaches that may be radically different from those of the past. Mining companies will also need to re-evaluate their appetite for risk to ensure they are not missing out on new opportunities by taking a complacent or conservative approach to allocating capital.”

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