By Alex MacDonald
LONDON--Mining and metals companies ranked capital allocation
and access to capital as their top business risk this year, up from
eighth place last year, according to a survey released by
consultancy firm Ernst and Young LLP Tuesday.
Mining and metals companies, both large and small, are facing
crimped profit margins as the world's largest consumer of
commodities, China has slower-than-expected economic growth while
the prospects for U.S. and European economic growth remain
lackluster.
Many of the companies, including the world's largest miner by
market capitalization BHP Billiton Ltd (BHP), and the world's
largest steelmaker by volume, ArcelorMittal (MT), have cut their
capital expenditure plans in the wake of falling commodity prices.
Shareholders have also called on companies to return excess cash to
shareholders in the absence of attractive returns from potential
new growth projects.
Resource nationalism, which topped the 10 business risks among
mining and metals companies last year, dropped to third place this
year while margin protection and productivity improvement rose to
second place from fourth place last year, Ernst & Young
said.
Mike Elliott, Ernst & Young's Global Mining and Metals
Leader, said for larger miners, the rapid decline in commodity
prices in 2012, rampant cost inflation and falling returns have
created a mismatch between miners' long-term investment horizons
and the short-term return horizon of new yield-hungry shareholders
in the sector.
"This raises the question of how to balance the demands of
short-term shareholders with those investing for longer-term
returns," he said. "There is concern that the pendulum may swing
too far, raising the possibility of another period of endemic
underinvestment in new supply and resulting in future price
volatility."
On the opposite side of the spectrum, the small miners are
cash-starved and their survival is under threat, Mr. Elliott
said.
"The dramatic and continuing sell-off in equity markets has
starved the junior end of the market of capital. Advanced juniors
and mid-tier producers have been caught in the middle, exposed to a
fragile balancing act between investors' thirst for yield and low
tolerance of risk," he added.
Mining companies with a market value of less than $2
million--about 20% of those listed across the main junior mining
stock exchanges--had on average less than $1 million in cash and
equivalents on their balance sheets at the end of last year.
The remaining top 10 concerns were social license to operate in
fourth place, skills shortage in fifth place, price and currency
volatility in sixth place, capital project execution in seventh
place, sharing the benefits in eighth place and infrastructure
access in ninth place.
The latter category dropped down from third place last year
while skills shortage dropped down from second place last year.
Ernst & Young introduced a new category called threat of
substitutes, which ranked 10th on the list of business risks. The
U.S. shale gas boom and the subsequent gas-for-coal substitution
that occurred in North America, for instance, is an example of the
looming threat that substitution presents for single commodity
companies or companies that are heavily reliant on one
commodity.
Other examples of this threat include: aluminum for steel;
palladium for platinum; aluminum, plastics, fiber optics or steel
and graphen for copper, and pig iron for pure nickel, the
consultancy firm said.
"Once substitution starts occurring, it is potentially
irreversible as it could cause a structural shift in consumer
habits," said Mr. Elliott.
-Write to Alex MacDonald at alex.macdonald@wsj.com
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