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Mining: Balancing risk and reward

The ninth in the series: CFOs in the mining and raw materials sector must deal with daily risks

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The great American novelist Mark Twain once said that a gold mine was nothing more than a hole in the ground with a liar standing at the top. While his observation was inspired by the US gold rush of the mid-nineteenth century, some might argue his statement holds some weight today. Like it or not, the mining and raw materials sector can be a wild and anarchic place.

Take Glencore, the secretive commodities trader, that went public last year creating no less than five billionaires as it did so. Established nearly 40 years ago by rogue Israeli businessman Marc Rich, Glencore has never been far from controversy. So far, it has been accused of breaking international embargoes to supply corrupt regimes with critical commodities, of paying kickbacks during the Iraqi oil-for-food programme and of having interests in mines and other operations with deplorable health and safety records.

And Glencore by no means stands alone. Conflict minerals, for example, is the collective noun used to describe those all-important resources which are extracted from the ground in conditions of armed conflict and rampant human-rights abuse. Even a cursory look at the world’s newspapers can present mining companies in a less than favourable light.

The problem, it seems, is that by some cruel twist of fate nature chose to deposit many of the world’s most valuable resources in some of its most inhospitable places. In spite of this, so integral are these resources to our capitalist societies, and so great is their demand, that the financial rewards for mining them continue to substantially outweigh the risks, for all concerned.

So, although far from the coal face, the life of a chief financial officer in the mining sector is no less short-lived, volatile, risky and hugely rewarding. In many regards the risks and rewards are no different to those of the gold rush era during those heady times in mid-nineteenth century America.

Trevor Reid, CFO of Xstrata, offers an illuminating view of the types of commitments mining companies must make during a presentation at the company’s preliminary results presentation earlier this year, when he outlined the capital projects that lie ahead for the group.

“Investments into our approved organic growth projects continued to ramp up during the year as a number of projects reached peak spending intensity and expansionary capital spending in total was $5.8 billion in the year,” Reid says, while explaining how capital expenditure would total $19.5 billion between 2012 and 2014.

The so-called “commodity-price chaos” - the increasing cost of doing business and the battle to attract relevant talent – have been singled out as major focus areas in a report by consultants Deloitte in what it sees as the main trends faced by the mining sector in 2012. The report also points out the challenges surrounding corporate social responsibility, risk and tax ('Top 10 mining trends for 2012’ - see below).

“We’re in the middle of a 100-year commodity boom,” says Phil Hopwood, Deloitte’s global mining leader. “It’s being driven by demand from economies such as China and India, driving prices in the market place to the highest level they have been for a generation.”

Gold rush fever

Hopwood goes on to provide a stark illustration of that demand. “We’re talking in terms of $82 trillion (£50.6 trillion) worth of infrastructure projects globally, and mining capital projects in the order of $500 billion,” he explains. “These are enormous sums, the like of which we’ve not seen for many years.”


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