Risk factors impacting the mining industry during 2016:

  1. Production Management
  2. Pricing
  3. Customer Concentration
  4. Declining Capital Sources
  5. Regulatory Changes and
    Political Uncertainty
  1. Global Competition
  2. Cost Management
  3. Modernization
  4. Cybersecurity
  5. Social Awareness
  1. Production Management
    Maximizing the economic efficiency of production is a competitive advantage for mining companies that do it well. Production is impacted by financial, geological, and even social factors. Mining companies that effectively manage these factors and maximize production in areas that return the most value to their company will be more successful. Additionally, companies that invest in maximizing the efficiency of their production abilities will be most prepared to take advantage of market improvements in their industry.
  2. Pricing
    Contract prices continue to be extremely volatile. Mining companies may be forced to service unfavorable contracts in order keep cash flowing and to maintain relationships with customers. Moreover, companies may want to “keep a toe” in the water to monitor contract prices as they are negotiated for short and long term orders. The best way to understand the existing market is to be in some form of sales negotiations with the customers.
  3. Customer Concentration
    Many mining companies sell most of their products to a small number of customers, which creates a significant risk to the companies’ revenue streams. The coal mining sector ships coal primarily to power plants or industrial sites. Environmental regulations have made the economics of running a coal burning power plant very difficult. Economic fluctuations, both domestic and abroad, make industrial applications unstable. Limestone producers are impacted by governmental contracts and proximity to construction projects. Companies should offset this risk by seeking to diversify their customer base through geographic expansion or alternative uses for their products.
  4. Declining Capital Sources
    Certain segments of the mining industry have lost favor with public investors and, consequentially, many financial institutions. Finance arrangements are difficult to obtain, and when obtained may come with high fees and interest. Companies should consider alternative capital sources such as international institutions, brokers, and even customers. These alternative capital sources may offer a form of strategic alliance, such as in marketing existing products, or helping to develop additional assets.
  5. Regulatory Changes and Political Uncertainty
    Regulatory and political issues can be a significant obstacle in the mining industry. Environmental agencies can block or hamper access to strategic mining areas. Certain regulations threaten the way in which extracted minerals are used, thus decreasing demand. Changing tax laws, such as Tangible Asset Regulations, can have a significant impact on companies if not properly considered.
  6. Global Competition
    Mining has grown from a local market to a national and now global market. As domestic demand declines, U.S. companies are forced to look internationally for revenue opportunities. This requires an understanding of historical relationships, trade barriers, currency values, and international regulatory requirements. Mining companies must follow and understand international markets in order to compete at the global level.
  7. Cost Management
    Failing to budget and monitor costs properly is a significant risk. Successful companies monitor their costs in great detail. It is very important for the accounting department and the production teams to be in sync in order to maximize the value of financial data given to management in a timely fashion. Companies must also manage legacy costs such as reclamation and employee benefits, which may not impact current operations, but do impact current cash flow.
  8. Modernization
    In various sectors of the mining industry, external factors impacting performance are changing very rapidly. Additionally, the average age of a mine worker across most sectors has increased for several years in a row. This indicates that the industry is not hiring and retaining young workers. Technologies used today are often similar to those used a decade ago, and often by the same people. By the nature of their operations being capital intensive, mining companies are not very nimble organizations. Companies that can modernize operations to the specifications of their market through new technologies and innovative tactics will be positioned to recognize cost savings and improve their market position.
  9. Cybersecurity
    Operators need to be proactive in cybersecurity by implementing effective controls to prevent and detect cyber-crime. Potential effects of an operator network infiltration can include theft of customer payment information, employee identify theft, and shutdown of operations.
  10. Social Awareness
    Mining companies have a unique role in the local, state, and national community. Worker safety should always be top priority, and companies must consider the impact of their actions within each unique community. Illegal or unethical practices will damage a company’s reputation and may make national headlines, and legitimate closing of a project due to financial reasons may generate significant reputational damage as well. Mining companies should consider the impact that closing a project will have on that community and the local economy.

For more information, contact Bill Kohm at bkohm@deandorton.com or (859) 425-7625, or Justin Hubbard at jhubbard@deandorton.com or (859) 425-7604.

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