The annual Strategic Business Risk Report 2009 outlines the sector’s top business risks for the coming year, with this year’s list substantially different to 2008 due to the onset of the global financial crisis.

“In 2008, capacity constraint issues such as labour shortages and infrastructure bottlenecks dominated the top 10 list of strategic business risks, but this year it is all about funding and cash flow,” Ernst & Young head of mining and metals, Europe, Middle East, India and Africa, Michael Lynch-Bell said.

“Boom-time ‘production at any cost’ attitudes have left an unsustainable level of costs for mining and metals companies, and with the fall in commodity prices, cost containment is now the biggest strategic challenge for the sector.”

According to Ernst & Young, most miners took action to reduce costs when commodity prices fell, though most were tactical and not strategic.

Citing a recent survey by the Economist Intelligence Unit, Ernst & Young said 93% of mining metals respondents reported they had accelerated cost-reduction initiatives, but only 57% of those respondents said the initiatives had been effective.

The report suggested a number of ways companies can respond to the risks, such as focusing on the areas that provide maximum value around cost-containment activities, applying benchmarked best practice and breakthrough thinking, measuring the impact on value of cost-reduction activities, and considering management accountability.

It added that it was necessary to actively embed cost-reduction behaviours to ensure the desired reductions were sustainable.

Industry consolidation retained second spot in the top 10, though the global financial crisis has changed the profile of the vendors and acquirers.

The report noted the emergence of Asian buyers out to make strategic long-term acquisitions, and lower asset prices due to quick divestments to secure cash and repair balance sheets.

Ernst & Young urged companies to prepare available assets for divestment while demand was present and look to maximise value and consider the strategic premium that buyers with a long-term perspective might be prepared to pay.

Third on the list was access to capital, a new entry this year, reflecting the change in financial markets.

“Funding of new projects and refinancing of maturing arrangements can be challenging and is of particular concern in a sector that relies on a constant stream of risk capital,” Lynch-Bell said.

According to Ernst & Young, one of the best ways to reduce this strategic risk is to know the alternatives to traditional sources of capital, such as foreign investment, joint financing or the introduction of a strategic partner, options which have already been used by many Australian companies.

Maintaining a social licence to operate and climate change concerns remained in fourth and fifth positions respectively.

“These issues are only going to become more significant for the sector as community support for future mining and metals projects becomes even more critical,” Lynch-Bell said.

The skills shortage dropped back to sixth place as hiring pressures eased due to the rising unemployment rate.

However, Ernst & Young says the skills crisis still exists and will escalate back up to previous levels as the sector recovers.

Infrastructure access came in at number seven after being third on last year’s list.

“The strategic risk for traditional metal and minerals suppliers is that if they don’t push forward infrastructure development, and with it speed to market, they may not be able to capitalise on a recovery when it occurs,” the report said.

Access to secure energy rose one spot to number eight, with the report citing events including last year’s Varanus Island explosion, which triggered a gas shortage in Western Australia, and South African power restrictions.

Ernst & Young says the disruption of energy is not just an economic risk, but also a safety risk.

Resource nationalism and pipeline shrinkage rounded out the top 10.

Lynch-Bell said supply-side capacity related risks were already expected to dominate the top strategic business risks in the future.

“Skilled labour shortages, infrastructure bottlenecks, lack of investment in exploration and secure energy supplies are major issues for increasing supply and the underlying causes have not been addressed.”

He said demand was not expected to be a major issue in the future.

“What will be more significant is the ability of miners to capitalise on any upswing in demand given the supply capacity issues and given that the sector has shut down mines and scaled back production.”

Debt-to-equity levels will become an issue, with levels historically being around 30% but rising to around 58% at the end of 2008.

“The debt load combined with post-financial crisis reticence of lenders, means that businesses won’t be able to borrow as much to fund expansion.”

Ernst & Young urged companies to conduct annual risk assessments and develop responses to possible risks, as well as evaluate the ability to manage risks and effectively monitor and control processes.