Willis cautions mining sector that cost cutting at the expense of risk management could up exposures

Mining companies looking to lay the foundation for long-term business growth through cost-cutting measures would be well-advised not to do so at the expense of risk management, cautions a report issued Monday by global risk adviser, insurance and reinsurance broker Willis Group Holdings.

Mining Risk Review 2014 – which, among other things, looks at the process of extracting maximum value from insurance procurement – warns companies not to be tempted to cut back on risk management outlays to achieve cost reductions.

“This could be fundamentally self-defeating as the costs saved are marginal, but leave potentially enormous exposures,” Willis notes in a statement.

The report suggests that mining companies are embracing cost-cutting measures in the face of the prospect of rising costs, falling commodity prices and decreased productivity levels. “To date, the bulk of cost cutting has come via reduction of head office spend, exploration and business development. We have not yet seen loss-making production assets curtailed or substantial cost cutting at the asset level,” it adds.

Mining companies should look for ways to extract maximum value from their insurance programs, recommends Andrew Wheeler, senior advocate partner in Willis’s Mining Practice. Despite mining operations often having highly developed risk registers and risk management systems, Wheeler notes in the statement, checks in the field demonstrate a disconnect exists between what is planned and what is really happening.

“There is often a poor understanding of risk controls in the workplace, poor implementation and a lack of robust reviews and audit systems to ensure the controls are working,” he says. “Good levels of control and business continuity planning can help ensure that large-loss events are reduced as far as possible. It is this level of commitment to strong risk management processes that define resilient mining operations,” he adds.

Wheeler comments that lower reinsurance costs, increased competition and a relatively benign loss environment have combined to the advantage of insurance buyers in 2014. “In all, companies who can drive down costs and protect their margins in this tough climate are the ones who will be resilient to the threats they face,” he adds.

The report notes that among the behavioural traits that make a mining company resilient is a well-defined system approach to managing the business, with clear key principles – essential principles include policy, commitment and leadership; planning; implementation; measurement and evaluation; and review and improvement – that permeate the company from top to bottom.

“Falling commodity prices are squeezing profits, but boom-era costs still prevail. Only those that can adjust their cost structure will be able to protect margins and create better value,” the report adds.

The next year is set to be a challenge, the report states, adding that the mining sector continues to face low commodity prices, combined with rising operational costs and supply and demand imbalances.

Add an uncertain financial future, and “those mining operations that can reduce costs from the boom-year levels and keep projects on track are likely to be the successful ones in the coming year,” Willis suggests in the report.

“On the positive side, the insurance market is very buoyant at the present time and we are predicting significant improvements for buyers in the coming year.”