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EDI TO R ��� S COM ME N T S E l l s w o r t h Dick s o n Miners face new and old challenges People unfamiliar with the mining industry often have the idea that mining companies somehow automatically generate huge profits ��� profits that can be generously handed to all levels of governments, First Nations (in some jurisdictions), as well as local communities. This is simply not the case. Even though the vast majority of mining companies want to be good corporate citizens and share their mineral wealth, there is only so much to go around. In addition, publicly-trading mining companies have a responsibility to their shareholders. If a mining company doesn���t generate significant earnings, their shareholders will punish them by dumping their shares, thereby driving their share price down. Take Teck Resources, for example. Gross profit before depreciation and amortization for 2012 was $4 billion. Sounds great; however, this was compared to a record of $5.8 billion in 2011. When this news came out, Teck shares dropped about $3.50. ���From an operations perspective, 2012 was a good year,��� said Don Lindsay, President and CEO. ���Our copper production was a record, we continued to increase our steelmaking coal production and we obtained new labour agreements for a number of our operations. However, due to uncertain global economic conditions, prices for all of our major products were down compared to last year, which resulted in lower earnings and cash flows than in 2011.��� So, here is an example of a great company being buffeted by forces beyond its control and being punished by shareholders as a result. Miners can���t give away their revenues on a grand scale. Nevertheless, governments at all levels and communities want larger slices of the pie. Just what are the various challenges that miners must overcome in order to generate earnings that can be shared with others? In a thoughtful and perceptive report, Ernst & Young has published Business risks facing mining and metals 2012-2013. The report notes that risks have become more extreme and more complex over the past year due to the fast-changing investment and operational environment. Two of the significant contributing factors are a softening of commodity prices and capacity changes in terms of skills and infrastructure. The report details the following top 10 risks: Resource nationalism: Governments at all levels around the world are going beyond taxation to obtain a larger piece of the pie. Skills shortage: The acute skills shortage in Australia and Canada is now spreading to Indonesia, Mongolia, Brazil, Chile, Peru and Mozambique. Infrastructure access: The long-running, minerals super-cycle has made remote deposits viable; they lack reasonable infrastructure access. Cost inflation: Costs are expected to rise over the next several years, due to labour, energy, lower ore grades, currencies, supplier constraints and taxes. Capital project execution: With rising costs and lower commodity prices, miners have to rethink how to best execute their mine building plans. Maintaining a social license to operate: Both governments and communities now expect a great deal from miners and woe to the mining company that doesn���t heed their requests. Price and currency volatility: Equity markets are increasingly sensitive to macroeconomic news. Higher commodity prices don���t fully impact share prices, while decreases do. Capital management and access: The under-valuation by the markets of mining shares has limited how much cash miners can raise, making it more difficult to allocate limited funds. Sharing the benefits: There is a great deal of pressure to share revenues among governments, local communities, employees seeking higher wages, suppliers, not to mention shareholders. Fraud and corruption: While fraud is a minor problem with North American mining companies, those that operate in certain foreign jurisdictions are being pressured to contribute to corrupt officials��� ���charities��� in spite of new regulation and enforcement. It���s not easy being a miner these days, but they carry on. n Ellsworth Dickson, Editor-in-Chief Email: editor@resourceworld.com T: 604 484 3800 | 1 877 484 3800 MARCH 2013 www.resourceworld.com 7