how the mining sector incorporates wildcards into its strategic planning
DESCRIPTION
There have been a number of events in the last 10 years that have had a significant influence on much of the world and appear to have been a surprise for many. These ‘low probability and high impact events’ are typically described as wildcard events in the strategy and futures studies literature. This research report examines how mining companies incorporate wildcards into their strategic planning by examining the risk reports of Exxaro, AngloGold Ashanti, Gold Fields and Northam. Since mining companies typically remain silent about risks that have a low probability of occurring, even if they have a high impact when they do, this research report examines what mining companies say about risks that they do not deem to be wildcards, i.e. their most important risks that they believe will have an influence on their business, rather than what they say about wildcards. It is in the interstices between what is said about risks that are widely regarded as important that this research report explores what is being said about wildcard risks.TRANSCRIPT
HOW THE MINING SECTOR INCORPORATES WILDCARDS
INTO ITS STRATEGIC PLANNING
DEBORAH LAUREN SPICER
Research report presented in partial fulfilment
of the requirements for the degree of
Master of Philosophy
at the University of Stellenbosch
Supervisor: PROFESSOR A. ROUX
Degree of confidentiality: A March 2012
ii
Declaration
By submitting this research report electronically, I, Deborah Lauren Spicer, declare that the entirety
of the work contained therein is my own, original work, that I am the owner of the copyright thereof
(unless to the extent explicitly otherwise stated) and that I have not previously in its entirety or in
part submitted it for obtaining any qualification.
D.L. SPICER JANUARY 2012
Copyright © 2010 Stellenbosch University All rights reserved
iii
Acknowledgements
Financial support for the MPhil in Futures Studies, that has culminated in the production of this
report, was provided by Venmyn Rand (Pty) Ltd. The report was also enriched by a discussion with
Claude Baissac of Eunomix.
v
Abstract
There have been a number of events in the last 10 years that have had a significant influence on
much of the world and appear to have been a surprise for many. These ‘low probability and high
impact events’ are typically described as wildcard events in the strategy and futures studies
literature. This research report examines how mining companies incorporate wildcards into their
strategic planning by examining the risk reports of Exxaro, AngloGold Ashanti, Gold Fields and
Northam. Since mining companies typically remain silent about risks that have a low probability of
occurring, even if they have a high impact when they do, this research report examines what
mining companies say about risks that they do not deem to be wildcards, i.e. their most important
risks that they believe will have an influence on their business, rather than what they say about
wildcards. It is in the interstices between what is said about risks that are widely regarded as
important that this research report explores what is being said about wildcard risks.
Key words:
Futures studies
Risk reporting
Risk assessments
Wildcards
Gold Fields
AngloGold Ashanti
Exxaro
Northam
vi
Table of contents
Declaration ii
Acknowledgements iii
Dedication iv
Abstract v
Table of contents vi
List of figures ix
List of acronyms and abbreviations x
CHAPTER 1 ORIENTATION 1
1.1 INTRODUCTION AND PROBLEM STATEMENT 1
1.3 RESEARCH OBJECTIVES 2
1.4 IMPORTANCE / BENEFITS OF THE STUDY 3
1.4.1. Wildcards as important in strategic planning 3
1.4.2. Wildcards and shareholders and stakeholders 5
1.5 METHODOLOGY 6
1.6 CHAPTER OUTLINE 7
CHAPTER 2 LITERATURE AND BACKGROUND REVIEW 10
2.1 INTRODUCTION 10
2.2 WHAT ARE WILDCARDS? 10
2.3 ARE THERE DIFFERENT LEVELS OF PROBABILITY OF A WILDCARD OCCURRING? 12
2.4 CAN WILDCARDS BE NATURAL EVENTS? 14
2.5. ARE WILDCARDS AND OTHER RISKS CAUSED BY HUMANS? 16
2.6. CAN RISK, IN GENERAL, OR WILDCARDS, IN SPECIFIC, BE QUANTIFIED? 19
2.7. ARE WILDCARDS CASE OR CLASS DEPENDENT? 22
2.8 CONCLUSION 23
CHAPTER 3 REVIEW OF MINING SECTOR RISK ASSESSMENT R EPORTS 25
3.1 INTRODUCTION 25
3.2 RESOURCE NATIONALISM 26
3.3 SKILLS SHORTAGE 27
vii
3.4 INFRASTRUCTURE ACCESS 29
3.5 MAINTAINING A SOCIAL LICENCE TO OPERATE 29
3.6 CAPITAL PROJECT EXECUTION 31
3.7 PRICE AND CURRENCY VOLATILITY 33
3.8 CAPITAL ALLOCATION 33
3.9 COST MANAGEMENT 34
3.10 INTERRUPTIONS TO SUPPLY 36
3.11 FRAUD AND CORRUPTION 36
3.12 CONCLUSION 37
CHAPTER 4 ANALYSIS OF ISSUES RELATED TO RISK REPORT ING AND WILDCARD RISK REPORTING 39
4.1 INTRODUCTION 39
4.2 WEB FORMAT 39
4.3 RISK REPORTING VS. RISK ASSESSMENT 42
4.4 NATURE OF RISKS DISCLOSED 46
4.5 CONFIDENCE IN HANDLING RISKS 47
4.6 RANKINGS OF RISK 48
4.5.1. Commodity, country or mining method specific risks 48
4.5.2. Interlinked risks 49
4.5.3. Risk as identifiable and assessable 50
4.5.4. The importance of history 51
4.7 CONCLUSION 52
CHAPTER 5 WILDCARDS AND LOWER PROBABILITY EVENTS 54
5.1 INTRODUCTION 54
5.2 NEW COMMUNICATION VEHICLES FOR COMMUNITY ACTIVISM 54
5.3 NEW TECHNOLOGY 55
5.4 RISKS NOT MENTIONED BY E&Y, BUT MENTIONED BY THE SAMPLED COMPANIES 56
5.5 CONCLUSION 60
CHAPTER 5 SUMMARY, CONCLUSION AND RECOMMENDATIONS 6 1
5.1 INTRODUCTION 61
viii
5.2 SUMMARY OF MAIN FINDINGS 61
5.3 RECOMMENDATIONS 62
5.3.1 Greater attention to wildcards 62
5.3.2 The removal of information asymmetries 62
5.3.3 Greater coordination of risk management 63
5.3.4 An improved understanding of “group think” 63
5.3.5 Exploring new presentation methods for risk assessments 64
5.4 FURTHER RESEARCH 64
5.4.1 Fundamental questions of this research report 64
5.4.2 Limitations of this research report 65
5.4.3 Exploration of wildcards and their incorporation into strategic planning 65
REFERENCES 66
ix
List of figures
Figure 1.1: Styles in this template 4
Figure 2.1: Typical characterization of risks 11
Figure 2.2: Exxaro’s risk bull’s eye, showing the most important risks as occurring close to the centre of the bull’s eye 12
Figure 2.3: Gold Fields’ risks based on severity and probability of occurring 20
x
List of acronyms and abbreviations
ANC African National Congress
BP British Petroleum
BSC balanced score card
EWRM enterprise wide risk management
E&Y Ernst & Young
JSE Johannesburg Stock Exchange
MPhil Master of Philosophy
NASDAQ National Association of Securities Dealers Automated Quotation
1
CHAPTER 1
ORIENTATION
1.1 INTRODUCTION AND PROBLEM STATEMENT
There have been a number of events in the last 10 years, which have had a considerable impact
on much of the world and appear to have been a surprise for many.
These include:
1) The dot com crisis, which resulted in significant falls in information technology and
communication stocks on the National Association of Securities Dealers Automated Quotation
(NASDAQ) after March 2000 and led to a re-evaluation of the value of this sector of the economy
(Petersen et al 2009:1).
2) The terrorist attacks on the World Trade Centre and the Pentagon, which caused many in the
West and East to reconsider their identities as well as how safe they felt in the world (Petersen et
al 2009:1 ; Steinmuller undated:193 ; Hiltunen 2006:61).
3) The 2008/2009 economic recession and the sub-prime lending crisis, which led to job losses on
a large scale, negative gross domestic product growth in many parts of the world and a lack of
consumption expenditure (Petersen et al 2009:1).
4) British Petroleum’s (BP’s) accident in the Gulf of Mexico, which was an environmental disaster
on such a scale that it had an influence, not only on the share price of BP, but on how the world
views multinationals and sustainable development.
5) Floods in Queensland, Australia, which resulted in the shutting down of 75% of the country’s
coal mines, affecting global coal supplies and making some mining companies revaluate how
prepared they were to cope with the potentially devastating effects of climate change (Harjani
2011:cnbc.com).
6) The 2011 tsunami in Japan, which may result in component shortages as a result of electricity
supply shortfalls as well as a reconsideration of nuclear programmes globally, since it is widely
regarded as the largest nuclear disaster since Chernobyl.
These ‘low probability and high impact events’ are typically described as wildcard events in the
Strategy and Futures Studies Literature (Petersen et al 2009:1-2).
While they have captured the popular imagination, it is difficult to determine whether these form
part of company risk assessments in the mining sector. This may be because they are often not
2
disclosed in the framework of risk reporting that does not pay much attention to them, instead
preferring to focus on those risks that are of higher importance and have a higher probability of
occurring, while also maintaining information asymmetries between the reader and management of
the firm.
1.3 RESEARCH OBJECTIVES
The research report plans to understand how mining firms incorporate wildcards into their strategic
planning.
There are several related issues and assumptions that underlie this topic. They are as follows
(Baissac: 2011):
• We can know what risks (including wildcard risks) will influence the mining sector.
• We want to know what risks (including wildcard risks) influence the mining sector.
• We want to do something about the risks (including wildcard risks) that influence the mining
sector.
• We can report about the risks (including wildcard risks) that influence the mining sector.
• We want to report about the risks (including wildcard risks) that influence the mining sector.
There are fundamental problems with all of these assumptions, and it is not at all clear whether all
or even some of them are true.
Since the general public, which is often not privy to the internal risk assessments that are carried
out within a firm, generally has access to publicly available reports on risk assessment, the
research report will seek to understand the last two assumptions outlined above, that relate
specifically to risk reporting, in the hope of understanding whether companies include wildcard
risks in their strategic planning.
These wildcards have had a significant influence on the world in the last ten years and at least
some theorists (including Hiltunen 2006:69) suggest that planning for events with a high impact
and a low-probability, or a higher probability given the continuance of current trends, is possible (as
further discussed in Section 2.2). This relates to the first assumption outlined previously, i.e.
whether we can know what risks (including wildcard risks) will influence the mining sector, and is
essential if one wants to ensure that the reporting of wildcard risks is carried out. However, it is not
sufficient that this be possible and this report does not intend to conclusively show whether it is
3
possible. A whole variety of additional assumptions need to be true for risk reports to contain and
address issues related to wildcards and how they are likely to affect any sector of the economy
and, for the purposes of this report, the mining sector in particular. Hence, this research report
focuses on describing what wildcard risks, if any, are contained in risk reports rather than risk
assessments.
1.4 IMPORTANCE / BENEFITS OF THE STUDY
There are two issues related to the relevance of this topic. The first relates to the importance of
considering wildcards in strategic planning. The second relates to being able to convince
shareholders and other key stakeholders that these wildcards are being addressed. Both are
important and Sections 1.4.1 and 1.4.2 discuss each of these issues of relevance.
1.4.1. Wildcards as important in strategic planning
There seems to be a sense that wildcards are an idea whose ‘time has arrived’ and that there is
value in examining wildcard possibilities to help companies anticipate what could occur in the
future.
It was envisaged at the outset of this research report that the mining sector would be incorporating
these wildcard events into its planning for a number of reasons, including that it (like many other
sectors) is integrally connected to the world’s economy, which means that when one of the
wildcard events occurs it inevitably has a ripple effect on the mining industry, which is invariably
influenced by the event. This has been observed at numerous times over the last decade. It was
also visibly seen in early 2011 in the aftermath of the Japanese tsunami, which resulted in a drop
in the price of uranium, as there was a global anti-nuclear sentiment which was associated with it
(Ker 2011: smh.com.au). There was also a reduction in the purchases of diamonds, as Japanese
consumers, which typically buy larger stones, shied away from significant purchases (Rough and
Polished 2011: rough-polished.com). While the often quoted expression is that “When the US
sneezes the rest of the world catches a cold”, recent events have shown that events in any number
of countries can dramatically influence the global economy, as the world economy becomes
increasingly integrated.
The mining industry, like many others, has also had its ideas of the inevitability of the status quo
shattered by recent wildcard events. This can be observed in price predictions in the diamond
sector, for instance. Consider Figure 1.1, overleaf.
4
Figure 1.1: Rough and Polished Diamond Price Foreca sts in November 2010 and January
2011
Source: Telfer et al (2011)
Figure 1.1 shows the divergent views of respected diamond research firm WWW in November
2010 and January 2011, with the November forecast showing a slowly decreasing diamond price
while the January forecast shows a slowly increasing diamond price. It is complete about-turns in
beliefs about the future and a willingness to consider alternatives, as illustrated by Figure 1.1, that
has come to characterize the mining industry at present. It is this kind of open frame of mind and
an increased openness to the consideration of a variety of factors that may come to influence the
mining sector that suggested the appropriateness of a study into how wildcards are being
incorporated into mining-sector planning strategies at this time.
However, many of the writers in this field are of the view that wildcards should be considered
because they improve strategic thinking. Kleiner (1999, quoted in Wright 2003:10), for instance,
notes that scenario planning (and the consideration of wildcards) allows planners to consider the
unthinkable, ungodly and unpredictable for the purpose of gaining an improved understanding of
individual and group assumptions about the future. Schwartz (1996, quoted in Wright 2003:12),
meanwhile argues that planners should deliberately seek “disconfirming advice” in the search, not
for the right or wrong answer, but the search to make scenarios more consistent, plausible and
useful. There thus may be value in exploring different alternative events so as to improve strategic
thinking.
5
1.4.2. Wildcards and shareholders and stakeholders
Shareholders and stakeholders interested in a particular company are keen to see that the
resources which have been entrusted to the company are being taken care of, especially due to
the recent spate of corporate governance scandals, including Enron.
While shareholders are often described as being particularly interested in maximising returns,
stakeholders are often described as interested in a wider range of interests (Fremond 2000:1;
Smith 2003:1). The dichotomy between the groups’ interests has been shown to be a false one by
various researchers, including Fremond and Smith. Both groups are acknowledged by them as
concerned with the long-term health and prosperity of a given firm (Fremond 2000:2) – a goal
which is unlikely to be achieved unless the company anticipates and mitigates the risks that it is
likely to encounter.
Shareholders and stakeholders also tend to agree on the corporate governance principles of
transparency and responsibility, among various other principles (Fremond 2000:2). These
principles involve the “full disclosure of financial and non financial information” and “ensuring that
the corporation fulfils its proper role in society” (Fremond 2000:2), respectively. They also suggest
that any factor that is likely to influence the firm or society in relation to the firm needs to be
disclosed, and presumably this would include risks that could potentially destroy the value of the
firm or risks that could potentially result in the company not fulfilling its proper role in society.
While the author of this report is not aware of shareholders or stakeholders who are very
concerned with wildcards being disclosed, the potential magnitude of the effect of a wildcard on a
company or society at large, makes this group of risks of potentially great importance for company
stakeholders, including shareholders.
It is possibly with this in mind, that the King III report makes several recommendations on the
board’s responsibility for risk governance, management’s responsibility for risk management and
risk assessment, response, monitoring, assurance and disclosure (PwC 2011a). It also argues that
the “board should disclose how it has satisfied itself that risk assessments, responses and
interventions are effective as well as any undue, unexpected or unusual risks and any material
losses” (PwC 2011a), a comment which suggests to the research report author that it is important
for the boards of companies to consider wildcard risks as part of their general corporate
governance obligations.
6
1.5 METHODOLOGY
Mining companies typically report on high impact high probability risks in their risk reporting, which
makes it quite difficult to examine wildcards, or high impact low probability events, since which are
ordinarily not disclosed or discussed.
This research report examines the literature on wildcards that is available and also the literature
around risk assessment reporting. This information is generally related to defining what a wildcard
is and to understanding risk reporting and did not specifically do so in the context of the mining
sector.
To find out more about how the mining sector views wildcards, it was important to view mining
company documentation on wildcards. However, this was challenging because mining companies
typically remain silent about risks that have a low probability of occurring, even if they have a high
impact when they do. As a result, this research report had to take the unusual measure of
examining what mining companies say about risks that they do not deem to be wildcards, i.e. their
most important risks that they believe will have an influence on their business, rather than what
they say about wildcards. It is in the interstices between what is said about risks that are widely
regarded as important that this research report hopes to examine what is being said about wildcard
risks.
The research report examines the web-based information that Gold Fields, Northam, Exxaro and
AngloGold Ashanti make available regarding their most pressing risks. These companies were
randomly chosen but represent companies that mine a range of commodities, since while Gold
Fields and AngloGold Ashanti both mine gold, Northam is a platinum mining company and Exxaro
is a coal mining company.
While they have an identifiably South African presence and their main contributing assets to
earnings in South Africa, they also represent companies with operations and interests in a range of
countries, with Gold Fields with operations in Australia, Ghana, Peru and South Africa; AngloGold
Ashanti with operations in South Africa, Namibia, Tanzania, Ghana, Mali, Guinea, Australia, the
US, Brazil and Argentina; Exxaro with operations in South Africa, Namibia, Australia and China;
and Northam with operations only in South Africa.
7
The companies also differ in their size, represented by market capitalization, as well as the
exchanges on which they are listed, with Gold Fields represented on the Johannesburg Stock
Exchange (JSE), New York Stock Exchange, NASDAQ, Euronext and the Swiss Exchange;
AngloGold Ashanti on the JSE, London Stock Exchange, Paris Stock Exchange and Ghana Stock
Exchange; and Exxaro and Northam on the JSE.
The web-based write-ups on risk that are identified as being of primary concern to the mining
company involved were assessed against Ernst and Young’s (E&Y’s) Business risks facing mining
and metals 2011-2012 to determine how well they agree with the risks that E&Y has identified as
important. Any discrepancies between what was E&Y described as the most important risks facing
the mining sector and what was reported by the various sampled mining companies were
examined to determine whether these discrepancies described or hinted at an important feature of
risks, in general, or wildcards, in particular. Discrepancies were also further investigated to check
whether they were an indication that risk reporting frameworks were in some way disallowing a
truthful full disclosure of risks, including wildcard risks.
1.6 CHAPTER OUTLINE
The preceding discussion was intended to give the reader a framework for the discussion that
follows, and had outlined the issue that this report hopes to address, the objectives that it intends
to fulfil, the two issues that make this topic relevant and the methodology that will be applied in the
course of this research report.
Chapter 2, which follows, is intended to give an overview of the debates about what constitutes a
wildcard. This is by no means a simple issue and theorists have diametrically opposing views
about the definition of a wildcard, from those that believe that one can anticipate wildcards, those
that believe that one can, in some cases, anticipate wildcards and those that believe that wildcards
constitute events that cannot be foreseen or planned for at all. The largely theoretical outline of
what constitutes a wildcard also delves into debates on whether wildcards can be natural events or
caused by people and the associated question of whether they are case or class dependent. The
discussion of what constitutes a wildcard is an important framework for the discussion in Chapter
3.
Chapter 3 reviews what four mining companies say about what could be potentially seen as the ten
most important risks facing the mining sector, as defined by E&Y.This discussion thus describes
8
what are traditionally seen to be events which are not wildcards. It is hoped that in more clearly
understanding what mining companies believe to be the key risks involved in their businesses that
one gets an insight into what is not disclosed and also gets an insight into the nature of reporting
and the nature of reporting about wildcards. Chapter 3 discusses such risks as resource
nationalism; skills shortages; infrastructure access; maintaining a social licence to operate; capital
project execution; price and currency volatility; capital allocation; cost management; interruption to
supply and fraud and corruption.
Chapter 4 represents a deepening of the discussion in Chapter 3, which had largely been a textual
analysis of risk reports by four mining companies. Chapter 4 is intended to be an analysis of risk
reporting and wildcard risk reporting, and investigates limitations of the reporting medium, the
power relations involved in reporting and the structure of the world of commerce and its influence
on risk reporting. It starts by assessing how the web format of risk reports affects risk reporting.
The next subheading discusses the difference between risk reporting and risk assessments and
suggests that the power relations between readers and writers of reports may result in writers not
being completely candid about risks or even being deliberately misleading. The chapter goes on to
discuss the nature of the risks disclosed by writers of reports, and specifically investigates whether
the jurisdictions, and the legislative environments that influence them, play any role in how reports
are written. The last section of the chapter further problematises the method that was employed to
undertake the textual analysis carried out in Chapter 3, and discusses such issues as whether an
overarching ranking of risks within a sector is even possible; whether risks can ever be seen as
items that stand alone, can be ranked in a specific order and can ever be seen as unconnected;
whether one auditing firm’s assessment of risk can be seen as an authoritative statement on risk in
the mining sector; and whether psycho-historical influences on risk reporters are likely to colour
and influence their assessments of risk.
Chapter 5 is a return to some extent to a textual analysis of the risk reports of Gold Fields, Exxaro,
AngloGold Ashanti and Northam. It highlights areas that have been ranked by E&Y in its list of the
top11 to 20 risks that influence the mining sector and how the sampled companies rank these
risks. It draws attention to several issues that the mining companies do not mention at all.
Chapter 5 goes on to mention risks that the mining companies mention but that E&Y does not.
These risks appear intuitively important to the mining sector and the research report queries
whether these risks, which are not acknowledged by one of the top auditing firms, are lower
probability events or potential wildcards. It further suggests that these risks are not of the same
nature as some of the wildcard risks that have been outlined by some theorists.
9
Chapter 6 concludes with a summary of important points raised and provides several
recommendations. Future research topics that could further tackle the issue of wildcards are also
highlighted.
10
CHAPTER 2
LITERATURE AND BACKGROUND REVIEW
2.1 INTRODUCTION
The literature and background review that is presented in this section hopes to outline some of the
debates and discussions that surround how wildcards are defined in the strategy, risk assessment
and futures studies literature. Since the topic of the study relates to how mining firms incorporate
wildcards into their strategic planning, an understanding of what is understood by the term
‘wildcard’ is an essential starting point for the study.
The definition of the term is also not a simple one, with different theorists offering diametrically
opposed viewpoints of what constitutes a wildcard. A starting definition of a wildcard as a low
probability, high impact event is offered. However, for some theorists the probability of a wildcard
occurring and the likelihood of its being anticipated is a central point of contention. Others discuss
whether wildcards can be natural events or caused by people and are interested in the associated
question of whether they are class or case dependent. Still other theorists are very concerned
about whether wildcards as risks can be quantified – an important feature of many risk
assessments that are being carried out in industry.
2.2 WHAT ARE WILDCARDS?
Wildcard events in the strategy and futures studies literature are typically described as low
probability and high impact events. They are thus believed to have:
• Little likelihood of occurring and sometimes the plausibility of their occurring is doubted, in
its extreme form.
• A large influence on actors, institutions and countries when they do occur.
This would suggest that they should lie at point “H” in a graph showing all events and trends and
how they are characterized according to their likelihood of occurring and their impact should they
occur (Figure 2.1). They would also be often ignored by planners and risk managers, who would
prefer to concentrate on events which have a high probability of occurring and would have a high
impact if they occurred, seen at point “A” on Figure 2.1.
11
HIGH
PROBABILITY
HIGH IMPACT
Figure 2.1: Typical characterization of risks
Planners might attempt to highlight those events that have a high probability of occurring and have
a high impact when they occur, since these would be seen to be the events that would have the
largest influence on the actors, institutions and countries, etc., that are being studied. The risk
reports surveyed, especially that of Exxaro, seem to endorse the model of categorising risk as
having a high probability and a high impact. Exxaro even outlined how each risk could be
described in terms of each of these categories, and drew a bulls eye to indicate that those risks
that scored high on probability and impact would be the “target” for assessment (Figure 2.2). This
language of focusing in on some risks is further endorsed by E&Y, which uses the terms “off the
radar” and “on the radar screen” to indicate which risks deserve particular attention. For those
interested in wildcards these metaphors may be alarming since they suggest that wildcards, which
may not be the highest probability events, may not be examined in any great depth.
A
B C
D E
F
G H
12
Figure 2.2: Exxaro’s risk bull’s eye, showing the m ost important risks as occurring close to
the centre of the bull’s eye
Source: Exxaro (2011a)
The other sampled companies, however, tended to be less specific about how risk fell into each
category, instead noting that these were their most important risks or the risks that affected them.
However, for risk managers the danger is in only addressing those issues that are believed to be
most likely to occur in the mistaken belief that other events – outside the traditional Bell curve
distribution are of low or lower importance. The chance of these events occurring is low, but their
impact will be great if they do occur.
2.3 ARE THERE DIFFERENT LEVELS OF PROBABILITY OF A WILDCARD OCCURRING?
Because of their influence on the world and global business, planners and studiers of the future are
paying more attention to these events and trying to understand them. And some are suggesting
that the risks that have been labelled wildcards may have been misnamed or that expansions and
alternatives to the definition of a wildcard, as a “high-impact, low-probability” event, need to be
considered when deciding whether to study a risk.
Markley (2011), for instance, suggests that ‘wildcards’ should be divided up into several categories,
with a Type I wildcard being one which is assumed by almost everyone as having a low probability
13
of occurring but having a significant impact if it does – this would suggest that this type of wildcard
lies in at “H” in Figure 2.1.
This would be in contrast with a Type II wildcard, which has a high probability of occurring if trends
that suggest it continue and a significant impact if it does occur. The occurrence of these Type II
wildcard events is not yet a commonly held belief, and thus these events have low credibility. On
this definition, it is uncertain whether the event should be placed at “H” or at “A”, but probably the
best interpretation is to show it at position “H” with an arrow leading to “A”, as in Figure 2.1.
Others appear to suggest that Type II wildcards are not wildcards at all but “gradual changes”.
This, for instance, appears to be what Hiltunen (2006) suggests. She appears to prefer to call the
Type II wildcards, that are outlined by Markley (2011), “gradual changes” rather than true wildcards
(Type I, in Markley’s description), which convey more of a sense of “abrupt discontinuity” than the
“gradual discontinuity” of events that are foreshadowed by trends, and which therefore have a
longer response time and become visible to a sizeable group of the population before they occur.
Hiltunen (2006), however, while she argues for a distinction between those wildcards that are seen
as more abrupt and other events that are more gradual, does not argue that wildcards have no
advanced warnings associated with them. She suggests that, while wildcards have a short time in
which they can be responded to, there are still weak signals that suggest that the change will
occur. Hiltunen (2006) argues that weak signals allow people to anticipate gradual changes, and
they also allow people to anticipate wildcards, although these are more difficult to anticipate than
gradual changes.
The companies sampled, and especially AngloGold Ashanti, appear to be very interested in
assessing risks from a historical perspective and this suggests that they are aware of the dynamic
nature of risks. It also suggests that they are aware that a risk’s probability of occurring can vary,
increasing or decreasing over time. Thus, for instance, AngloGold Ashanti notes:
Environmental laws and regulations are continually changing and are generally becoming
more restrictive. In particular, the use of sodium cyanide in metallurgical processing is
under increasing environmental scrutiny and prohibited in certain jurisdictions. Changes to
AngloGold Ashanti’s environmental compliance obligations or operating practices could
adversely affect the company’s rate of production and revenue.
With statements like these, the company indicates that the nature of some risks vary over time so it
is important to continually monitor them.
14
But this is again contrary to other discussions of wildcards, since there are some, such as Barber
(quoted in Hiltunen, 2006), who argue that there are no advanced warnings for wildcard events,
which are characterized by sudden and wide-reaching impacts. On this definition, a wildcard could
not be predicted and the arrow shown in red in Figure 2.1 could not even be anticipated. Barber
would presumably want to make a radical distinction between events that are foreshadowed by
weak signals that could be interpreted by society and those that cannot be predicted. She would
presumably not want to make the distinction between Type I and Type II wildcards, and would want
those events that have been characterised as Type II wildcards characterised as something else.
2.4 CAN WILDCARDS BE NATURAL EVENTS?
What then are we to make of the fact that many of the sampled firms’ outlined risks as well as the
risks outlined by E&Y have a strong human element.
The list of wildcard events that is outlined by Petersen (2009:14-16) includes several natural
wildcards, including the earth’s axis shifting, an asteroid or comet hitting the earth and the ice cap
breaking up. Many of these have occurred in geological time and it is not inconceivable that they
could happen again.
Taleb (2007) also calls our attention to the fact that our knowledge of the natural world, which has
been built up in the course of human learning, may also be shown to be incorrect. Thus, where
Europeans believed that all swans were white before visiting Australia, they found out that black
swans were common in this country. The potential falsifiability of all claims about the natural world
suggests that our knowledge of a class of objects can be grounded on false assumptions. As a
result, people might be surprised by an event which does not fit in with what had been understood
about the class to which it belongs, in the same way as the ‘discovery’ of black swans led
Europeans to redefine the characteristics of that class of birds.
This incomplete understanding of nature also appears to have occurred in the March 2011
Japanese tsunami. Japanese engineers had anticipated that a tsunami could occur but designed
their seawalls to be up to 40 feet high, never envisaging that a tsunami of greater than this height
could hit the coast of Japan. This miscalculation, along with miscalculations about where tsunamis
were most likely to hit the coast, is likely to have resulted in significant numbers of deaths (Onishi
2011).
15
The tsunami example and swan example, as well as the many natural examples of wildcards
provided by Petersen, suggest that the natural world can be a source of wildcards.
Hoppe (1997:53) describes the term “class probability” and believes that this term is appropriate to
describe natural events. He notes that people can know a significant amount about whole classes
of events, such as the long-run frequency distributions of tornadoes, although they might not know
about specific events within this class, such as who will be hit by a tornado and how much damage
it will cause. No one knows who will be hit by a tornado, although if they are, as they infrequently
are, the losses are likely to be large, says Hoppe. For this reason, it is possible for people to pool
their risk of tornadoes and pay an insurance premium, calculated based on the long-run frequency
of tornadoes, to be insured against this risk (Hoppe 1997:54). He argues that people can know
everything about classes of events, such as natural events, and their probability distributions.
Others agree that the body of knowledge about natural events is accumulative and we can know
an increasing amount about these events as the body of knowledge is increasingly added to
(Baissac, 2011). However, from the Japanese tsunami example and from Taleb’s example of the
black swan, it is noteworthy that sometimes our knowledge of natural events is not as complete as
we would like and this sometimes leads to wildcards. Also, from the events listed by Petersen, who
lists natural events which are not everyday events but have occurred in historical time, it is clear
that one can be lulled into only considering those natural events that occur with higher probability
and ignore events that have lower probability.
Several of the sampled companies mention that climate change may influence the sustainability of
operations, but do not expand on which risks they are specifically considering under the heading of
“climate change”. AngloGold Ashanti mentions risks such as floods, droughts and inclement
weather and notes that these conditions may be exacerbated by climate change.
It is possible that companies feel that they are adequately protected from natural disasters, since
they are typically included in force majeure clauses. They are thus not expected by clients to
deliver on their commodity contracts as a result of these disasters, can be exempted from deviating
from their mining plans if there is a natural disaster, and have a ready excuse for shareholders if
they fail to perform. Part of the reason for this is that traditionally natural disasters appear to have
been seen as something that is beyond the control of a firm, which have typical force majeure
clauses in many of their government and supply contracts, which exempt them from having to
perform as they intended to if they encountered a significant natural disaster, including
16
“earthquakes, floods, fire, plague, Acts of God (as defined in the contract or in applicable law) and
other natural disasters” (Worldbank undated:3).
However, how natural events, and particularly extreme natural events, influence a mining concern
has come under the spotlight as a result of the scope and intensity of natural disasters, in the form
of heavy rains and floods, which affected Australia in 2010 and 2011 (Creamer Media 2011).
These have led to many believing that there is a need to reassess, revise or renegotiate force
majeure provisions since they were found to be inadequate in many cases since they did not, in
scope and detail, tackle the liabilities of all roleplayers involved (Creamer Media 2011). Some have
even suggested that companies need to expend more effort in understanding weather events,
since there are likely to be more intense droughts, cyclones, floods and fires and as least some of
these will be foreseeable. These commentators have argued that commodity companies should be
using the services of weather services to limit losses of revenue and disruptions to operations
(Fogarty 2011). This suggests that companies need to consider natural risks in a deeper fashion
and that these should not be relegated to a lower status of interest, since it should be a “top of
mind” consideration, as one commentator described it (Creamer Media 2011).
2.5. ARE WILDCARDS AND OTHER RISKS CAUSED BY HUMANS ?
The World Bank (undated: 3) seems to endorse the view that there is a distinction between natural
vs. human-linked surprise and unforeseen events, which it includes in its list of force majeure
events. This is because the bank separates natural events, including earthquakes, floods and
plague, from political and special events, including terrorism, strikes and nuclear contamination.
The majority of wildcard events that are listed by Petersen (2009:14-16) are also events that
involve humans. These include human cloning being perfected, an altruism outbreak, and nuclear
terrorists attack peoples ability to act in a way that is different in some way to the way that they
have behaved in the past, among many other wildcards.
In a mining context, many of the sampled companies’ risks that are outlined in this research report
relate to human agency in some way, including resource nationalism (Section 3.2); skills shortage
(Section 3.3); infrastructure access difficulties (Section 3.4); maintaining a social licence to operate
(Section 3.5); capital project execution (Section 3.6); price and currency volatility (Section 3.7);
capital allocation at a time of depleting resources (Section 3.8); cost management (Section 3.9);
and fraud and corruption due to greater political risk (Section 3.11). Even interruptions to supply
due to natural and environmental disasters could be linked to human agency if one believes that
people are partly responsible for the greenhouse gases and climate change (Section 3.10).
17
Does this suggest that the majority of risks, including the wildcard risks, facing the mining sector
are connected with human agency? This research report suggests that it does.
This is particularly true if one accepts a learning model of events and actions, as put forward by
Ludwig Lachman. His model proposes that people continue to learn from their previous actions so
it is impossible to predict their future actions, and this results in a radical uncertainty with respect to
events in which people play a role. This may make it difficult for companies in the commodities
sector to correctly understand how the price of commodities will behave, for instance, since
speculators in commodities are very adept at working out new ways of benefiting from price rises
and falls (as more fully described in Section 3.7).
Even if one accepts a less uncertainty prone model of knowledge and action, such as the historical
model of knowledge and action, one is bound to believe that there is a significant amount of
uncertainty attached to human behaviour. As put forward by Ludwig von Mises, this model
suggests that knowledge is provided by history, and, if conditions remain unchanged, we can
expect that the future effects will be similar to the past effects. However, since it is uncertain
whether conditions remain unchanged, there is still a moderate uncertainty about how the future
will evolve, although there is some certainty about people’s personality characteristics and a
history of their choices, the theory describes.
An example of a risk that might fit into this historical paradigm is that of resource nationalism (as
discussed in Section 3.2), since there is historical evidence to suggest that, where commodity
prices are high, countries tend to want more of the natural resource pie, while, when commodity
prices are low, countries tend to want to create a more favourable investment climate to attract
companies to invest in their countries. This cyclical nature of resource nationalism appears to be
proven but, because mining takes place in many jurisdictions, it is clear that not all jurisdictions
behave in the same way towards resource nationalism. This may be for a variety of reasons
including a particular country’s dependence on the mineral sector, particularly powerful lobby
groups advocating against resource nationalism, underfunded governments that find it difficult to
implement legislative changes timeously since it would require a significant amount of research,
and pro-investment members of various governments, etc. All these variables may make one
government’s decision to follow a resource nationalism agenda different to another government’s
decision to not follow a resource nationalism agenda.
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There are also those that suggest that human action is more predicable than action as outlined by
the learning or the historical models. These are those that subscribe to:
• The general equilibrium model, which states that events in which human beings play a part
are insurable and can be described with long-run frequency distributions in the same way
as earthquakes and tornadoes can be described.
• The rational expectation model, which assumes that people have perfect knowledge and
decide what actions they and others will take based on their knowledge of the actions that
are available for them to take.
These models suggest that events in which human agency is important are fairly predictable. This
seems to me difficult to believe because human-related events are the events that most of the
commentators and companies believe are more risk prone.
This research report suggests that the general equilibrium and rational expectation models may be
applicable in some cases and acknowledges that these models seem to hold true in times of
stability. However, in times of uncertainty and turbulence, a learning model of action or a historical
model of action (which allows for uncertainty because it allows for changes in the conditions that
may change) appear to be more appropriate. Since the present economic crisis has turned many
assumptions on their heads, it appears that models which suggest greater certainty may not be the
most appropriate at present.
Further evidence for the idea that risks in the mining sector are often associated with human
agency comes from Benning (2000:147), who outlines risks typical of the mining sector, including
orebody risk, technology risk, operational risk, market risk, infrastructure risk, political risk,
construction risk, and environmental risk. Of these risks only orebody risk (which is associated with
the geology of the body to be mined) and environmental risk are potentially not directly associated
with people. And even these risks are to some extent, since the interpretation of the orebody
depends on the abilities of the person who has been tasked with its modelling while, as argued
earlier, much environmental risk involves some human agency. This seems to me to suggest that
human agency is an important contributor to even the more common risks that are described in the
mining industry.
Hoppe (1997:71) argues that, where individual learning takes place in a context of human history,
we know some but not all of the factors that determine an outcome. In this situation, we can refer
to “case probability” rather than “class probability”, where one would know nothing about individual
events. Hoppe (1997:71) suggests that one might be better off with these “case probability” events
19
rather than “class probability” events, since at least one knows something about individual events
rather than groups of events. This research report suggests that this is an appropriate conclusion,
although it is aware that the learning model of action may also hold in some cases, and it may not
always be possible to know how people will behave as they are continually changing and adapting
their behaviour. This is further complicated in an environment where there are numerous
roleplayers, as is the case with resource nationalism, which involves governments, mining
companies, communities and workers, etc.
2.6. CAN RISK, IN GENERAL, OR WILDCARDS, IN SPECIFI C, BE QUANTIFIED?
For those who think of events in terms of probabilities of occurring as well as the long-run
frequency distributions of classes of events, there is the belief that one can quantify the risk of
some events occurring. These are likely to be people who think of uncertainty and risk in terms of a
Gaussian Bell curve, where the likelihood of something of low probability occurring is located on
the edges of the bell curve rather than the mount in the middle. Taleb (2007:36) notes that it is
easy to predict what you observe by extending what you observe for these events. He also notes
that this type of phenomenon may have mild randomness and is characterised by continuity with
history.
Since they are in some sense able to be described, these events could be high-probability events,
Type II wildcards, or gradual changes (as discussed in Section 2.3).
In the risk assessment domain the quantification of risk appears to be extremely important. This
can be seen in the sampled companies’ reports in the frequent presentation of risks on graphs with
calculations and rankings of risks. Such is the case with the Gold Fields “heat map”, where the
relative severity of risks and the probability of risks is graphically illustrated and tallied (Figure 2.3),
and the bulls eye scoring of Exxaro (Figure 2.2), which helps to give risks a score of one to 100 in
order to assess their importance.
Part of the emphasis on the quantification of risk may stem from the fact that, in order to prevent
unverified and non-credible reporting, many countries have introduced mechanisms to ensure that
reporting is accurate, including the liability and the auditing of risk reporting (Dobler 2008 :186).
This also seems to be enshrined in South Africa, where the King III Report argues for “accurate”
disclosure of risks (PwC: 2011a). While it may be a leap to assume that the term “accurate” implies
some sort of mathematical calculation of risk, this research report suggests that the quantification
of risk is a possible outcome of the need to carry out an assessment on whether the risks
contained in a report can be factually supported. This is supported by the fact that practitioners in
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risk assessment also confirm that statistical methods of calculating risk, in addition to historical
methods, among others, are among the traditional arsenal employed by risk assessment
professionals when carrying out risk assessments (Baissac: 2011).
Figure 2.3: Gold Fields’ risks based on severity an d probability of occurring
Source: Gold Fields (2011b)
The mathematics of actuaries does seem to play a role in informing risk assessors of risks. Some
note that insurance premiums make risks concrete and an increase in an insurance premium
suggests that the risk of a particular event is increasing. Thus, the threat of many events related to
global warming has increased as is evidenced by the fact that the cost of certain types of insurance
has gone up; the cost of global warming is monetised in the higher prices of certain types of
insurance, some believe. This suggests that mathematics may be an important means of alerting
risk assessors to the fact that there may be a gradual or even significant change in the way that a
particular risk should be perceived.
However, there are some that caution against the use of mathematics in risk assessments, arguing
that mathematical language is often used to justify assumptions and hide the subjectivity of those
that formulated the risk statements. This perhaps suggests that, where mathematical calculations
are carried out after risk assumptions are made and merely to justify those assumptions, those risk
assumptions should not be regarded as value free. In addition, Stroh (78-79) cautions against
21
creating a hyperreality in document and trying to convey that organisations are representable; the
author of this research report suggests that by quantifying risks and representing final calculations
of certain risks as the most important risks that are likely to influence a firm, risk reports often set
up their conclusions as unchallengeable and representing the truth about risks that they face
(although it should be noted that, even through a narrative on risk, the firms are suggesting that
they can reflect the “truth” about the risks that they face).
Some would argue that wildcards, as a phenomenon, would have to fall in a Mandelbrotian curve
since wildcard events are likely to be so rare that they would not fall on a Gaussian curve. When
people speak of events in these terms, they tend to speak about “long tails”, “fat tails” and extreme
outliers. Taleb (2007:36) refers to events that fit in a Mandelbrotian curve as “grey swans”, and
acknowledges that they are hard to predict from past events and that history cannot be relied on to
confirm them.
Some of those theorists that argue that a wildcard is something that cannot be foreseen at all,
however, would argue against the quantification of this type of event at all. This seems to be the
case with Taleb (2007:36) who argues that some occurrences cannot be anticipated in advance
through experience and that their occurrence is wild or superwild. As a result, these events do not
fit into the even distribution of the Bell curve and cannot be described in repeatable patterns on any
scale as one would expect from events that are Mandelbrotian. Called “black swans” by Taleb
(2007:36), they are impossible to predict from past events and history cannot be relied upon to
confirm them. This would suggest that the quantification of these risks would be difficult.
However, since the risk assessment environment demands auditability, it is likely that wildcard
events that are highly uncertain, or are Type I wildcards, will not be noted in risk reports. Dobler
(2008:186) confirms that people prefer not to disclose information in which there is an uncertainty
in the risk information. They also prefer to report risks where there is a risk management system in
place. While a risk management system does not demand a quantification of risk information, risk
management systems often eventually do use some mathematics to try and capture the large
amount of risk information that is available and that needs to be processed in some way.
The fact that our world is increasingly complex makes quantifying the effects of a wildcard also
difficult. Our modern environment connects different institutions, countries and sectors in
increasingly dense networks. This results in a complex environment, where an understanding of all
the elements in a system does not result in an understanding of the system, states Stroh
(2005:86). Isolating and describing elements of the system, trying to establish how they are
22
causally related, and trying to establish what magnitude of cause will have what magnitude of
effect make trying to quantify a risk difficult.
Taleb (2007:226) argues that, while interconnections appear to make systems seem robust and
make them appear to be immune to wildcard events, they cannot be so. Instead, interconnections
make pieces of the network as well as the whole network vulnerable to the effect of a ‘black swan’
– or high-impact, low-probability event – on important interconnected nodes. Thus, the US
experienced large-scale blackouts as a result of an important electricity node failing in 2003, while
much of the world experienced a recession as a result of problems within the interconnected
financial sector in late 2008 and 2009. Mathematical calculations of the likelihood of the latter event
occurring were not widespread and the few commentators who did suggest a recession would
occur had their views widely publicised after the recession took hold.
2.7. ARE WILDCARDS CASE OR CLASS DEPENDENT?
For different theorists, it may be possible to have knowledge of a class of wildcards, such as
tornadoes, and still contend that, because one does not know when an individual event will take
place, a specific tornado could be a wildcard. These theorists would presumably be content with
the class of Tornadoes being modelled on a Gaussian curve and would still insist that the specifics
of an individual tornado are unknown even if one knows their typical frequency and the physical
parameters that they conform to, including that they will fall on the Fujita (F) scale, which classifies
tornadoes according to whether they can cause moderate to incredible damage depending on their
speed, and which has modelled that only 0.1% of tornadoes lie in the highest classification on the
F scale (National Geographic, 2011; Tornado Facts, 2011).
Thus, for Petersen (2009:14-16), the likelihood of the ice-cap melting is still a wildcard, even
though it sits comfortably within what has happened historically in the geological record, with cool
and hot periods in evidence over the last 2bn years (Scotese 2002).
Other theorists such as Taleb (2007:36) argue that the event characterised by wild or superwild
randomness could only be known in its individual case. He notes that wild or superwild events do
not belong to groups where the typical event is one that is situated in the centre of a Gaussian
curve. Instead, he argues that wild and superwild events skew groups in which they are situated.
Such would be the case with a best-selling author, such as JK Rowling, whose book sales would
be considerably higher than other authors’ sales, he notes.
23
In some cases, wildcard theorists tend to be very specific about what event they are describing
even giving them a timeframe and a geographic location. Thus, Petersen (2009:14-16), for
instance, describes one possible wildcards as “Hackers Blackmail the Federal Reserve”.
Taleb (2007:141) appears to be critical of the specificity of this approach. He argues that people
can overestimate the unusual or some specific unusual event. Thus, where a sensational event is
at the forefront of someone’s mind, due to exposure in the press, for instance, people tend to
overestimate the importance of such an event occurring. This, Taleb calls the “error of specificity”.
The sampled companies tend to focus on generic risks facing their businesses rather than specific
issues. This seems to be because the risks that they outline are the business risks that apply
across the various operations, where there are a lot of operations. Most of the companies tend to
outline individual operational risks separately and these are typically not disclosed to the general
investing public.
As an example, Gold Fields notes that the top 10 “corporate, regional and operational mitigation
actions and strategies identified during the EWRM [Enterprise Wide Risk Management] process
are aligned with operational business plans and integrated into the Individual Balanced Scorecards
(BSC) of all employees from C-Band through to ExCo”. However, it is possible that in the
distillation of corporate, regional and operational risks into only 10 risks, some of the risks that are
important may be lost. It is also possible that some of the regional and operational risk
assessments may have additional depth and suggest some wildcards that may be obscured by the
insistence that the company primarily target 10 risks even while being useful in focusing the
attention of staff on these risks and remunerating them for concern about them.
However, not being specific enough with risk definition may have its dangers. The force majeure
descriptions tend to be very generic in legal contracts as do the general categories of risk that risk
assessors use to understand a business, industry or country, etc. These generic risks may be too
general to be taken cognisance of.
2.8 CONCLUSION
Wildcards are typically described as high-impact low-probability events. However, there is
disagreement as to whether wildcards can be anticipated at all, with some suggesting that they are
24
accompanied by weak signals, some suggesting that some wildcards can be anticipated, and
some suggesting that they cannot be anticipated at all.
There is also disagreement about whether there is more uncertainty associated with natural or
human-linked phenomena, with some suggesting that human-linked phenomena are more prone to
having a high degree of uncertainty, others suggesting that specific natural phenomena involve a
large amount of uncertainty, and still others suggesting that the classification of natural phenomena
may have not been correct, leading to inaccurate information about specific natural phenomena
and potential surprises for those who believe they understand those phenomena.
Another issue of contention is that some believe that classes of events can be known and therefore
modelled mathematically, while others believe that wildcard events cannot be modelled and are
unknowable.
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CHAPTER 3
REVIEW OF MINING SECTOR RISK ASSESSMENT REPORTS
3.1 INTRODUCTION
Ernst & Young (E&Y) (2011) updates its list of top 10 risks for the mining and metals sectors each
year. It lists the most important risks for the mining and metals sectors as:
• Resource nationalism.
• Skills shortage.
• Infrastructure access.
• Maintaining a social licence to operate.
• Capital project execution.
• Price and currency volatility.
• Capital allocation.
• Cost management.
• Interruptions to supply.
• Fraud and corruption.
These risks are those risks that are likely to be broadly understood as having the likelihood of
having the most influence on the mining sector and are likely to be those risks that have a high
probability and a high likelihood of occurring. They are thus those risks that are likely to be being
considered and they are unlikely to be wildcards, since these are typically describes as low
probability, high impact events (as described in Chapter 2 of this report).
This chapter examines the risks that several mining companies list as the most important risks that
they are considering for their companies and examines whether they are considering wildcard
events in their risk assessments of their companies. What follows is a discussion of:
• The risks that E&Y has identified as important.
• Whether a sample of South African mining companies agree with the assessment that
these are the most important risks and report on these risks.
• Whether they deviate at all from the risks identified as important by one of the top auditing
firms.
26
• Whether mining companies’ discussions of their most important risks can give investors any
insight on whether they are taking wildcard events into account in their risk assessments.
3.2 RESOURCE NATIONALISM
Resource nationalism is mentioned by E&Y as the biggest risk for the mining sector in 2011 and
2012. This is because the mining sector has become of interest to various countries which are
hoping to get a greater share of mining profits from the booming sector that promises to boost
treasuries, which have in many cases been hard hit by the global financial crisis. E&Y notes that
resource nationalism could result in additional taxes or royalties or increased participation in mining
ventures by governments.
It appears that E&Y regards resource nationalism as highly likely to occur and to have tremendous
effects if it does occur. Northam, Exxaro and AngloGold Ashanti specifically refer to this issue, but
Gold Fields does not. Northam mentions this first of the risks that it outlines and mainly describes
the fiscal and regulatory dimensions of nationalism, such as beneficiation provisions, royalties,
health levies and other taxes and licences. Exxaro, meanwhile, only describes an extreme form of
resource nationalism, which is resource nationalisation, or the taking over of resources by the
government; this it ranks as the 19th most important of the 20 risks that Exxaro outlines. Still others
do not mention resource nationalism at all. Exxaro specifically says that this is a high impact, but
low probability event, while Northam’s positioning of this as its first-mentioned risk suggests that
the company believes that resource nationalism is a high impact and high probability risk.
What is interesting is that some companies regard resource nationalism as the most important risk,
others regard it as a less important (but still noteworthy) risk, while others regard it as a risk
scarcely worth mentioning. This is interesting since one would expect that the number one risk, as
identified by E&Y, would at least be being considered by companies in this sector. Since it is not
being uniformly considered, it is certain that companies define this risk in terms of different
probabilities of occurring and having different levels of impact should it occur. Thus, in terms of
Figure 2.1 of the MPhil research report, some may view this risk as a high probability, high impact
event, others view it as a low probability, low impact event and still others view it as a low
probability, high impact event (and potentially, therefore, as a wildcard).
As described in Chapter 2 of the MPhil research report, those that are involved in wildcard
research sometimes refer to “weak signals” that herald the onset of a wildcard that should be
incorporated into planning. The writer of this research report would suggest that the announcement
by E&Y of “resource nationalism” as the most important risk that is likely to affect the mining sector
27
in 2012 is rather a strong signal, as is the fact that a search on “resource nationalism”, in inverted
commas, on Google on the 7th of December 2011 produced 330,000 results suggests that this risk
has a long history of discussion.
In its extreme form, resource nationalism can be understood as resource nationalisation, which has
been the subject of heated discussions in the press, as the South African African National
Congress (ANC) Youth League had been promoting the idea that the country’s mineral resources
should be nationalised. Since this has been a highly publicised debate, this research report
suggest that this should be viewed as a strong signal that this should be something that should be
considered, especially since a search for the “nationalisation of mines”, in inverted commas,
presented 543,000 results on Google on the 7th of December 2011.
While the threat of nationalisation of mines appears to have diminished with the five year
suspension of ANC Youth League President Julius Malema, it seems peculiar that those issues
that appear to be the most important in terms of the risks that relate to the mining sector have not
received the attention that they deserve. This, to me suggests that it is even more likely that those
events that are regarded as having a “lower probability” of occurring, including many wildcards, will
be ignored if even the widely regarded most important risks influencing the mining sector are
ignored. Some potential reasons for this issue being disregarded are further discussed in the
Section 4.3.
3.3 SKILLS SHORTAGE
E&Y (2011:2) identifies skills shortages as the second most important risk for the mining sector in
2010 and 2011 and indicates that it may become an even more important risk in 2012. It notes that
the mining sector is using staff from other sectors in which an upturn has yet to occur and that near
retirement workers have also left the sector. It argues that industrial disputes, strikes and walkouts
will become more common in the tighter labour market as workers seek higher wages.
Others, such as PwC and Deloitte, meanwhile, argue that labour costs are likely to rise due to
competitive poaching and the need to rehire ex-employees who have turned contractor as a result
of recessionary downsizing and income disparities between joint venture partner firms and
operations will also increase labour turnover.
One would expect that this topic that has received attention from the leading auditing firms, and
shows 1,450,000 results in a Google search on the 7th of December 2011 for the combination of
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terms “skills, shortage, mining, industry” (not in inverted commas) – thereby indicating that it is
something of wide concern – would be mentioned by most of the mining companies sampled. This
would be another of the risks in which there would be “strong signals” to support the consideration
of this risk in a company’s risk assessments.
Not surprisingly then, most of the mining companies surveyed list labour issues as among the risks
that they consider worth mentioning.
The fact that so many companies of the sample regard this as a significant risk, suggests that this
is a high probability event that is being planned for, if identified risks translate into operational level
actions. However, E&Y (2011:2) notes that “projects are being cancelled or deferred due to the
inability to staff up construction and operations”. This may suggest that potentially some of the
impacts of the skills shortage are not being anticipated or planned for, and that these related risks
might be wildcards.
Another risk that is related to shortages of skills is identified by AngloGold Ashanti, which notes
that a skills-poor environment presents difficulties in retaining staff and presents a challenge in its
being able to achieve its employment equity targets since staff are poached by others. Thus the
risk of not being able to achieve employment equity targets, and the response by a government
intent on ensuring that its goals of ensuring that ‘black’ people are able to participate in the mining
sector, may actually be a wildcard for many companies. Thus the acknowledged risk of skills
shortages may hide a wildcard risk, i.e. the loss of mining rights as a result of not being able to
meet employment equity targets, remaining unidentified by many firms, with the exception of
AngloGold Ashanti, since it is associated with a risk that has been identified.
Interestingly again is the fact that different mining firms rank skills shortages differently among their
risks. Gold Fields lists it 5th of the 10 risks that it identifies as important, Northam lists it next to last
among the short list of risks that it identifies and Exxaro lists it 10th of the 20 risks that it identifies.
AngloGold Ashanti, meanwhile, is interesting in that it tackles skills shortages under various
headings. It notes that labour disruption and increased labour costs might influence its results; that
the employment of contractors might expose the company to project delays and suspensions or
increased mining costs; and that the company competes with other firms for key human resources.
Section 4.3 further discusses some of the political aspects involved in the reporting of skills
shortages as a risk.
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3.4 INFRASTRUCTURE ACCESS
E&Y mentions infrastructure access became more of a risk in 2010. The company mentions power,
water, shipping, ports and rail as types of infrastructure that mining and metals companies require
to get their commodities or downstream products to the market. However, since E&Y has a
separate risk category dedicated to access to secure and cost-effective energy, it is understood
that the third most important risk that relates to the mining sector, i.e. infrastructure access, speaks
mainly about access to transportation. This is reinforced by the fact that it notes that a lack of
sufficient rail networks is the biggest obstacle in getting commodities to market.
E&Y notes that some projects have been cancelled as a result of a lack of infrastructure provision.
Others (Spicer: 2011) have also noted that infrastructure provision is becoming important because
mining investments are taking place in more remote locations in which there has been inadequate
expenditure on infrastructure and in which there are pressing social needs that suggest that
infrastructure provision may not necessarily be the most important items on governments’
expenditure lists.
Exxaro is the one company that mentions rail infrastructure explicitly among its risks, and lists it as
the most important risk for its current operations and growth aspirations. It is clear that, as a
producer of coal, which is a bulk commodity, this infrastructure is vital for it and understandable
that gold companies Gold Fields and AngloGold Ashanti and platinum producer Northam are not
as concerned with the availability of bulk transportation means. Sections 4.5.4 and 4.5.1 further
elaborates on how companies may perceive risk differently for a variety of reasons.
3.5 MAINTAINING A SOCIAL LICENCE TO OPERATE
E&Y outlines that maintaining a social licence to operate has moved from being the 5th most
important risk for the mining and metals industry in 2010 to being the 4th most important one in the
2011-2012 list of risks. E&Y notes that it is important that companies ensure that their:
• Environmental performance does not become a concern for local communities and
regulators.
• Reputation is not damaged by safety incidents.
• That land disputes between themselves and local communities are avoided.
The author of this report has taken social licence to operate to refer to specifically whether the
company is endorsed by the local community within its immediate environment although a social
licence to operate clearly extends to the broader society, which needs to reflect on whether a
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company is taking care of a country’s collective environmental resources and whether its safety
and health performance reflects care for workers who may not reside within the immediate vicinity
of the mine.
Gold Fields and AngloGold Ashanti use specific language related to social licences in their risk
assessment write-ups. Gold Fields specifically mentions the risk of losing its ‘social licence to
operate’ and lists it as the last of the ten risks that it identifies. AngloGold Ashanti, meanwhile,
notes and then expands on the statement that “Mining companies are increasingly required to
consider and ensure the sustainable development of, and provide benefits to, the communities in
which they operate”, which is the 11th heading that it discusses when referring to its risks. Through
these write-ups (which list this risk as quite low among the risks examined, both of these
companies appear to be relegating “social licence to operate”, and the likelihood that they will lose
the endorsement of the communities in which they operate, to having a lower probability of
occurring and having a lower impact if it occurs than many other risks, and this appears to be
contrary to the much more important status given to this risk by E&Y.
However, because of the many aspects that influence whether a company has a social licence to
operate, including environmental, safety and land issues, several of the issues are discussed in a
variety of the sections of the risk information provided on the websites of the sample companies.
This makes it difficult to determine whether the ranking of “social licence to operate” by the
sampled companies is actually as low as it first appears. Gold Fields, for instance, discusses safety
related stoppages first among the risks that it discusses. While this has a financial implication, it is
clearly also important because the broader community, including the regulatory authorities and the
unions, is involved, and its censure in effect may mean that the mine will close.
AngloGold Ashanti, similarly, addresses health, safety and environmental issues under a number
of headings, and this may suggest that the risk of not obtaining a social licence to operate,
including the threat of multiple health, safety, land and environmental affecting its social licence to
operate, among various other issues, is being considered as an important risk which is described
in its fullness.
The other sampled mining companies also address many of the health, safety and environmental
issues that would be important for the local community as well as the broader national communities
in which they operate. Again, because these issues are discussed under numerous headings and
at different points in the risk assessment information it is difficult to determine how important
maintaining a social licence to operate is. Exxaro, for instance, mentions:
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• The inability to maintain a licence to operate due to non-compliance with all applicable legal
and regulatory frameworks (its 3rd most important risk).
• Insufficient supply of clean water for sustainable operations and communities (its 9th
mentioned risk).
• Risks associated with the closure of current operations (its 11th listed risk).
These all have health, safety, environment and land implications and can be seen to be of concern
to the local and broader community.
However, the fact that some of the sampled mining companies do not use the common terms that
relate to ensuring that their operations are endorsed by or not frowned on by the local community
may suggest that these companies’ analyses of the risk environment may have omitted some
important issues. Indeed, consideration for the local community is very much entrenched in many
countries’ mine-related legislation and sustainability of operations appears to be a growing concern
for those in the mining sector. Added to this, the fact that this is a “strong” message that should not
be overlooked is suggested by the fact that a Google search for “social license to mine”, without
inverted commas, on the 8th of December 2011 produced an impressive 112,000,000 results. The
fact that this “strong” signal is not being taken into account as much as it potentially should be does
not bode well for risks that are associated with “weak signals”. Section 4.3 elaborates on some of
the political reasons which may influence the ranking of the “social licence to mine”.
3.6 CAPITAL PROJECT EXECUTION
E&Y notes that capital project execution had fallen from E&Y’s ranking of it as the auditing firm’s
most important identified risk in 2010 to its 5th most important risk in the 2011-2012 report on risks
encountered by the mining and metals industry. This change in ranking had occurred because
2010 was more of an uncertain economic time and price volatility, limited cash flow and reduced
debt capital, made spending decisions difficult, E&Y notes.
E&Y suggests that capital project execution remains important because:
• A large number of projects by different companies are coming on stream and may require
the same resources.
• These projects make up a large percentage of company expenditure at present so attention
to budgets and scheduling is important.
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The companies sampled appear to take some of the issues that relate to capital project execution
into account and Exxaro and AngloGold Ashanti risk assessments seem to accord best with that of
E&Y.
Exxaro stresses capital project execution under the two headings of:
• Delays to projects as a result of the time taken to get mining and environmental right
approvals (which it lists as its 4th most important risk).
• More specific to the topic being discussed, the late commissioning of growth projects that
are important for the company’s sustainability (which Exxaro lists as the 8th most important
risk that it identifies).
This suggests that it, like E&Y, regards project execution as very important and a considerable risk
for the company if it is not achieved effectively.
AngloGold Ashanti (2011), similarly, seems to regard project execution as important since it notes
that it “faces many risks related to the development of its mining projects that may adversely affect
the company’s results of operations and profitability”. This it mentions 6th of the risks that it
outlines, making its estimation of the ranking of capital project execution similar to that of E&Y.
Gold Fields, meanwhile, notes “delivery on project feasibility studies” as its 6th most important risk.
This item includes the roll out of the company’s Capital Investment Framework and project
management guidelines and the establishment of project risk registers and a revised contracting
strategy to prevent delivery risks for individual projects. However, since this risk relates to
feasibility studies rather than project execution, it appears that Gold Fields is more concerned with
the earlier stages of projects rather than the later stages in which projects are implemented, even
though some of the interventions that it suggests for the earlier stages of projects can no doubt be
applied to the later stages of project execution too. In its discussion of its risk integration process,
moreover, the company explicitly refers to the importance of capital projects being delivered on
time and within budget, noting that its risk tolerance allows it to have a 10% to 15% overrun on
these issues. This suggests that, while “capital project execution” is one of its key risk areas it does
not translate into one of the risks that the company identifies as being part of its “heat map” (the
company’s terminology) of top risks.
Northam, meanwhile, appears not to take this risk into account at all in its risk assessment write
up. This lack of consideration for this risk is not accounted for by the fact that it has no capital
expansions under way, since it appears that the company is in the process of undertaking early
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infrastructural work and a boxcut at its Booysendal project (Northam, 2011). This could suggest
that this seemingly very important risk is not being considered by the company. One wonders if this
suggests that this is a potential wildcard for the company due to its not being mentioned in the risk
assessment write-up. Section 4.2 further explores whether the nature of the reporting medium as
one that emphasises briefness may also play a role in obscuring the importance of the risk to the
company.
3.7 PRICE AND CURRENCY VOLATILITY
E&Y has noted that price and currency volatility has been increasing as a risk for mining and
metals companies, as it had ranked this risk as the 9th most important risk in 2010, but has since
ranked it as the sector’s 6th most important risk due to operating costs often being determined in
another currency than earnings and new developments in commodity investment and speculation.
This is one factor that all of the sampled companies note in their risk assessments. Gold Fields
ranks it as its 7th most important risk; Northam lists financial and market risk as the second
heading that it addresses; Exxaro lists it as its second most important risk; and AngloGold Ashanti
lists it first among the risk factors that it considers.
Interestingly, many of the companies rank this risk much higher than many of the other risks that
they rank, and this research report hypothesises that the importance of this risk to these
companies could be given greater weight than it deserves and potentially this could be detracting
attention away from various other risks that may not be getting the attention that they deserve.
Section 4.4 further discusses why this may be the case.
3.8 CAPITAL ALLOCATION
Capital allocation is ranked by E&Y as the 7th most important risk facing the industry. This is
because it has become increasingly difficult for mining and metals companies to determine the
best way of allocating capital and ensuring their sustainability in an environment in which their
mineral resources are increasingly getting depleted. E&Y notes that companies are using their
capital to:
• Integrate vertically.
• Add additional value to products.
• Expand into other geographical regions to mitigate their political risk exposure.
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Many of the companies sampled incorporate this risk into their risk assessment write-ups and
appear to take cognisance of it in a variety of instances and ways in their documentation on risk on
their websites.
Gold Fields once again does not appear to feature this as a key risk for the company, but notes it
among the risk areas and tolerance levels by calling attention to the fact that a proper assessment
of risks and returns needs to be undertaken at the time of a merger or acquisition and by noting
that geological potential and political risk need to be balanced against each other when considering
exploration projects.
Exxaro (2011b) notes that “investment opportunities do not yield expected returns” is its 18th most
important risk of 20. This research report takes this reference to be similar to the capital allocation
criteria outlined by E&Y since it also prioritises the importance of weighing up capital allocation
against the returns that it expects. Exxaro also notes that this is a high impact, low probability
event and does not appear to give it the same level of status that this risk is given by E&Y.
AngloGold Ashanti (2011), meanwhile, notes ideas related to the importance of assessing where
capital is spent in relation to risks and has headings in its risk assessment information such as:-
• “AngloGold Ashanti faces many risks related to the development of its mining projects that
may adversely affect the company’s results or operations and profitability, the company’s
7th mentioned risk; and
• “AngloGold Ashanti faces uncertainty and risks in exploration, feasibility studies and other
project evaluation activities”, the company’s 8th mentioned risk.
The company also stresses that it “may experience unforeseen difficulties, delays or costs in
successfully implementing its business strategy and its strategy may not result in the anticipated
benefits”.
3.9 COST MANAGEMENT
E&Y notes that cost management is the risk that it regards as the 8th most important risk
influencing the mining sector as a result of the scarcity or key inputs and the high cost of
transportation – items that are increasing at a rate high above that of inflation.
Several companies of those sampled had tackled the issue of HR availability in parts of their risk
assessment write-ups, as mentioned in the earlier discussion. Others’ discussions about capital
35
allocation had stressed the management of capital budgets to ensure that costs did not balloon out
of proportion, as discussed under the risk entitled capital allocation. This risk that links with many
other types of risk categories as outlined by E&Y is also specifically mentioned in relation to,
among other items:
• Gold Fields’ 3rd most important risk, involving the erosion of margins, where the company
notes that the company needs to implement stricter cost controls.
• Northam’s discussion of its 2nd highlighted risk of financial and market risk, where it
explicitly mentions the rising cost of raw materials.
• Exxaro’s 12th most important risk which it describes as the “adverse impact of above
inflation increases on operating costs, profitability and cost of capital projects” and its 15th
most important risk of “not successfully implementing improvement project initiatives
thereby not realising revenue, cost reduction and increased operational efficiency target”.
• AngloGold Ashanti’s discussion of its 6th listed risk of inflation.
As a result of the proliferation of terms such as cost and associated concepts in the various
companies’ discussions on risk, it is difficult to compare whether the companies regard this risk as
equally important, and depending on how they rank this risk determine whether they are not
perceiving it as enough of a risk or perceiving it as too much of a risk.
One thing is certain, however, and that is that there is some disagreement even among the main
auditing firms on where this risk should lie in the relative rankings of risks appropriate to
companies. KPMG (2011), for instance, disagrees with E&Y’s ranking of cost as a risk, and place
cost escalation as its most important risk for the mining sector in its Business risks facing the
Mining Industry publication. It notes that cost escalation can be viewed as a “derivative of other
risks in the mining industry”, including commodity prices and capital costs for projects. As a result,
this risk may be being taken account in many sections where risk is being discussed.
In any event, this cross cutting nature of the risk assures that it is likely to not be a wildcard since it
is not a low-probability event by anyone’s estimations.
However, this being said, it is still a possibility that the magnitude of cost escalations or specific
cost escalations related to a single input into the mining process may be unforeseen or not planned
for. Village Main Reef CEO Bernard Swanepoel, for instance, has noted that while everyone is
talking about “cost obsession”, this obsession is not being enacted in many operations (Ryan:
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2011). This to me suggests that it is possible that this risk may yet be unanticipated or unplanned
for at an operational level, and thus it may be a wildcard at the operational level of many
companies.
3.10 INTERRUPTIONS TO SUPPLY
E&Y notes that a spate of natural and environmental disasters has so affected the mining industry
of late that the risk of interruptions to supply has moved up its list of risks affecting the mining
industry to become the 9th most important risk for the sector. The auditing firm notes that these
natural and environmental disasters have influenced all aspects of the supply chain, including the
transportation required to get companies’ products to market.
This risk is described separately to the risk of climate change, since this risk is described by E&Y
as mainly related to government instituted schemes to tax or in some way price carbon emissions.
This risk is ranked by E&Y as the 13th of the risks likely to influence the mining and metals sectors.
Only AngloGold Ashanti appears to specifically address “interruptions to supply [due to natural
disasters], and does so as a small item under risks related to its operations where it notes that
“natural phenomena, such as floods, droughts or inclement weather conditions, potentially
exacerbated by climate change”. This does not seem to suggest that this issue is addressed to the
extent that E&Y suggests that it should be.
Moreover, the other discussions on risk appear to tackle this issue in even less detail. Gold Fields’
notes, for instance, simply mention that as part of its “integrated approach to business
sustainability, our environmental, social, health and safety risks are fully integrated into the EWRM
[Enterprise Wide Risk Management] process”, and places a footnote that notes that
‘environmental’ includes “water-related and climate change risks”. The company goes on to
provide a climate change vulnerability map to illustrate the fact that it identifies and proactively
manages longer term risks, but again mentions of climate change are not to rank it as a risk to the
company but to illustrate how wide and inclusive the company’s risk assessments are.
3.11 FRAUD AND CORRUPTION
E&Y notes that fraud and corruption are growing risks for the mining industry, and the auditing firm
has increased its ranking of this as a risk from 14th in the 2010 review to 10th in the review for
2011-2012. This is because mining and metals companies are entering new political environments
in their search for mineral resources that are being depleted elsewhere in the word and are
37
increasing their exposure to jurisdictions where corporate governance is not always highly
esteemed.
Of the sampled companies, only Exxaro mentions “Fraud perpetrated resulting in quantifiable
losses”, and this it does as its 14th listed risk. It notes that this is a high impact high probability risk
that it is considering.
The other companies, if they mention fraud and corruption as a risk, do so as a preamble to their
discussion of their main risk items. Thus, Gold Fields mentions “ethics and corporate governance”
as among its risk areas in its discussion of its “Risk management assurance programme” but does
not include any item related to “ethics” among the top ten risks it includes as important for its
business. This lack of mentioning of this important risk, or lack of mentioning of it among the key
risks that they mention, suggests that some companies may not be taking sufficient cognisance of
this important risk and it may be a wildcard since an event related to fraud and corruption could
result in quantifiable losses for the company.
Exxaro, meanwhile, does mention that climate change adversely impacting on the sustainability of
its operations and this is its 7th most important risk. However, the company does not elaborate on
what it means by climate change. The reader is therefore not certain whether this risk relates to
natural and environmental disasters that are likely to affect it, or whether it is intent on reducing its
carbon footprint in anticipation of a potential carbon levy or quota limit that may be imposed on it.
The lack of explanation of this risk by Exxaro makes it difficult to ascertain whether this risk, and all
aspects of this risk, are being considered and planned for or whether some aspects of this risk are
unforeseen and unplanned for. However, the signals for the importance of this risk do not appear
to be weak, and they have received extensive media coverage, as is suggested by the fact that a
Google search on the term “climate change”, in inverted commas, on the 9th of December 2011,
produced an impressive 123,000,000 results, although these results would include all aspects of
climate change, including those aspects that relate to government regulation, which E&Y lists as a
separate risk.
3.12 CONCLUSION
Chapter 3 offers a textual analysis of the risk reports of various companies and demonstrates that:
• Exxaro, Gold Fields, AngloGold Ashanti and Northam in some cases share the estimation
of the importance of a particular risk as outlined by E&Y.
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• In other cases, the sampled companies collectively, or most often individually, suggest that
a particular risk is more important or less important than the importance ranking that is
outlined by E&Y.
• The sampled companies, most often individually rather than collectively, sometimes omit to
mention a risk that E&Y regards as important, thereby suggesting that they do not regard
that particular risk as paramount for their organisations.
• The risks that are not mentioned, or are mentioned in a way that suggests that they are not
seen as as important as indicated by E&Y, could suggest that these are wildcards or
events that may influence a company without their being planned for. Cases such as these
could suggest an almost inexplicable under-estimation of risk
• There are occasions when a disagreement with E&Y’s ranking of a particular risk could be
a correct statement of the risks that are perceived by a particular company, and their
emphasis on, or their negation of, the importance of a particular risk may be due to specific
factors, such as the commodity being mined.
• There are occasions when companies appear to deliberately mis-state the importance of a
risk. The political environment or the jurisdiction in which the company is located may play
a role in that case.
• Apparent mis-stating of a risk may also be due to the fact that the risk is covered under
various headings, that when read together suggest that the risk has being given the
cognisance that it deserves.
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CHAPTER 4
ANALYSIS OF ISSUES RELATED TO RISK REPORTING AND WI LDCARD
RISK REPORTING
4.1 INTRODUCTION
Chapter 4 is a more in depth analysis of some of the issues that had been hinted at in Chapter 3
and attempts to explain why companies might be underestimating risks or mis-stating risks. It
explores various issues including whether the web format adopted by AngloGold Ashanti, Northam,
Gold Fields and Exxaro plays any role in their reporting; how risk reporting differs from risk
assessment; whether the confidence that companies display about dealing with risks leads to a
misrepresentation of risks; whether companies are influenced by trends in reporting; and whether
risks can be ranked at all.
4.2 WEB FORMAT
The discussion of the risk assessment write-ups on a sample group of mining companies raises
the issue of how risk reporting differs from risk assessment, particularly on a web platform.
The sampled mining companies adopt different approaches to displaying their information,
although all reported on risk on their websites, possibly in compliance with the King III report, which
requires that boards should allow risk information to be accessible to stakeholders (PwC: 2011a).
Gold Fields has collapsible and expandable sections that can be opened and closed by the reader.
Its text on risk management roughly spans six printed pages. This research report could not
determine how closely this mirrored information presented in its annual report and appeared to be
a new section that is not represented in the annual report.
Northam opts for about two pages that the reader scrolls down, with a link to its annual report. The
link to the annual report allows readers to navigate the document and click on the section on the
report that describes business and the risk environment. It is clear that the website information on
risk is a modified version of that available in the annual report and it appears that the risks that are
mentioned on the website are updated versions of the information presented in the annual report.
However, it is clear that the website information on risk is roughly comparable to the risks
represented in the annual report and, while it is an updated version of the risks presented in the
annual report, is not materially shorter than the information represented in the annual report and
therefore should not be regarded as a summary of this information.
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Exxaro’s website text on risk spans approximately five pages and requires the reader to scroll
down this information to read it. There are items in the right hand panel that promise that the
reader can click on them to read more, but on the 12th December 2011 these links did not work.
However, on searching the 2010 Annual Results, the text on risk in that document and on the
website were found to be identical and are not an updated version of the risks identified in the
company’s annual results report.
AngloGold Ashanti has a risk assessment write-up on its website that is a duplicate of that
contained in its Annual Financial Statements. This spans approximately 18 pages of printed text.
The author of this research report assumed on starting the assessment of the various sample
companies that they might have condensed the information that they make available in the public
domain in their annual reports on their websites. This, however, does not appear to be the case. It
appears that the risk information available on their websites is the fullest representation of what
they share with the public in their annual reports.
However, both text in an annual report and text on a website are necessarily not as voluminous as
internal risk assessment documents and it is probable that much of the thought behind the
sampled companies risk assessments is not conveyed due to the conciseness of the mediums.
Since wildcards are likely to be considered the least material of the risks that are mentioned in
these reports, it is likely that, if anything is left out, it is likely to be these. It is thus probable that the
summary reports of internal risk assessments may not contain the depth of internal discussion that
takes place about wildcards.
Notwithstanding the size limits of the reporting medium, there are also likely to be financial issues
surrounding the assessment and reporting of risks. Although it is not inevitable, it is likely that the
bigger the firm, the more it has to spend on risk assessment and reporting. This, at least would be
my assessment of the fact that AngloGold Ashanti dedicates about 18 pages to the reporting of
risks compared to Northam’s two pages. It would also be my hunch that Northam may not have the
risk assessment resources of firms like Gold Fields, which notes that it uses service providers such
as Control Risk, Deloitte, International Mining Industry Underwriters, the World Economic Forum
Global Risk Network and Maplecroft to assist it in identifying, managing and assessing risks.
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Because the nature of the medium would allow the companies to update their risk information
regularly, the author of this research report also assumed that companies would take advantage of
this to provide investors with the most current assessment of their risks. This appears not to be the
case, with the exception of Northam, which this research report assumes has updated the risks
represented on its website, since there are items that are different to those risks represented in its
annual report. There thus does not seem to be correlation with the size of the company,
represented by its market capitalisation, and its preparedness to provide updated risk assessment
information, although since my sample of companies is so small, this cannot be reliably and
definitively concluded.
While most companies emphasise that risk assessments are done regularly, with reviews of the
key risks also being carried out regularly, with quarterly assessments and biannual reviews in the
case of Gold Fields, for instance, there appears to be a delay in updating these risks, with the
sampled companies for the most part decided to use annual risk assessment data. This suggests
that the information provided in the risk reports may not reflect the most up-to-date risks and might
not reflect the current view of the relative rankings of the various risks. This could also be
construed as being contrary to the King III Report guidelines (PwC: 2011a), which suggests that
reporting should be timely, although King III does allow the annual reporting of risk, so it does in
fact allow for what some may view as fairly dated risk assessment.
It is also anticipated that the format of reporting risks so that they are valid over the whole year
might lead some companies to be wary of stating all but the most certain of risk that could occur
over a year. Even wildcard risks that might be plausible to report on at the time of the annual report
might be avoided since it is possible that their greater uncertainty would result in there being far-
fetched when seen in the context of the span of a year.
A case in point might be discussions on financing. Depending on which date the annual report of
the various companies comes out, it is likely that they will have divergent views on the likelihood of
access to capital being a risk. Exxaro and AngloGold Ashanti mention the possibility of balance
sheet and other resource constraints and the possibility of a lack of credit availability influencing
their flexibility and the solvency of their suppliers. This appears insightful given the current
uncertainty about the global banking sector’s stability and the fact that at the time of writing this
section of the MPhil research report (December 2011) the likelihood of a regional financial crisis in
Europe is not implausible.
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Given that these risk assessments were likely written before this issue came to the fore, the risk of
access to finance was probably less likely than it is today. While Exxaro and AngloGold Ashanti’s
seeming anticipation of the unfolding of events in Europe seems uncanny now, the lack of
mentioning of this issue by the other companies makes their reports seems out of date when
viewed today, especially using a medium which allows immediate updating. However, had current
financial events not occurred, AngloGold Ashanti’s specific mention of the possibility of credit
unavailability might have seemed less insightful and a hindsight assessment of it might have
shown that the assessment was not true.
Dobler (2008:197) notes that risk assessments in many jurisdictions require some level of
verification. While this is often done through a mandatory verification process, stakeholders often
also look at forecasts later to assess their credibility. Dobler (2008:197) suggests that this may
result in an increase in the verified and credible risk reporting, but it may also result in unverified
risk information being withheld. This research report suggests that where risk reporting is only
released to the public once a year, its credibility over the span of the year becomes more
important. The research report writer would also hypothesise that it may be more difficult to report
on wildcards as a result, since only a few of them will come to pass. Some may pass the criteria of
having them being able to be verified later to assess their validity but, since wildcards by their
nature often do not come to pass and are not widely accepted by the general public as
representing a likelihood of occurring, it may represent a risk to companies to disclose them in
documents that are expected to remain valid over an extended time period.
4.3 RISK REPORTING VS. RISK ASSESSMENT
Numerous researchers have highlighted the distinction between risk reporting and risk
assessment. Lajili and Zeghal (2005:128), for instance, note the fact that there is a significant
difference between internal risk reporting that is intended to assist management and employees;
risk information that is presented to the board; and external reporting, such as the reporting that is
being discussed in this MPhil research report. They highlight the fact that these different types of
reporting practises can be informal or formal and are often characterised by information
asymmetries between management and stakeholders.
Dobler (2008:186) further elaborates on the theme of information asymmetries and notes that
managers have incentives to withhold or disclose information in public reports.
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With reference to several of the topics outlined in the previous chapter, it is interesting to note that
resource nationalism is not prioritised by the sampled companies as much as E&Y suggest that it
should be. While the writer of this research report has, in Chapter 3, suggested that the lack of
prioritisation of this risk may indicate that this is a wildcard, in relation to information asymmetry, it
should also be acknowledged that the may be an attempt (perhaps unintentional) of not upsetting
government.
This hypothesis is given credence by the fact that governments historically, and particularly in
South Africa, have been keen readers of annual reports and especially of the risks that are
represented in them. This is illustrated by the fact that Sasol was accused of “bad mouthing” South
Africa, when it noted that black empowerment equity transactions were a risk to its business as
was recent mining legislation (Battersby:2003). The incident in which the then president of the
country, Thabo Mbeki, was a lead participant and commentator, could have potentially resulted in
companies becoming more light footed around their representation of risk related to resource
nationalism and new mining legislation, and may be resulting in a diminishing of the rankings of
these risks in the reporting of mining risk factors.
All of the companies that were sampled have assets in South Africa and all will, as a result, be
dependent on the State to give them their mining and prospecting licences. It would seem, as a
result, that companies may not want to offend government, and have taken this position. This
might be more likely in cases where there is a licence pending or where government is a purchaser
of the commodity involved, such as would be the case for many of the coal mines within South
Africa that depend on the purchase of coal by State electricity utility Eskom.
However, it is also possible that companies on some level will be trying to influence government
through lobbying in their annual reports. Minister of Mineral Resources Susan Shabangu, for
instance, is well aware of how investor confidence can be affected by poor reports of the country’s
investment climate and responds publicly, trying to address issues that could negatively affect
future investment (Janse van Vuuren: 2011). As a result, it is possible that companies may be
trying to influence government policy on various issues through the court of public opinion that it
can address through their annual and other public reports.
Dobler (2008:195) also notes that reports have also been described in terms of games, and it has
been suggested that reports have been used to present unfavourable information, in this case
negative risks that are influencing the company, to competitors in the hopes of dissuading them
from investing in the sector. This motivation is countered by a desire to present private positive
44
information, some of which can potentially not be supported with evidence, to shareholders in the
hope of attracting investor attention.
In the case of trying to dissuade competitors from entering the sector or seeking to obtain rights in
a nearby area, it is likely that this motivation might result in numerous risks being mentioned and
possibly even those risks that are considered wildcards, since the volume and importance given to
these risks could influence competitors’ behaviours in entering into a sector.
In the case of trying to persuade investors to invest in a mining firm, at first glance one might
anticipate that the identification of fewer risks and the downgrading of the likelihood of them
occurring and the impact of them occurring would be the best strategy to attract investors. There is
also the strategy of showing risks that are likely to result in something positive. However, some
research now suggests that investors view greater detail in the reporting of risks in a positive light,
with a firm’s valuation going up with the finer information that is contained in the reporting of risk
(Dobler 2008:194). This would suggest that the most optimal strategy in formulating a risk
communicating strategy would be to list all known risks, describing them fully, in the hope of
conveying to shareholders that one is knowledgeable about the potential risks that one is likely to
face and will be in a position to more easily combat these risks as a result.
However, as far as wildcard reporting is concerned there could be the fear that shareholders might
believe that a company was not being realistic in its representation of risk. Many wildcards are
regarded as having not been widely accepted in the community and, if they are deemed to be
outlandish, it is likely that the investor would not have great confidence in the company that is
reporting the risk. Thus, it is perhaps a good strategy for companies to stay away from
pronouncements that are too outlandish to be accepted by the general investor.
The fact that companies are very aware of which risks are acceptable to report and which risks are
unacceptable to report is given credence by the observation that companies tend to disclose risks
in herds (Dobler 2008:193). Dobler notes that if a sufficient number of companies come to disclose
a particular risk, it is likely to be followed by the whole economy or at least the industry in which
those companies are located. This suggests that risks tend to only be foregrounded where they
have gained great acceptance in the industry as a large and, while some companies may place an
emphasis on a wildcard, it is more likely that companies will report and consider the same widely
appreciated risks. As a result, at least at a formal external reporting level, the likelihood of a
wildcard risk being reported diminishes significantly.
45
The issue of which risks are reported publicly is also likely to be affected by the information
asymmetries that occur earlier on in the risk reporting cycle , when reporting of risks is made at a
board level. It is likely that there is some skewing of risk representation to a board that is politically
connected, especially when it comes to the representation of risks such as changes in regulation
and resource nationalisation. It seems to me that it would be human nature to alter the tone of the
risk information that is conveyed to a board on which members linked to the ruling party serve. A
source who is involved in risk assessments has also attested to the fact that one company was
assured by one of its politically-connected boardmembers that their rights would not be contested.
Based on this information, the company decided that there was not a risk involved in its security of
tenure and, to its detriment, did not foresee or plan for this risk, which did eventually materialise.
Thus, the very nature of the board influencing how risks are perceived should not be
underestimated.
Besides the government or politically-connected stakeholders who read the risks involved in
mining, there are also community and labour stakeholders. It is likely that risk reporting could take
these stakeholders into account.
One would expect that labour stakeholders would be interested to hear that skills shortages were a
significant risk for a company, and potentially use statements along these lines to support above-
inflation wage demands and strike action.
One would also expect that communities would be eager to read whether companies believe that
there is any likelihood of their social licence being taken away, as well as any potential reasons for
this occurring. They might appreciate that they are being considered and they might appreciate
that issues that affect their environment, health and safety, etc., are being looked at with due
concern. However, companies would also have to be wary of disclosing such information if they
were endangering the environment, health and safety of the community in any way, since the
community could use the risk write-ups that describe this as ammunition for bargaining or for
closing down the mine, etc. The importance of considering community stakeholders in the
readership of public reports is underscored by the fact that the reader has heard from undisclosed
sources that companies are even particularly cautious about showing before-mining and after-
mining photographs in their company reports.
46
4.4 NATURE OF RISKS DISCLOSED
Much of the risk assessment research that has been carried out in the past has been carried out
on the management discussion and analysis sections of annual reports and on the notes to the
Financial Statements, although Beretta and Bozzolan (2004:267) acknowledge that in some
jurisdictions, such as Germany, risks are contained in their own section. It may be for this reason,
that many global companies report risks in a fairly narrow fashion and mainly list market and credit
related risks when they discuss risks related to their companies (Beretta and Bozzolan 2004:267).
The author of this research report would suggest that this trend towards a narrowly understood set
of risks that is reported on may obscure the importance of low probability risk reporting, and is
likely to result in fewer wildcards being reported on.
This research report has investigated companies that have dedicated sections of information
related to risk, and they tend to be the companies that have a broader conception of risk than that
related to the market or credit. They are thus not those companies that typically have notes to a
financial report, where a discussion of climate change or skills shortages may seem out of place.
They are also those companies that are more likely to discuss risks that do not relate specifically to
economic risk.
The sampled companies’ presence in South Africa, where they have been exposed to the King III
Report may also be a factor that has resulted in their broader conception of risk. King III, after all,
calls for complete risk disclosure and requires that any undue, unexpected or unusual risks or
material losses be noted (PwC: 2011a). This, to me, suggests a broad understanding of risk and
an understanding of risk that goes beyond what is typically construed as a risk, and potentially an
endorsement of the disclosure of high-impact low-probability events, i.e. wildcards. However, the
King III Report’s insistence on accurate risk disclosure might also act to decrease the likelihood of
wildcard risks being noted, since the term “accurate” suggests verifiability, and it has been noted in
the discussion that preceded this that this often could result in unverified, or potentially not widely
accepted, information being withheld.
Sections 3.7, 3.8 and 3.9 identify risks that specifically relate to financial information, i.e. to price
and currency volatility, capital allocation and cost management, so, according to what has been
discussed previously, it is possible that risk paradigms that had prioritised financial information may
be having an influence on the ranking of these items, especially where they appear to be being
ranked higher than potentially they should be.
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4.5 CONFIDENCE IN HANDLING RISKS
The King III Report also insists that “the board should ensure and that management considers and
implements appropriate risk responses” (PwC: 2011a). This confidence in their ability to manage
risks, possibly influenced by King III, comes through in all of the risk write-ups of the sampled
companies since they typically list control or mitigation measures, sometimes in greater length than
their identification of the risk, alongside the risks that they highlight.
However, this sense of being able to control risks and being able to explain them accurately and
fully may actually give investors and stakeholders a lack of a sense of how vulnerable firms are to
risks, may result in risks for which no satisfactory mitigation measure has been thought about not
being disclosed, and may result in a false sense of comfort about the company’s ability to control
its environment and identify risks.
Dobler (2008:201) discusses the possibility of having negative reports that force managers to
disclose where they are not informed about a particular risk or the extent of that risk. Clearly this is
not the approach taken by the King III Report, and it is possible that allowing negative reports
would at least force managers to acknowledge which risks are so far off their radar screen that
they have not considered them at all. Potentially, some of these might be the wildcard events that
mining companies may be ignoring.
Taleb (2007:48) notes that an attitude of learned ignorance is the first step towards honest
inquiries after the truth and that the illusion of understanding is often an obstacle towards
identifying black swans, or wildcards. However, it is unlikely that this avowal of ignorance would go
down well with investors who want to be assured that a company is prepared for any risk that it is
likely to encounter. As a result, companies are unlikely to volunteer information that presents their
not being able to control and manipulate the environment in which they operate.
The closest that one of the companies that was sampled comes to acknowledging a lack of control
over their immediate environment is the risk write up that comes from Northam. The company
refers to “constantly changing environmental laws and regulations as well as increasing community
and social obligations”. It also refers to the fact that “the mining sector in South Africa is subject to
changes in regulatory requirements”. The frequent mention of “change” and the dynamic
environment suggest a regulatory risk environment that is in flux and that needs to be adapted to.
Just how well investors respond to this type of language remains to be seen: it is possible that they
may reward Northam for its honesty and invest or avoid Northam because its future is more
48
uncertain than the future that is represented by some of its peers. However, it is certain that the
investment community and how it perceives the reporting of uncertainty in risk write-ups will
continue to influence how these write-ups are compiled. It will also be interesting to note if, as a
result of their exposure to ideas of uncertainty due to the recent financial and other shocks and a
sense that it is not possible to always be in control of one’s immediate environment, there will be a
change in the acceptance levels of investors towards risk write-ups that do not convey the
expected mastery over their environment that many mining companies’ risk assessments tend to
convey. For this, a study covering these types of reports pre and post the financial crisis period
could perhaps be instructive in understanding how uncertain events have shaped investors’
reception of shareholder-directed reports.
4.6 RANKINGS OF RISK
4.5.1. Commodity, country or mining method specific risks
Thus far, it has only been alluded to in the discussion on infrastructure (Section 3.4) that there may
be reasons that are commodity specific why one risk may apply more to one mineral producer than
another.
The same is true of risks that may be more country specific or mining method specific. Such may
be the case with secure and cost effective electricity. This E&Y (2011:30) lists this as a risk
because underdeveloped countries have not invested sufficiently in energy production, which has
resulted in a difficult production environment for those dependent of electricity and particularly for
those involved in underground mining, which requires electricity for production and for the provision
of services, such as ventilation. The auditing firm ranks this as its 11th most important risk though
and it is thus a risk that the company regards as “under the radar”.
For South African mineral producers this lower risk ranking may seem unusual. Gold Fields
mentions energy security as its 8th most important risk; Northam mentions “Infrastructural services
supply risk” as the 3rd risk heading that it discusses and deals exclusively with its security of
energy supply; and Exxaro mentions the lack of security of supply and the cost of energy as its 5th
most important risk. Only AngloGold Ashanti does not devote considerable space to noting that this
is an important issue, and only notes “electrical power interruptions” as among the many risks
faced by its operations.
While the amount of concern given to electricity supply security and cost seems out of proportion to
this risk’s ranking by E&Y, South Africa’s frequent recent spates of power interruptions as well as
its numerous tariff increases, the concern over electricity seems particularly appropriate in a South
49
African mining environment. As a result, the sampled companies rank this higher and will be
prepared for the possibilities of supply interruptions in a way that they might not have been prior to
the electricity interruptions; in that sense what might have been a wildcard that had a tremendous
impact on their businesses in the past has now been accounted for. To this extent, in a South
African mining environment, not mentioning this risk, or mentioning it in passing, may suggest that
this risk is not properly accounted for.
4.5.2. Interlinked risks
It has also been suggested previously that several risks may be so intertwined with each other, that
a ranking of one over another would be non-sensical since each implies the other to a certain
extent. Such may, for instance, be the case with interruptions in supply (caused by natural and
environmental disasters) and climate change (Section 3.10). Such may also be the case, as has
been noted, with skills scarcity, which may suggest increased costs, due to labour action, and a
likelihood of a company not being able to meet its employment equity target, due to competitive
poaching by other firms (Section 3.3).
Interlinked risks may also be the case with the risk of increased regulation. E&Y only ranks
increased regulation as its 17th most important risk, despite the fact that it ranks related concepts
much higher. For instance, it describes resource nationalisation as its most important risk, and this
is linked to increased regulation as increased regulation is likely to have to be introduced to ensure
that the State gets a greater share of the mining pie. Increased regulation is also linked to ensuring
that one has a “social licence to operate” (another of E&Y’s higher ranked risks) since the State
ensures that the health and safety of communities and workers is taken into account and the
environment is protected by introducing legislation. Northam, in particular, spends a considerable
amount of space tackling this increase in regulation, and, while this may seem peculiar given
E&Y’s low ranking of this risk, it may be perfectly justifiable given that regulations relate to many of
the risks that E&Y does identify.
The lack of noticeable linking between the risks is perhaps also a function of the fact that they
appear as a list, and would probably be better portrayed as a systems map. The list has its
advantage of making risk assessment formatters concretise specific risks, but it is possible that
some additional details are lost.
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4.5.3. Risk as identifiable and assessable
The discussion so far has also assumed uncritically that E&Y has identified the key risks that the
mining and minerals sector will face and that it is able to know unequivocally what these risks are.
The company’s qualifications to know what risks affect the sector is somehow assumed and its
superior knowledge of the mining sector over companies that are involved in mining has gone
unchallenged.
While E&Y notes that it has used discussions from its own analysts as well as discussions with
mining firms to compile this list, it does not detail which companies it surveyed or describe how it
came to its conclusions. It does not even state that its choices of the top ten risks to influence the
mining sector is a consensus view, leading one to query on what basis one should accept its view
of the nature of risk in the mining sector.
It is clear from comparing E&Y’s list with that of the sample of those in the mining sector, that there
are considerable differences of opinion on what constitutes the most important risks for those
involved in the mining sector. There are also considerable differences in opinion between the
sampled firms on the most important risks facing the mining sector or themselves in particular.
The lack of clarity on a list of the most important risks facing the mining sector is further
emphasised by the fact that a competing auditing firm has compiled its own list of risks facing the
mining sector and its list is very different in ordering and in nature. KPMG (2011) generates a list of
the top five business risks that the mining sector will face based on a survey of mining executives.
It lists cost escalation first - E&Y’s 3rd most important risk - which it follows with government
involvement in the industry, access to new projects, ability to raise capital, and labour shortages.
This research report suggest that KPMG’s “government involvement in the industry” incorporates
E&Y’s most important risk of resource nationalism, as well as its 17th most important risk
“increased regulation. As a result of KPMG’s first two risks being in E&Y’s top three list of risks, it is
likely that they are fairly comparable. However, when it comes to KPMG’s 3rd, 4th and 5th most
important risks there is some divergence in opinion especially with regards to the 3rd and 4th risks
which E&Y ranks as its 12th and 15th risks, respectively.
This lack of comparability may be partially a result of the company’s demonstrating that they are
different and that they offer an independent perspective of risk. The up and down movement of the
risks each year on each of the auditing firms’ lists may also be cynically seen to be important in
order to confirm that the risk environment is a complex one that the auditing firms need to be
51
consulted on continually. Equally cynically, this movement of risks makes the lists that are drawn
up an eagerly anticipated read, which might not be so enthusiastically expected if there were not
the dramatic shifts in which risks are among the top, which are new entrants into the list and which
risks are falling in importance.
However, it may also be that it is not so easy to perceive and capture the lists of risks that are likely
to influence a particular sector. Since the exact influence of a risk on a sector is hard to determine
even where that risk is widely regarded as important, the same may be considered to be true of
wildcards – which, by their definition, are difficult to identify as important influences on a company
in the future.
4.5.4. The importance of history
Companies that have had an experience with a particular risk tend to rank these risks higher
(Baissac, 2011). This is in evidence particularly in the risk reporting of AngloGold Ashanti, which
highlights the actual conditions that it is facing, noting that it has borrowings of ~UDS1.9bn when
discussing indebtedness, that its growth initiatives will require USD2.5bn over the next three years
in its discussion of its financing arrangements and how 2,500 staffmembers are receiving anti-
retroviral drugs when discusses the diseases, including HIV/AIDS, that it faces.
An intimate knowledge of the company could present many weak signals that could suggest
potentially a wildcard risks. Gradual changes could also be suggested and these could assist
companies to identify events that will happen with a strong likelihood and with a high impact.
Interestingly, Baissac also notes that those companies that have had experience of resource
nationalism, for instance, will also be among those that take this risk most seriously. One would
therefore expect that companies in South Africa that have experienced a re-writing of much of the
mining legislation, the introduction of mining royalties, and the proposal for increased beneficiation
requirements would take resource nationalisation more seriously, notwithstanding the political
reasons not to that were mentioned in Section 4.3.
One would also expect companies that had just come through a recession which has gripped the
world to consider this as a serious risk. Of the sampled companies, AngloGold Ashanti outlines this
risk most explicitly. The company notes that “global economic conditions could adversely affect the
profitability of AngloGold Ashanti’s operations”. It notes that this could influence supplier
insolvency, changes in its anticipated income and expenses, unforeseen cash payments into
52
pension funds due to their underperformance and, importantly, a reduced ability in its ability to
obtain finance.
The fact that “access to capital” is high on the list of risk concerns for many of the companies
sampled is potential support for the idea that these companies had experienced the difficulty of
raising capital during the recession and haven’t forgotten this lesson.
This sensitivity to this risk is understandable given the recent global financial woes, which could
continue if problems in the Euro-zone are not solved. However, the fact that E&Y sees this risk as
diminishing (reducing its ranking from 8th on its list of concerns to 12th on its list of concerns) while
various of the sampled companies suggest that this remains a risk is either due to some
misperception of the risk by E&Y or by the companies involved. In all events, it appears that many
of the mining companies sampled will not be as surprised if another financial crisis results in a
shortage of available capital.
While the global economic collapse could be seen as having been a wildcard when it happened, it
is clear that companies are prepared for another collapse of a similar nature and will not be caught
napping if such a collapse occurs once more.
4.7 CONCLUSION
Chapter 4 describes some of the subtleties that may influence risk reports and the understanding
of risk reports as presented in Chapter 3. These include:
• The format of the risk reports, which may influence their length and the ability of users to
update the risk reports in addition to being associated with a certain cost that may not be
equally well borne by all companies writing risk reports.
• Information asymmetries that are involved in risk reporting, and which may give managers
incentives to withhold or disclose information in public reports. These asymmetries may
result in companies trying to influence other roleplayers in the mining sector through their
reports.
• There being a tendency to report risks that relate to financial information.
• The possibility that global mining sector rankings, as presented by E&Y, disguise the
importance of commodity country, commodity and mining method-specific risks and that
risks may be interlinked.
53
• The possibility that rankings of risks by companies may be more of an accident of history
than a faithful representation of the risks faced by a company.
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CHAPTER 5
WILDCARDS AND LOWER PROBABILITY EVENTS
5.1 INTRODUCTION
E&Y mentions several other issues that it describes as “off the radar” and which do not make it on
the company’s top ten list of risk affecting the mining and metals sectors. These include:
• Access to secure and cost effective energy.
• Access to capital.
• Climate change concerns.
• Consolidation.
• Pipeline shrinkage, referring to the scarcity of projects that are available for investment in.
• Scarcity of water.
• Increased regulation.
• New communication vehicles for community activism.
• New technology.
Several of these receive significant attention from the sampled companies, including on the issues
of access to secure and cost effective energy (discussed further in Section 4.5.1), access to capital
(discussed further in Sections 4.5.4) and increased regulation (discussed further in Section 4.5.3).
Others of these E&Y off-the-radar risks receive less attention or even no attention by the sampled
companies, including new communication vehicles for community activism and new technology.
These could potentially be the next wildcards for companies, since they are clearly not giving these
issues the attention that E&Y suggests that they possibly should since they are included on the
auditing firm’s set of risks. The sections that follow discuss two of the “off-the-radar” risks and
some of the risks that Exxaro, Gold Fields, AngloGold Ashanti and Northam mention that E&Y
doesn’t.
5.2 NEW COMMUNICATION VEHICLES FOR COMMUNITY ACTIVI SM
E&Y describes this risk as the 18th most important risk facing the mining sector and, as such,
views it as an “off-the-radar screen risk” since it does not feature among the top ten risks that it
describes in its report on “The top 10 business risks for mining and metals”. It further notes that this
risk has fallen from being the 16th most important risk, although the auditing firm acknowledges that
public concern over the mining and metals sectors is being “played out openly on this new
55
platform”. The mining companies sampled, similarly, do not feature this as a significant risk and
even fail to mention it in their risk reports, thereby indicating that it is less than noteworthy.
However, this stance by both E&Y and the mining companies that have been sampled seems
surprising given the publicity in 2011 and early 2012 about concerted campaigns using new
communication media to topple governments and raise awareness about business practises. The
usage of new media over this time has included its use to publicise and promote political action in
the Middle East, to galvanise people against the abuses of the current economic order through the
Occupy Wall Street movement, and, at the time of writing this report, to raise awareness of working
conditions in China (The Economist, 2012).
The author of this research report believes that the omission of this important risk may result from
a certain apathy from various mining companies to new communication media. This is confirmed
by the fact that some suggest (Spicer: 2011b) that there is a significant difference in the uptake of
new media by mining companies outside of Australia and Canada and those located in Australia
and Canada, with those in Australia and Canada appearing to be early adopters of the media.
There is also a significant difference between junior mining companies and major mining
companies’ acceptance of new media, with junior mining companies being early adopters of this
medium.
For Exxaro, AngloGold Ashanti, Gold Fields and Northam it is perhaps an accident of location and
an unfamiliarity with new communication media that results in these companies not mentioning this
as a risk. The contention that there is a lack of interest in new media by these firms is reinforced by
the fact that only AngloGold Ashanti, of the companies surveyed, appears to have a presence on a
medium such as Twitter, and this seems to be reduced to its owning the user ID, since it is not an
active user on the new media platform (Spicer: 2011b).
5.3 NEW TECHNOLOGY
Another surprising issue that appears not to be taken cognisance of by Exxaro, Gold Fields,
AngloGold Ashanti or Northam is that of new technology. To be fair, even E&Y suggest that this is
not a significant risk to the industry by ranking it as the 19th of 20 risks that it outlines and by
ascribing it the title of a risk that is “off the radar screen”. Moreover, E&Y’s analysis suggests that
this risk has even fallen from the 17th most important risk faced by the mining sector to being the
19th most important risk.
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However, given that South Africa is at the forefront of deep-level gold and platinum mining, the
research report writer would have thought that Gold Fields, AngloGold Ashanti and Northam,
producers of gold and platinum, would have suggested that this is a risk that is worth considering.
This is particularly true of AngloGold Ashanti, which is spearheading moves to promote
mechanisation and automation, and is promising to have peopleless stopes (Creamer: 2011). The
inexplicable not mentioning of new technology and the importance of obtaining and making this
technology work in deep level mines can only be explained away by suggesting that those
involved in the technology development programme are not actively working together with those
involved in risk reporting and risk assessment
In a case such as this, it appears that global mining concerns have resulted in companies with
South African operations ignoring risks that are particularly prominent in the South African mining
sector.
5.4 RISKS NOT MENTIONED BY E&Y, BUT MENTIONED BY TH E SAMPLED
COMPANIES
There are issues that are not included in E&Y’s “off the radar” list but are mentioned by the
sampled companies. These include items such as negative investor perceptions of the jurisdiction
that a company invests in, the possibility that previous software versions might influencing
information security and availability or that there might be a loss of information and integrity of
data, the possibility of geological risk, the risk of delays in obtaining mining and environmental
rights, the vulnerability to operational performance that may be out of the company’s control due to
the operation being run by a contractor, the risk of the interpretation and application of accounting
literature influencing the bottom line, the difficulties involved with security and political instability,
the costs of occupational health diseases and the risk of high cost insurance premiums, among
others.
These are risks that the author of this research report believes are particularly applicable to the
mining industry. They do not reflect any real surprises, although it is surprising that E&Y does not
list them among those risk that it believes are particularly important for the mining sector. This may
suggest that E&Y can perhaps also learn from mining companies about the risks that typically
affect them, and that the auditing firm is not the sole arbiter of what should be construed as an
important risk, as has already been suggested.
57
These risks suggest that companies are exploring risks that differ from a high level overview of
what the typical risks in the mining sector should be, and suggest that there may be a break from
the “herd reporting” that has been discussed previously (Section 4.3). This bodes well for the
uncovering of wildcards, which are often not accepted by the majority of the interested roleplayers
and are by definition not reported by the “herd”. It also suggests that these low probability events,
which remain unacknowledged by many, may be wildcards.
However, even these seem a far cry from some of the Petersen’s Out of the Blue Wildcard
Catalogue (1997 quoted in Petersen et al 2009:14-16) since the sampled companies’ outlined risks
are very much tied to what has happened historically or what there is some evidence for occurring.
Petersen’s wildcards, in contrast, include:
• EARTH AND SKY
o The Earth’s Axis Shifts.
o Asteroid or Comet Hits Earth.
o Ice Cap Breaks Up.
o Gulf or Jet Stream Shifts Location Permanently.
o Global Food Shortage.
o Extraordinary West Coast Natural Disaster.
o Rapid Climate Change.
o Collapse of the World’s Fisheries.
o Major Break in Alaskan Pipeline.
• BIOMEDICAL DEVELOPMENTS
o Bacteria Become Immune to Antibiotics.
o Worldwide Epidemic.
o Foetal Sex Selection Becomes the Norm.
o Human Mutation.
o Health and Medical Breakthrough.
o Long-term Side Effects of a Medication Are Discovered.
o Human Cloning Is Perfected.
o Life Expectancy Approaches 100.
o Birth Defects Are Eliminated.
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o Collapse of the Sperm Count.
• GEOPOLITICAL AND SOCIOLOGICAL CHANGES
o Civil War in the United States.
o U.S. Economy Fails.
o No-Carbon Economy Worldwide.
o Altruism Outbreak.
o Social Breakdown in the United States.
o Israel Defeated in War.
o Collapse of the U.S. Dollar.
o Economic and/or Environmental “Criminals” Are Prosecuted.
o Rise of an American “Strong Man”.
o Stock Market Crash.
o Civil War between Soviet States Goes Nuclear.
o Major U.S. Military Unit Mutinies.
o The Growth of Religious Environmentalism.
o End of Intergenerational Solidarity.
o New Age Attitudes Blossom.
o Religious Right Political Party Gains Power.
o Mass Migrations.
o Africa Unravels.
o U.S. Government Redesigned.
o Electronic Cash Enables Tax Revolt in the United States.
o Western State Secedes from the United States.
o Illiterate, Dysfunctional New Generation.
o Collapse of the United Nations.
o Mexican Economy Fails, United States Takes Over.
o End of the Nation-state.
o Society Turns away from the Military.
• TECHNOLOGY AND INFRASTRUCTURE UPHEAVAL
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o Long-term Global Communications Disruption.
o Massive, Lengthy Disruption of National Electrical Supply.
o Energy Revolution.
o Time Travel Invented.
o Y2K: The Year 2000 Problem.
o A New Chernobyl.
o Encryption Invalidated.
o Loss of Intellectual Property Rights.
o Fuel Cells Replace Internal Combustion Engines.
o Room Temperature Superconductivity Arrives.
o Developing Nation Demonstrates Nanotech Weapon.
o Cold Fusion Embraced by Developing Country.
o Faster-than-Light Travel.
o Virtual Reality, Holography Move Information, Instead of People.
o Virtual Reality Revolutionizes Education.
o Self-Aware Machine Intelligence Is Developed.
o Technology Gets out of Hand.
o Humans Directly Interface with the Net.
o Nanotechnology Takes Off.
o Computers/Robots Think Like Humans.
• NEW THREATS AND OLD THREATS FROM NEW SOURCES
o Information War Breaks Out.
o Major Information Systems Disruption.
o Nuclear Terrorists Attack the United States.
o Terrorism Swamps Government Defences.
o Terrorism Goes Biological.
o Hackers Blackmail the Federal Reserve.
o Inner Cities Arm and Revolt.
• SPIRITUAL AND PARANORMAL
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o The Arrival of Extraterrestrials.
o The Return of the Awaited One.
o Remote Viewing Becomes Widespread.
o Life is Discovered in Other Dimensions/Realms.
o Future Prediction Becomes Standard Business.
Some of the events on Petersen’s list of wildcards are events that one could easily conceive of as
happening or have to some extent already happened, including terrorism goes biological, collapse
of the US dollar, US economy fails, mass migrations, and inner cities arm and revolt.
Petersen’s list, however, seems quite sensational and is reminiscent of attention getting
newspaper headlines, which the risks outlined by the sampled mining companies are anything
besides. Many of the risks that Petersen outlines also seem quite inconceivable, including the
arrival of extraterrestrials, time travel invented and the return of the awaited one. Never in the
author of this research report’s wildest imaginings can she ever envision a mining company’s
annual report or risk reporting documents to contain such risks.
It is evident that the risks that the sampled companies outline could be conceived of as possible by
the broader community and not nearly as outlandish although they could potentially be conceived
as wildcards due to the risks’ unacknowledged status.
5.5 CONCLUSION
Certain risks that E&Y relegates to the “off the radar screen” category are perhaps being ignored
by South African mining companies at their peril. These include the risk of new communication
media to their businesses as well as the risk of not adopting new technology to access gold and
platinum orebodies that are becoming deeper. These could be potentially seen as wildcard risks if
they are not being anticipated as worthy of consideration.
In the same way, E&Y could potentially be seen as missing some risks that are integral to the
mining sector. The risks that Exxaro, Gold Fields, AngloGold Ashanti and Northam identify that are
unmentioned by E&Y are, however, risks that are intuitively felt to be important and may not be of
the same type as the risks that some theorists are listing as wildcard risks (some of which seem
quite inconceivable).
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CHAPTER 5
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 INTRODUCTION
Chapter 5 discusses some of the main findings of the research report and makes several
recommendations for risk assessments. The findings and the recommendations relate to risks in
general as well as to wildcard risks. The chapter concludes with a discussion of further research
that could be undertaken as a follow up to this research report, and specifically highlights further
research related to wildcard risks.
5.2 SUMMARY OF MAIN FINDINGS
Some of the main findings of this research report are:
• There does not seem to be a clear definition of what would constitute a wildcard.
• Mining companies tend to report on what they perceive to be high-impact (and oftentimes
high-probability) events, rather than considering low-probability high-impact events
• In a comparison of mining company risk reports and an E&Y assessment of these risks
there are divergent assessments of what constitutes the most important risks facing the
mining industry.
• There are a number of reasons why there may be divergent assessments of what are the
most important risks facing the mining industry, including:
o Information asymmetries between the writers and readers of reports that ensure
that readers are not given the full details regarding a particular risk or are given
misleading information related to a particular risk.
o Psychological barriers to accepting particular risks.
o Structural issues that determine which risks are considered important, including the
jurisdiction in which companies are located.
o Historical factors that suggest that companies will be more aware of a particular risk
if they have encountered it before.
o The nature of the medium of risk reporting that does not allow the reporting of risks
as interlinked with each other, forces companies to report with an acceptable level
of brevity and does not require that companies update their lists of important risks
regularly enough.
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• It is suggested that wildcard risks reporting would face similar disclosure obstacles as the
reporting of risks that are considered the most important risks facing the mining industry.
• Where there is a significant discrepancy between what is commonly regarded as the most
important risks facing the mining industry and what the company perceives to be the most
important risks facing it, this could suggest that important risks are being overlooked and
these risks could represent wildcards for particular companies.
• Where companies are reporting on particular risks that their peers are not, these risks may
have been foreshadowed by weak signals, that have been picked up by some and not
others, and they may be regarded as wildcards.
• South African mining firms reporting of risks, and even risks that are not discussed by
others, does not describe many of the fairly outlandish wildcard risks that are discussed by
some theorists.
5.3 RECOMMENDATIONS
There are several recommendations that are suggested by the research report. These are
discussed below and overleaf.
5.3.1 Greater attention to wildcards
From the discussion in Section 1.4, there are several reasons why greater attention should be
invested in examining wildcards that may influence a business, including the fact that they may
have a significant influence on that business and the fact that greater transparency and awareness
about risks are being required by shareholders and legislators. To this end, it might be
advantageous for those in the mining industry to discuss these risks openly and even to join
forums such as iknow (2012), if they are not members already, to get a better sense of the weak
signals that might suggest wildcards that could potentially affect the world or particular industry
sectors.
5.3.2 The removal of information asymmetries
From the discussion in Section 4.3, it is apparent that information asymmetries reduce the
possibility that information is transferred from the risk assessor to the risk report writer and to the
reader unfiltered by political and economic considerations. While it may be wishful thinking to
suggest that complete transparency might be possible in risk reporting, this might be a noble aim to
strive towards, and may even present the possibility of an upward valuation of a company’s shares,
since investors are indicating that they prefer companies that are knowledgeable and transparent
about the risks that affect their businesses, as has been suggested in this research report.
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5.3.3 Greater coordination of risk management
It is clear from the research report that there may be different groups of people who are involved in
risk reporting and risk assessment (never mind those people at an operational level who are
charged with implementing the risk management strategy). Those that report the risks may be
performing somewhat of a public relations function, since they may also be responsible for
ensuring that an acceptable image of the company is portrayed in public reports, while those
implementing risk management strategies may not perceive the importance of risk assessments
that are often carried out in a top-down fashion. This disconnection between members of a risk
management team can result in various members not fully understanding the importance of various
risks, not including these risks in their communication to the general public and not implementing
measures that would indicate that these risks are considered important risks likely to affect a
particular business. As a result, it may be prudent to ensure that all members of a risk
management strategy team understand the risks affecting the business, including those risks that
are typically described as wildcards.
5.3.4 An improved understanding of “group think”
The nature of herd reporting is discussed in Section 4.3, where it is noted that sectors tend to
disclose risks as a herd, with only those that are accepted by all being promoted. The “group think”
surrounding these issues as well as the group reporting habits are unlikely to present anything that
truly challenges the status quo, even though some of what is presented may be mildly surprising.
Markley (2011:4-5) notes that there are several reasons why wildcard events have low credibility,
including:
• Passive disbelief, caused by no attention being given to a subject, worldviews that conflict
with consideration of a subject, a lack of dissemination of information on a subject, or not a
lack of dissemination in a convincing way.
• Active disbelief, where wildcards conflict with held beliefs.
• Disinformation, where important information related to a wildcard has been distorted.
• Taboo, where talking about a wildcard would undermine someone’s credibility.
• Censorship, where authorities limit discussion of certain wildcards.
• Disrepute, where those discussing wildcards are wary of being regarded as a prophet.
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It is important that those that are involved in risk assessment and risk reporting actively examine
their assumptions and whether their thinking has in any way be conditioned by the inputs of others.
An awareness of this “group think” phenomenon should be encouraged, as should actively
challenging belief structures and exploring alternative belief structures.
5.3.5 Exploring new presentation methods for risk a ssessments
It has been suggested in this research report that the ranking of risks in short lists, without showing
their interlinkages, is not the most appropriate way to explore the most important risks affecting the
mining sector or of showing wildcard risks that may be ignored through this means of presenting.
Baissac (2011) has suggested more innovative ways of exploring the risks related to the mining
sector, including through the stories, poems, etc. These may show more of the interconnectedness
of the risks involved in a sector and involve less of the politicised representation of risk. However,
given that these forms of risk presentation may be too novel for shareholders or those who are
familiar with traditional representations of risk, it might be advisable to suggest that risk reporting
adapts a newer but more acceptable method of presentation such as a systems map of risks,
showing their interconnections as a web and indicating a larger number of risks, some of which
may be regarded as peripheral but come to be seen as important wildcard events.
5.4 FURTHER RESEARCH
5.4.1 Fundamental questions of this research report
Going back to the assumptions that are involved in a research report of this nature, readers can
recall that some of the fundamental questions raised by this report are:
• We can know what risks (including wildcard risks) will influence the mining sector.
• We want to know what risks (including wildcard risks) influence the mining sector.
• We want to do something about the risks (including wildcard risks) that influence the mining
sector.
• We can report about the risks (including wildcard risks) that influence the mining sector.
• We want to report about the risks (including wildcard risks) that influence the mining sector.
This research report has touched on many of the aspects listed, but dealt mostly with the first point
as well as the last two points. Each of the individual assumptions merits further research in its own
right.
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5.4.2 Limitations of this research report
The author of this research report had originally anticipated the need to interview representatives
of mining companies since the author anticipated that the wildcards that may be considered by
companies may not be stated in public-domain documentation because they might be regarded as
too outlandish for investors, who may not want to invest in companies which consider all-manner of
seemingly inconceivable risks in their risk planning. However, due to time constraints, and a lack of
response from the four mining companies that the author of this research report contacted, this did
not happen.
This has limited the study significantly, and has resulted in a textual analysis of the risk reports that
are available in the public domain. Further research, perhaps including interviews from the
companies involved or perhaps including primary research from having been involved as a
participant in risk assessments, may prove to be valuable and could be a source of additional
research.
5.4.3 Exploration of wildcards and their incorporat ion into strategic planning
While this research report attempted to examine how mining companies incorporate wildcards into
their strategic planning, it would be interesting to examine what the methodology would be used to
discuss some of the more outlandish wildcards that are listed by Petersen (2009). In addition,
besides this practical aspect of how to assess wildcards of the nature suggested by Petersen, it
would be interesting to determine whether the time spent on examining these wildcards, including
the wildcard risk of extraterrestrials arriving, would be seen as a waste of shareholder money and
possibly a breach of corporate ethics.
It may be true that this list serves as a mental exercise to open up the mind to new possibilities,
even though some of Petersen’s suggested wildcards have been shown to have occurred and are
plausible. However, there are very real issues about the practicality of investigating wildcards such
as these, as well as ethical issues such as the misuse of shareholder money in investigating risks
that are in some cases quite far fetched.
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