Assessing Business Risks And Understand Management And Governance In Mining Industry – A Case Study Of Newcrest Mining Limited

Newcrest Mining Limited operations

Mining is the extraction of valuable materials, minerals or metals from the earth. The mining industry is primarily an important industry and contributor to the Australian economy. The mining industry is currently facing stiff challenges; the prominent amongst them are associated with employment, energy and environment (Trudinger, Walter and Ralph, 2013). The key aspect of so much hassle about this industry is the growth of global economies and technological advancement. One of the Australia’s most renowned mining companies is NCM (Newcrest Mining Limited). The current report has been drafted to assess the performance of company and areas where it can improvise by considering the potential risks of the industry.

NCM is the worlds most known gold mining companies. It is engaged in the activities of exploration, mine operation, mine development and sale of gold’s as well as copper/gold concentrate. It possesses a wide portfolio of mines and pipelines of Greenfield and brownfield exploration projects. It has its mines located in Australia.  

The Newcrest has a keen interest in five production provinces across four countries with a key focus on the geographical areas of Australia. The company is well established to make strong revenues by delivering high quality of gold assets on a long-term basis. The company places significant focus on strategic research and development regarding the underground mining technologies for bulk production. This investment in advanced technical instruments has helped the company in learning methods for caving mining.

The financial data’s of Newcrest Mining Limited reveals that it has strong cash flows realising higher gold prices, which offsets its copper prices and increasing costs of inputs. There has also been a significant improvement in operating cost profile (Hajkowicz, Heyenga and Moffat, 2011). The companies statutory profits of the FY16 is US$332 million by driving a production of 2.439 million ounces of gold. The Net debts have been substantially reduced by 27% over the year, which amounts to approx. US$2.1 billion. The gold production has also been at a mounting state with about 1% rise amounting to 2.4 ounces for the year. The overall financial performance of the company has been solid with all positive cash flows. This has led to enhancement in companies overall financial metrics with greater profitability and better market conditions.  

Newcrest Mining Limited is nonetheless an un-hedged gold producer having a sound balance sheet broadcasting its financial strengths connected up with strong technical capabilities and placing itself well positioned to compete effectively in the long run.

The company has been reporting its financial practices in authentic ways using Australian Accounting framework. This framework ensures that company provides fair and just information regarding its business accounts. Indeed the accounts are drafted in tune with the IFRS (International financial reporting standards), and thereafter the interpretations are as per the IAS (International Accounting Standard Board). The method of preparing financial statements is based on the historical costing method (Nag, Han and Yao, 2014). The method helps reveal an overall picture of the previous transactions and highlight the areas where cash and resources requirements are to be made for future wants.

Investment and Financing activities

The mining industry is site-specific, and Australia has a matured mining and resourceful industry built on nearly 200 years of experience. Newcrest Mining Limited is a gold mining company, which involves mining as well as processing of gold from underground and selling of the same in the world. It serves the industry with two most prominent ores, i.e., gold and coal. The demand of this ore in the industry is higher than any other production material. The global market has the epitome of value for this type of mining extraction.

This industry is highly fragmented. Australia’s mining companies are competing fiercely in this industry because of the value of these metals and minerals they have been seen to drive a significant amount of countries economy. The mining sector has been fluctuating and not stagnant as the investment in mining saw a fall of 29.9% in 2016 compared to 2015. The mining is moving away from the phase of investment and delivering increase output it is likely the possible reason for its pattern.

Nonetheless, the Mining volumes of the country in total are strong, as the sector has been transitioned into the production phase. As the production phase requires few employees than the overall investment phase. Mining output represents 6.9% of total Australia GDP (Ivanova, 2014). Mining has been ranked as the highest contributing industry to country’s GDP.

Optimization of the end-to-end supply chain is extremely important for integrating and automating the operations, marketing function and logistics. As any failure could lead to heightening risks, which could impede productivity, erode substantial profits and lead to compromising product quality. Companies striving to remain competitive must ensure that it takes key steps to optimize its supply chain from just a ‘pit’ to the point of consumption, import and export (Reeson, Measham and Hosking, 2012). The mining supply chain comprises of a complicated series of interrelated activities covering operations, transportation as well as the marketing functions. Planning, execution and budgeting of activities throughout these functions are important to ensure maximum profits and efficiency. It is challenging aspect for companies to make sound decision in this matter of concern virtually.

The metals and mining sector is among the largest industry sectors in Australia. Mining industry of Australia is intensely competitive between some key players who are competing to survive every bit of land reservoirs. There are more than 2000 companies listed on ASX, out of which 700 are companies associated with and metal and mining sector. Many of the world’s prominent resource companies along with numeral mid-tier producers as well as exploration companies exist within this industry (O’Connor, Vera-Muñoz and Chan, 2011). There are multiple companies competing for their share of the portion within the industry, and the global giants of the market are BHP Billiton and Rio Tinto. BHP Billiton and Rio Tinto are the key market leader in this field of extraction and production of natural resources. The division performance is influential on the basis of its pricing, global presence and value in terms of revenue. They represent the potential future of industry leader and have been highly capital-intensive companies. The resources and its extraction are renowned major market capitalisation.

Financial reporting practices

The mining sector is driven by substantial merits and to procure these merits it is important that the following success factors are considered by the organization:

1. As mining product is generally considered as a commodity, companies must strive to seek a cost position advantage.
2. Diversifying company on the basis of output, customer, market (export/local) and mining location (Freebairn and Quiggin, 2010).
3. Accessibility to skilled work-force and labour productivity can help in the worthy extraction of resources.
4. Technological improvement can help in increasing the efficiency of operational activities.
5. Companies must uncover their probable and proven reserves and adopt replacement strategy to enhance business performance as well as credit quality.

The mining industry is affected by following threats:

1. The production of commodity goods is affected by vulnerable gaps which are used by cybercriminals to take advantage and use the IP and other proprietary information.
2. Dependency on other probable materials
3. The capital requirement is high, and its accessibility is limited (Fleming and Measham, 2015).
4. Access to energy resource areas is typically another complicated task as a threat to resource nationalism can reduce the land areas with fruitful resources.

The ground-breaking element of Australian mining law is that all the minerals are controlled and vested in the hands of crown and commonwealth. The state and northern territory have its own regimes that govern the extraction and exploration of mineral in their respective boundaries. The primary legislative regimes, which govern mining in Australia, are:

1. Planning and Development Act 2007
2. Mineral Titles Act 2010
3. Offshore Minerals Act 2000 and Mining Act 1971.

Further, commonwealth holds constitutional powers which overrides state powers. These are a relation to exports, national defence/security, taxation, competition, employment, foreign affairs and environmental concerns (Kemp et al., 2010). It is important that Newcrest mining limited hold annual exploration and extraction license to conduct commercial mining activities. Further, also safeguarding environmental concerns as any wrong conduct could lead to heavy penalties.

According to Ho (2014), PEST is the external macro environment factors which affect the company and are beyond companies direct influence or control in the industry.

Political: the countries government places a huge impact on the operation of mining business of Newcrest Mining Limited. The Australian government policies are sturdy but not severe. It has given the possible encouragement to the company for mining gold.

Economic: Australia has a strong economy with high per capita income. It also has abundant natural resources, which is a major advantage in extracting extensive reserves. It also is a significant exporter of energy, food and resources. Thus the basic needs are fulfilled making the economy viable for the company to flourish.

Social: Since, the customer is central to the organization; this factor is the key driving factors for the organization. Australia has a rich source of tourism, and with wide popularity of the company, it serves the best suitability for its products.

Technological: Gold is not only known for social purpose but also technological purpose is sought regarding it. As this product is most ductile, malleable and highly bacteria resilient known to man. The company has already been known for its R&D projects and high expenditure on adopting best technology for optimum exploration.

As inferred by Manteghi and Zohrabi (2011), Porter’s five forces is a framework, which describes the influence of five forces on the industry. These different sources help in shape up the competition currently subsisting in the industry. The five forces impact on mining industry is:

1. The threat of substitutes: the threat of substitute is comparatively low. The substitute for gold is other precious metals like silver, diamond, platinum etc. But nonetheless, the global acceptance of gold is high. It also holds the advantage as denominated in worlds currency.
2. The threat of new entrants: the key barrier to entry in this industry is financing. All the precious metals prominent in the mining industry are highly capital intensive, so the threat to new entry is also low.
3. Power of Buyers: Buyer’s power is high in the mining industry as it serves a commodity-based product. As gold mined by one company is not in anyway different from the gold mined by another (Helms and Nixon, 2010).
4. Power of Suppliers: the prime resource a gold mine requires is a land that is available in an abundant manner across the world. The only hindrance would be government approval and environmental cautiousness. Thus this threat is moderate.
5. Competitive rivalry: there are key industries that are ultimately drivers of competition and productivity. They do not compete on price but indeed compete to procure major land. Thus, the competitiveness is intense.

Also, there are factors other than those highlighted which could affect the overall performance of the Newcrest Minings. For instance, the environmental impact of gold mining can be a major concern for the company and its country both. Gold mining is a toxic producing industry. Thus, it could bring legal penalties to company affecting their profits, and the country could be market polluted.

For competing effectively, it is important that the company possess key competent skills by training employees thus guaranteeing development. The employees require specialised skills and expert knowledge for optimum exploration and extraction of minerals from underground (Connolly and Orsmond, 2011). Acknowledging a competent base of a skilled workforce will lead to development as the proficiency can help in meeting the changing trends and development in their process of production.

Industry size and growth

Acquiring novel commodities and services can be a risky venture for companies as the extraction of the same could lead to mixed reviews either it appeals customers or nor. For instance, the commodity features can bring multiple risks towards companies regarding diminishing profit and corporate image.

The demand for gold is globalized; Newcrest Mining Limited must capitalise this opportunity and consider the prospect of expansion of the business. The business expansion can help in reaping those areas that have high potential but are yet to be explored. The exploration of such areas requires extensive research and development capabilities to assess the unfound areas.

The Newcrest Mining Limited has spread its work across different geographical areas like Indonesia, Pacific region and Asia. Each of these areas has their code of laws related to accounting and regulatory compliance (Pellegrino and Lodhia, 2012). The company is required to be aware of legal compliance and the accounting standards of different countries as ignorance could result in heavy fines. Moreover, the company also may encounter legal consequences when the method adopted by them might not be in consistency with that of other countries. This could lead to prominent legal provocations. Therefore, organization’s are advised to ensure that it meets both legal as well as permanent laws.

The effort is required to be undertaken by Newcrest to absorb the changes that are in tune with rapid developments. There are chances that these developments are not easily adjustable to current needs and can lead to heavy capital requirements. It is thus advisable for companies operating in mining industries are having stable financial balances to adapt to changing trends as and when required.

Information technology is a necessity in current business environment. The mining industry may or may not be equipped to new technologies or software’s, but nevertheless, it is still important to update to them, as it will help in meeting the current operation of business more aesthetically. Indeed this will require the organization to gather both times as well as money (Hosseinzadeh, et al., 2016).

Strategies are mere end goals to an organization. the strategies serve as a guideline to an organization assisting them in planning to procure long-term goals. With the constant industrial changes, business is required to remain abreast of all knowledge to upkeep their corporate standing. The current inclusion of accounting standard IFRS 9 is a measure for business seeking to meet the forward requirements of the business. these changes are a risk to business as it hampers current working but the same is required to comply as an impending priority.

Evaluating these financial ratios could make a broad outlook of the company. It can be seen that these ratios state that the growth has been fluctuating as there been an increment in efficiency ratios and a decrease in solvency ration which turns out as a good prospect for further growth and diversification.

Through deeper investigation of annual reports, it has been observed that the communication system is interpersonal, well-defined consisting of both oral as well as the written mode of transferring information. The company encourages both formal and informal communication across their divisions (Basu et al., 2015).

Industry supply chain

For procuring esteem level of competency, employees are given specialised training, which, surpasses their abilities and skills to handle problems. It helps it in performing superior roles and adapts to cross-functional jobs to perform multiple tasks. Moreover, employees are offered with unrestricted opportunities to deliver exceptional ideas and establish a competitive edge.

Newcrest adopts a code of conduct, which is applicable to companies directors, employees and officers. In addition to this, Newcrest also has a Speak out standard and service, which though is confidential, independent, and anonymous it turns out to be a way for raising concerns of employees, suppliers, contractors and customers towards inadequate and unethical behaviour leading negative consequences (Darling, 2011). Supervision of risk management practices, as well as internal controls,  are key responsibilities of the board.

The Newcrest leaders adopt participative leadership style to encourage their employees and have their verdict on substantial matters. The company nevertheless sustain a positive environment towards dealing with business uncertainties and adoption of creative ideas to handle probable risks.

The company has a hierarchical structure where employees are placed at the varied level, and there is a clarification of roles and authorities. There is clarity in communication and flow of information. Due to the coordinated structure and actions, the employees are competent to fulfil their responsibilities and are accountable to their superiors.

The company has enabled employees to adopt flexible working practices that are supporting a range of personal and professional circumstances. It has NewSafe policy wherein organization has created a safe environment for employees resulting in the development of a strong, safe culture in the company (Owen and Kemp, 2013). It has fair policies framed, which bound the employees towards the organization, and the company recruits only competent employees. Considerable wages are provided by the organization with clear disclosure of job entitlement. The work policies of the organization are flexible.

Conclusion

The current report proclaims that the state of the mining industry in Australia is at its peak there are a lot of companies who are willing to explore the mines of the country space. Newcrest has been successful at establishing its base and sustaining a considerable share of market nonetheless competing with some major giants. It is important that the company is abreast of the risks associated with this industry like political risks, inflation hike etc. can have impending effects on the company.

Reference

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