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Mine Project Risk Management

J A Jones1

ABSTRACT
Risk management has become an essential tool for mining companies to ensure their projects
are well-managed and profit expectations are achieved. Risk management has also become a
mandatory corporate governance requirement in Australia for publicly listed companies and
equally important to attract investors.
This paper provides a brief overview of the essential tools needed to implement a practical
risk management framework to comply with the internationally recognised ISO 31000:2009 risk
management-principles and guidelines from the perspective of small or soon to be producing
mining companies.
To successfully deal with the unknown and to manage the opportunities and risks involved with
a mining project requires a clear understanding of the basic risk management principles. These
include how to develop a project risk register, how to develop a project risk treatment plan and
how to manage and monitor project risks to take full advantage of the opportunities presented.
The first step is to identify and fully appreciate the risks that face a mining project. There are
many risk identification methods that can be used including checklists, brainstorming and hazard
and operability (HAZOP) studies. These often lead to a telephone book full of risks which are near
to impossible to manage. A risk library specifically designed for mining projects containing no
more than 100 risks will cover the major showstoppers, is practical and can be readily implemented
and successfully managed.
A risk framework also needs to be established which is compatible with the company’s structure
and objectives. Once each risk has been assessed in regard to consequence and likelihood and the
risk control systems are in place they need to be assigned to the responsible manager. The extreme
or high risks will require a risk treatment plan to be developed. Risks will change during the life
cycle of a mining project. Hence, a reliable monitoring system is also required for compliance.

INTRODUCTION
All successful mine projects to various degrees have followed At promotional presentations attended by the author,
risk management principles. In particular, for the junior every mine project presentation has provided what can only
miners there are many obstacles to overcome in order to take be described as an unbelievable opportunity to invest in a
advantage of opportunities as they present themselves in winning mine project. All the major concerns have been fully
the resource sector. The initial strategic risks which need to addressed including proven Reserves, power requirements,
be addressed include firstly obtaining sufficient investment process equipment, transport, shipping and the customers are
all lined up. All that is required are some astute investors!
funds, keeping abreast of political risk or government
changes of policy, and new technology which may provide a But for the truly astute investor the question remains ‘what
marketing edge. risk management systems are in place to address the plethora
of risks which face every mining project, such as compliance,
Mine projects commence with the discovery and initial operational and environmental risks?’ This is where good
assessment of a potentially viable resource whether iron risk management principles can be used to distinguish a well
ore, gold, coal, coal seam gas, natural gas or other valuable managed project above the many other mining opportunities
resource. The next step is to define the resource with a drilling which are also vying for investment funds.
program and to quantify the resource with an estimate that Risk management is also a mandatory requirement of the
can be publicly reported in compliance with the JORC Code. ASX Listing Rules to demonstrate good corporate governance.
Assuming initial seed capital can be obtained, the project may
proceed to the developmental stage. Often in the case of new CORPORATE GOVERNANCE
miners preparation for an Initial Public Offering (IPO) on the Today corporate governance drives everything and is the
stock market will also be required. However, investors have responsibility of the board of directors (Robinson, 2006). Due
become more and more risk savvy and this is where mine diligence and compliance audits today have become much
project risk management can assist to raise investment funds more rigorous in regard to putting risk management systems
by addressing uncertainty and allying the fears of potential under the spotlight, cutting through previously accepted
investors. generic attempts.

1. MAusIMM, Senior Consultant, RiskTech Pty Limited, PO Box 3100, Rhodes NSW 2138. Email: jjones@risktech.com.au

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J A JONES

To implement good risk management is not that difficult important and should involve all employees in regard to their
and doing the job correctly can be a lot easier and more risk management responsibilities.
beneficial than glossing over, especially for junior miners Risk management is best integrated into organisational
who are seeking to raise investment capital. This starts with processes to simply become the way things are done. This
an understanding of the basic principles. has proven to be the best methodology to implement risk
management procedures. Regular monitoring and review
Risk management principles of risk management metrics or performance indicators will
The Organisation for Economics Cooperation and keep the mine project on track and provide continual risk
Development (OECD) Principles of Corporate Governance improvement.
state ‘The corporate governance structure specifies the The Victorian Government ‘Investment Life Cycle
distribution of rights and responsibilities among different Guidelines’ #2 Project Risk Management Guideline provides
participants in the company such as the board, management, a good definition of project risk management as follows:
shareholders and other stakeholders it spells out the rules ‘Project risk management is the culture, processes and
and procedures for making decisions on corporate affairs by structures, adopted by an organisation, directed towards the
doing this it also provides the structure through which the effective management of risk in projects’.
company objectives are set, and the means of attaining those As with all risk management, mine project risk management
objectives and monit- oring performance.’ seeks to identify, prevent, contain and reduce negative impacts
The ASX Corporate Governance Principles and Recomm- and to maximise opportunities and positive outcomes.
endations, second edition, 2007 (Australian Securities
Exchange, 2007), provides guidelines for policies and Risk management principles and ISO 31000
procedures to ensure all companies provide good governance The international risk management standard ISO 31000:2009
and peace of mind for investors. In particular, the requirement Risk management – Principles and guidelines supersedes
of ‘Principle 7 – Recognise and Manage Risk’ for listed the pioneering Australian Standard AS/NZS 4360:2004:
companies provides broad guidelines to ensure uncertainty is Risk management. However, most of the fundamental risk
addressed with appropriate risk management systems. management principles have been retained.
Annual reports for mining companies under the section ISO 31000 contains 11 major principles for managing risk.
for risk management often contain similar motherhood These require that risk management should:
statements which provide very little detail. They simply state 1. create value … (above all else risk management should
that many risks are controlled by the board’s risk manage- provide business added value)
ment committee. It would appear that the risk management 2. be an integral part of the organisational processes
committee must be very busy which leads to the conclusion
3. be part of the decision making process
that the directors are not fully aware of their onerous
4. explicitly address uncertainty
responsibilities.
5. be systematic, structured and timely
All directors and officers have a ‘duty of care’ to act in
6. be based on the best available information
the best interests of the total organisation and a fiduciary
7. be tailored to suit the company structure
responsibility on behalf of the organisation’s shareholders and
other key stakeholders to protect their interests. In Australia, 8. include the human and cultural factors of an organisation
class actions and litigation by disgruntled shareholders are 9. should be transparent and inclusive
becoming more commonplace and directors can be taken to 10. should be dynamic, iterative and responsive to change
task to demonstrate how they have acted to provide good 11. should facilitate continual improvement.
governance including ASX Principle 7 in regard to risk The ISO 31000 risk management process connects the
management. essential risk management elements together including,
The directors of a junior mining company are often literally establishing the context, to identify and analyse risks, to
at the coalface. For junior miners, it is not uncommon for most evaluate and prioritise the risks and to treat the risks. Each
of the directors to have an active role as part of the executive step requires monitoring and review as well as good commun-
ication and consulting.
team and to be involved with the initial start-up of a mine
project. Director’s activities are likely to include everything
from raising funds, establishing key customer agreements to PROJECT RISK MANAGEMENT
negotiating with the government and port authorities which Like reading most standards, project teams and managers can
involves considerable responsibility for which they can be still be left wondering what is required and how to put this
held accountable. into practice.
Before embarking on communicating and consulting, a
A practical risk management framework stakeholder analysis should be conducted to determine with
With a number of executive directors, the establishment of a whom to communicate and consult and what it is that should
practical risk management framework can actually be more be communicated. The preferred way to establish the context
easily established. In any case, it is essential to obtain a mandate and to identify the broad risks is to conduct a SWOT analysis.
and commitment from the board for risk management to be A simple combination of consequence and likelihood can be
successfully implemented. It will be the CEO’s responsibility used to identify the major show stoppers and to remove the
to establish a risk management policy and procedures. obvious immaterial risks.
Accountability and responsibility should be allocated to
responsible managers as part of their job descriptions and The project risk management register
assessed as part of their performance appraisals. The comp- To ensure a meaningful risk brain storming session, the use
any secretary will normally have the responsibility to of a risk library with no more than 100 risks is recommended
establish external communications such as announcements to so that immaterial risks can be quickly filtered out. Each risk
the stock exchange. Internal communication systems are also from the risk library plus other project specific risks which are

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MINE PROJECT RISK MANAGEMENT

considered to require attention are analysed in regard to their risk rating and the manager who is assigned responsibility
consequence and likelihood. This enables the creation of a risk for each risk. The level of management required is clearly
register for the risks which are considered significant. The risk identified by the risk matrix shown above. The risk register
register should contain a description of each risk description will quickly highlight which risks require attention. Clearly
or scenario, a summary of the controls and the risk rating the risks which rate extreme or high need to be addressed or
assigned. treated to reduce the risk where possible.
The process should not be overly complicated. For most
small to medium sized mine projects, it should be possible to The project risk management treatment plan
prepare the initial risk register within two to three days using Generally risks will have standard control tasks which can
a mine risk library. Finally, risks will need to be monitored be evaluated. This will help determine what risk treatment
and reviewed on a regular weekly or monthly basis. It is will be required. Risk treatment may involve regular sign off
recommended that a software system be used to automate the for compliance risk exposures, risk transfer with insurance
monitoring and review process. for insurable risks or risk control programs to mitigate the
impact of risk by reducing its likelihood or consequence. Risk
There are a myriad of suitable risk management programs
treatment can also include risk avoidance such as by change of
available which include the ability to send out regular emails
mine methodology or by contracting out high risk operations.
to the responsible managers for each risk. Most managers
would contend that they receive too many emails! Hence, A risk mitigation strategy is often developed using expert
the email response required should simply be a tick the box risk consultants to assist companies who do not have the
if the risk is in compliance or under control, a brief update of in-house expertise. However, it is important that the mine
progress for required actions or a request for help if needed. project team remains actively involved.
It is important that a mechanism to allow for requests for help The risk treatment plan is similar to the risk register but
is included as risks may escalate as the project progresses and will also include the planned risk treatment action and
require a higher level of management to then be involved. the risk rating which will apply once the risk treatment is
The two main risk criteria used for prioritising risk are applied. It is not always possible to reduce the risk rating
consequence and likelihood, ie how severe the consequence despite the implementation of good controls. However, the
of the risk will be and how likely it is for the risk to occur. acknowledgement and treatment of risk at the appropriate
In this paper five levels of consequence are used, namely level is a necessary requirement for good governance.
insignificant, minor, moderate, major or catastrophic and for
likelihood rare, unlikely, possible, likely and almost certain. Insurance
An alternative to using descriptors is simply to number the
There are insurance policies available to cover property risk
five levels 1 to 5. The simple product of consequence and
exposures such as a contract works and plant and machinery,
likelihood provides the risk rating shown below, which again
business interruption risk including contingent business
can be numerical (one to 25). This results in a risk rating table
or risk matrix. interruption and advanced profits, liability exposures
including public liability for injury or property damage,
An example risk matrix (the product of risk consequence directors and officers cover, environmental impairment
and likelihood) is shown in Table 1 which is a standard five by
and professional indemnity. Policies are also available for
five risk matrix based on ISO 31000 in which five risk ratings
goods in transit and of course for company employees with
or rankings are shown:
workers compensation which is compulsory. Companies can
• very low (1 - 3): these risks would not require special also obtain insurance protection to cover legal expenses for
attention but could change unacceptable employment practices such as discrimination or
• low (4 - 9): these risks would normally be managed by harassment.
operational procedures
• medium (7 - 11): these risks would require management Isn’t insurance enough?
attention Experienced risk management professionals are probably
• high (12 - 19): these risks would be a senior management already well aware that unfortunately insurance doesn’t
concern cover everything and loss of reputation, poor management
• extreme (20 - 25): these risks would be a CEO/board level decisions, change in market conditions, sovereign risk or
responsibility. breaking the law are uninsurable. Insurance policies also
The mine project risk register should be extended to include include a considerable amount of fine print with a myriad
a column for risk description or a risk example, the current of exclusions as well as the policy limit, standard sublimits
risk controls, the consequence level, the likelihood level, the and the excess. Insurance does not guarantee that any mine

TABLE 1
Example five by five risk matrix.

Likelihood
Rare – 1 Unlikely – 2 Possible – 3 Likely – 4 Almost certain – 5
Insignificant – 1 Very low Very low Very low Low Low
Minor – 2 Very low Low Low Medium Medium
Consequence
Moderate – 3 Very low Low Medium High High
Major – 4 Low Medium High High Extreme
Catastrophic – 5 Low Medium High Extreme Extreme

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J A JONES

project will achieve its profit objectives. At best insurance stakeholders in a project can have that a mine project will be
may provide some compensation. successful. Australia bears witness to many successful mine
In addition, there are a number of insurance traps in regard operations; indeed some of the largest and most successful
to risk treatment. Management teams need to fully understand resource companies in the world have originated in Australia.
what and who is covered by the insurance policy as well as Compliance with best practice guidelines for corporate
the policy exclusions. They then need to ensure provision of governance can certainly mitigate strategic and financial risks.
full disclosure of all material facts to the insurer and to select At the coalface, so to speak risk control or risk mitigation
appropriate policy limits. A contract works policy may be procedures include occupational health and safety training,
provided for different elements of the mine project such as fire protection systems, environmental safety management
construction of the processing plant. It is important that the and for companies to enthusiastically satisfy all mine safety
company or principal be listed as a named insured on any regulations. Risk mitigation procedures also include disaster
policy arranged by the contractor and it is preferable to have recovery plans for computer systems.
all insurance policies arranged by the company’s professional
Essentially all risk mitigation strategies are designed to
insurance broker.
minimise or reduce the likelihood or consequence of risk.
As mentioned previously, all directors and officers of a However, at the end of the day there will always be some risk
public company have an onerous duty of care to always act in which must be accepted.
good faith and in the best interests of the total organisation and
to act with due care and diligence, and within their various Risk identification during the operational
codes of ethics. They have a duty of care not to improperly phase of mine projects
use their position or information to gain personal advantage
As mine projects go through the transition from the
such as by insider trading or awarding favourable business
developmental to the operational phase so do the risks
contracts for a director’s gain. They also have a fiduciary
responsibility or trusteeship to ensure that the company involved. Some risk will also increase in significance such as
does not trade whilst insolvent. Severe penalties including a operational risks and others diminish for example strategic
jail sentence can apply. Directors and officers insurance may risks. When identifying risks as the project evolves, it is a
assist with legal expenses but not the penalties imposed for good practice to consider the critical activities for the mine
deliberate or unlawful acts. project.
However, insurance will always be an important consider- Critical mine project activities include but are not limited to
ation for risk treatment, but it is not the only option to the following:
consider. An insurance broker who specialises in the mining • administration (external communications, regulatory
sector is recommended for mine projects. compliance)
• financial control (reporting to shareholders, ASX, accounts
Contractual protection payable)
Any contract with another party in itself creates a vicarious • marketing and sales
liability and ‘duty of care’ cannot be contracted out. Not • IT and communications
only are company officers responsible to fulfill obligations • resource development (exploration, JORC statements)
under contract, they can also be assuming the legal liability
• mine planning and development
for others. In particular, care needs to be taken in regard to
• construction (mine infrastructure, access roads)
indemnity clauses and hold harmless clauses. Where contracts
are prepared by others wherever possible all hold harmless • utilities (power supplies, water supplies)
and indemnity clauses should be removed from the contract. • drilling and blasting operations
• mining operations (in-house staff or contract miners)
Other traps with contractual wordings that should be
avoided include the following: • loading and haulage (fleet purchase or contractors)
• primary crushing operations
• ‘acts of omission’ – preferably amend the words ‘any act
• conveyor transfer (run-of-mine (RoM), crushed ore,
or omission’ to ‘any negligent or willful act of omission’
concentrate)
• ‘indirectly caused’ – delete ‘or indirectly’ from the phrase
• secondary crushing operations
‘directly or indirectly caused by’
• grinding circuit (semi-autogenous grinding, ball mills)
• ‘contributory negligence’ – in regard to contributory
negligence, add the words ‘except to the extent that such • processing operations (metallurgical requirements)
loss is attributable to the negligence of the company, its • tailings disposal (environmental management)
employees, servants and agents’. • maintenance workshops (fuel supplies, re-fuelling
It is strongly recommended that all contracts be reviewed by facilities)
a legal professional specialising in contract law to minimise • storage facilities (warehouse, supply chain
contractual risk. • campsite facilities (fly-in, fly-out)
When it comes to engaging contractors or subcontractors • mine rehabilitation.
to assist with our mine project, it is vital that only contractors
who are competent and have their own appropriate insurance
Business continuity planning
in place are selected. Otherwise, the company may find itself Apart from disaster recovery plans for computer systems,
responsible for contractor mistakes or for any losses caused little consideration is generally given to business continuity
by their negligence due to their contractual relationship with planning (BCP) for mine projects. When a business impact
them. analysis is conducted for the critical mine project activities
listed above, it is clear that a major loss would have a severe
Risk control procedures financial impact on the company and reflect poorly on the
There is no insurance available or contractual guarantee that company’s reputation.
can remove all uncertainty to ensure that a mine investment Mining software programs to maximise mine production
will provide a handsome return. However, the more risk have been successfully implemented for many years. Similarly
or uncertainty can be addressed, the more confidence all online BCP products are available which can be used as an

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integral part of the company’s risk treatment strategy, in TABLE 2


particular for risks which need to be accepted. Example of strategic risks from the mine risk library.
A PRACTICAL MINE RISK LIBRARY Strategic risks Drivers/examples
All mine projects are subject to a large number of generic Investment funds Failure to attract investors, or maintain investor
risks. This lends itself to the development of a practical mine confidence
risk library. The risks are divided into the main categories of
risk as follows: JV alliance Failure of strategic alliance partner
• strategic risks Directors and officers Failure to comply with ASX rules could result in
• operational risks de-listing
• financial risks Reputation Enhance or damage reputation
• compliance risks Market Market conditions for product may improve or decline
• environment risks
Mergers and acquisitions M&A due diligence process could reveal inherent or
• supply chain risks
patent defects
• human resources risks
• health and safety risks Competition Increased competition could increase costs or reduce
• assets or property risks. market price/conditions
Table 2 provides an example is of strategic risks. Technology New technology could provide marketing edge
A similar list is developed for each category of risk with Political Government policy changes could result in increased
about eight to ten risks each, to make up our risk library. charges or benefits

TABLE 3
Example mine project risk register.

Mine project risk register


Risk # Strategic risk Controls Consequence Likelihood Risk rating Responsible manager
1 Adequate funds Investor/bank equity Catastrophe Likely Extreme Board
2 Alliance partners Contractual Major Possible High CEO
3 Mergers and acquisition Due diligence Major Unlikely Medium CFO
4 Reputation Practices and procedures Moderate Possible Medium HR
5 Market Advance contracts Moderate Possible Medium CEO
6 Economy Research advisors Moderate Unlikely Low CEO
7 Competition Cost control Moderate Possible Medium CFO
8 Technology Engineering Minor Possible Medium Eng
9 Political Lobby groups Major Possible High CEO
Risk # Operational risk Controls Consequence Likelihood Risk rating Responsible manager
10 Contractual Audits Major Possible High COO
11 Assets Fire protection Major Unlikely Medium Eng
12 Contractors Induction process Moderate Possible Medium OHS
13 Vicarious liability Insurance checks Major Unlikely Medium OHS
14 Professional indemnity Training Moderate Unlikely Low Eng
15 JORC error Peer reviews Major Possible High COO
16 Mining loss Competent manager Major Possible High CEO
17 Flood/storm Emergency procedures Major Unlikely Medium OHS
Risk # Financial risk Controls Consequence Likelihood Risk rating Responsible manager
18 Liquidity Accounting procedures Major Unlikely High CFO
19 Contingent BI Insurance/BCP Major Possible High CFO
20 Cont Liabilities Insurance/accounting procedures Moderate Possible Medium Accounts
21 Counterparty debt Insurance/accounting procedures Moderate Possible Medium Accounts
22 Debtors Accounting procedures Moderate Possible Medium Accounts
23 Commodity price Advance sales contract Moderate Possible Medium Accounts
24 Cash flow Accounting procedures Moderate Possible Medium Accounts
25 Interest rates Fixed interest contracts Moderate Possible Medium Accounts
26 Forex Local currency contracts Moderate Possible Medium Accounts

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J A JONES

TABLE 4
Example risk treatment plan.

Risk # Operational risk Controls Risk rating Recommendations (example only) New rating Responsible
manager
10 Contractual Audits High Consider liquidated damages and insurance Medium COO
11 Assets Fire protection Medium Insurance and fire protection Medium Eng
12 Contractors Induction procedures Medium Audit contractor OH&S procedures Medium OHS
13 Vicarious liability Insurance checks Medium Maintain copies of current insurance Medium OHS
14 Professional indemnity Training Low No further action Low Eng
15 JORC error Peer reviews High Ensure material facts communicated High COO
16 Mining loss Competent managers High Mining consultants to review Medium CEO
17 Flood/storm Emergency Procedures Medium Regular training Medium OHS
Risk # Financial risk Controls Risk rating Recommendations (example only) New rating Responsible
manager
18 Liquidity Accounting procedures High Review authorised limits Medium CFO
19 Contingent BI Insurance/BCP High Develop BC plans Medium CFO
20 Contingent liabilities Insurance/accounting procedures Medium Contractual reviews and credit checks Medium Accounts
21 Counterparty debt Insurance/accounting procedures Medium Credit checks Medium Accounts
22 Debtors Accounting procedures Medium Credit checks and regular invoicing FU procedures Medium Accounts
23 Commodity price Advance sales contract Medium Market research Medium Accounts
24 Cash flow Accounting procedures Medium Regular bank reconciliations Medium Accounts
25 Interest rates Fixed interest Medium Minimise exposure Medium Accounts
26 Forex Local currency contracts Medium Hedging policy Medium Accounts

Risk analysis Many venture or junior mining companies remain unaware


of their risk management obligations. Failure to have
Using the risk library, a risk brain storming workshop is then appropriate risk management systems in place is a breach of
conducted with senior managers who are responsible for the corporate governance compliance and can well leave directors
critical activities to analyse each risk in terms of likelihood exposed to litigation and class actions.
and consequence. The risk matrix table (Table 1) enables a risk
This paper outlines a basic sound approach to implement
rating to be assigned and the development of a risk register
risk management for mine projects which will help to
and risk treatment plan demonstrate good corporate governance. Risk management is
An example mine project risk register is shown in Table 3 not only necessary for good management but will help attract
and an example risk treatment plan in Table 4. investors and ensure a successful and rewarding mine project.

REFERENCES
CONCLUSION Australian Securities Exchange (ASX), 2007. Corporate governance
Today the mining sector is faced with more risk than ever principles and recommendations, second edition corporate
governance guidelines.
before with major capital expansion projects, national OH&S
legislation, increasing environmental concerns such as public Australian Securities Exchange (ASX), 2011. Listing rules, guidance
fears about groundwater and political risk. This all works notes and waivers.
together to increase the onerous responsibility placed on the ISO 31000:2009, 2009. Risk management – Principles and guidelines.
board of directors and company officers’ duty of care with the OECD, 2004. Principles of corporate governance.
prospect of harsh penalties or litigation. Robinson, G, 2006. Risk Thinkers Guide, 174 p (Brolga Publishing Pty
Mining executives can no longer afford to simply pay lip Ltd).
service to risk management. It is also increasingly more The Victorian Government Department of Treasury and Finance,
difficult for the junior miners to attract investment capital. 2009. Investment life cycle guidelines, number 2: project risk
management guideline.

122 PROJECT EVALUATION CONFERENCE / MELBOURNE, VIC, 24 - 25 MAY 2012

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