Winning. Through Better Perspective.

Sharpening Mining Business Acumen

Training the miners
Sharpening mining business acumen

Risk Management in
Mining

1 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Political Risks.
Political Risk & Mining - Common themes and issues

 Mining law (certainty and clarity)

– title, land ownership, permits and licences

 Environmental
– compliance with international standards
– community impact and acceptance

 Social & Community

– In-migration and displacement/resettlement
– Country/cultural issues
– Project/company as „de-facto government‟ (social infrastructure
etc.)
 Illegal mining
– environmental, health and safety, violent conflict, corruption, reputation

 Corruption
– undermines rule of law, commercial/contractual efficiency

Marsh 3
Political Risk Insurance - Basic Structural Elements

 Confiscation, Expropriation, Nationalization (CEN)

– Deprivation, Selective Discrimination, Forced Divestiture, Forced
Abandonment, Embargo & Export Cancellation
 Political Violence
– War & Civil War, Strikes, Riots & Civil Commotion, Sabotage & Terrorism
 Currency Inconvertibility & Exchange Transfer Blockage
 Breach of Contract / Non Honouring of Obligation
– Sovereign / Public obligors or counterparties (e.g. non-payment, non-
delivery, etc.)
 Contract Frustration
– Inability to import/export
– Government act

Marsh 4
Managing Political Risk

Rule 1: Good, commercial, common sense!

 Due diligence

 Partners (local or other)

– choose wisely

 Advisors
– an experienced team adds credibility & capability

 Government and community relations

 Plan for the long term (beyond closure) and communicate

Marsh 5
 Mitigating Political Risk - Political Risk Insurance – Project
Coverage

Insurer

PRI Coverage
Foreign
International
Investor /
Bank
Sponsor
 Capital  Corporate & Project Loans
 Dividends  Principal
 Shareholder loans  Hedging & derivatives
 Invested & Interest
 Other assets Capital etc

International Market
Emerging Market
Foreign
Country
Mine

Marsh 6
Mitigating Political Risk - Political Risk Insurance –
Contractual Exposures

Bank / Surety
Provider

Performance, Maintenance, etc Bond

Insurer

“Unfair” Call
International
Contractor

Payments
PRI
Coverage EPC & Maintenance
Agreement

International Market
Emerging Market
State Co.
Power
Company

Marsh 7
Geo-technical Risks
Geo-technical risk

9 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Other geo-technical risks

• Improper mine planning

• Inappropriate selection of equipment
• Poor haul road plan
• Inappropriate waste dump location and design
• Hydrological errors
• Unexpected quality

10 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Price & Financial Risks
Inputs Price Risk (IPR)

 Any business which gets affected due to change in price of its inputs/
raw material has an IPR.

 IPR can squeeze profit margins or put pressure on Selling Price of

finished product.

Marsh 12
 How to Avoid IPR?

 Bulk Purchase
– Increase storage and handling cost
– Increase interest cost/ opportunity cost

 Investing in Upstream activities

 Hedging

Marsh 13
Hedging

 Off-setting an existing or anticipated price risk in the business by

taking opposite position on exchanges.
 A hedge transaction is designed to protect the normal business
margins/ profits from adverse price fluctuations
 A perfect hedge eliminates speculative profit/ loss from Business

Marsh 14
Currency Risk

 Systematic or Market Risk

 Currency, Interest Rate & Capital Market Risk
 Transaction Exposure
 Translation Exposure
 Operating/Economic exposure
 Settlement Risk

15
Marsh 15
Market Risk; Impact of Liberalization

 Market Volatility & Market Risk

 Liberalization and Globalization of Financial Market
 Integration of the Market Segments
 Forex Market to Money Market to Capital Market; Long Term Bond
Issue by FIs
 Asset Liability Mismatch & Risk

16
Marsh 16
Futures & Forwards

• Financial Futures is a Security trading in the Futures Exchange.

• Futures are securities (like Bonds) while Forwards are agreements (like loans).

• So, Futures have standardized (by Futures Exchange) features. They have
given face values; given periods of maturity; transparent costing.

• On the other hand, Forward contracts (being like loans) are negotiable and
tailor-made, and their costing is not transparent.

17 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Options

• A call option is an option to buy a certain asset by a

certain date for a certain price (the strike price)
• A put is an option to sell a certain asset by a certain
date for a certain price (the strike price)
• A European option can be exercised only at the end of
its life
• An American option can be exercised at any time

18 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Operational Risk – Enterprise
Asset Management.
Enterprise Asset Management is Prudent Maintenance

• Business case for EAM is for three objectives:

– Cost reduction per unit output
– Increased output and productivity
Risk reduction through improved safety and environment compliance

• Maintenance preserves the functions of the physical assets

• Maintenance impacts all areas of business – safety, environment,
quality, customer satisfaction, energy efficiency, availability and costs.

20 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Reality of Failure

F – The Reverse J
Curve
E – Random failure
D – A sharp increase
in probability of failure
settling at random
failure
C – Steady increase in
probability of failure
B – The Traditional
View
A – The Bathtub Curve

21 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Function Types

• Two Types of Functions:

– Primary Function
– Secondary Function

• Primary function of a gearbox is „to transfer power‟ and secondary function is „to
contain oil‟
– A Safety Officer says that it has failed when a leak causes pools of oil to form on the
floor
– A Maintenance Manager says that this function has failed when a leak causes
excessive oil consumption
– A Production Manager says it has failed when the leak is so bad that the gearbox
seizes

22 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
 Operational effectiveness and EAM
Performance Drivers
Operational factors
 Planning and coordination issues
Asset Utilisation  Equipment scheduling & placement
 Operating protocols (formal & informal)

 Metallurgical & geological interpretation

Influencers  Grade control & mill feed variability
Mine Planning  Mine sequencing and scheduling
 Short term versus long term objectives
Productivity Variations in cycle time
Operational Cycle 

 Cause-effect analysis
Times  Operating protocols

Maintenance/Operations communications
Objective Operations 

 Operating protocols
Planning and  Plan compliance
Operational Control
Effectiveness
Equipment Capacity planning and execution
Capital effectiveness Match of fleet/plant to process
Cost
 Maintenance effectiveness
Maintenance
 De-rating due to maintenance
losses &  MTTR and MTBF
Life-Cycle Maintenance effectiveness
Cost Operator training & awareness
Cost Operational losses 

 Operator competency
& effectiveness  Early problem identification

Operating  Strategic Sourcing

Sourcing &  Supplier performance
Cost procurement  Service performance to business
process
23 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
 EAM
Performance Drivers
Operational Factors
• Effective maintenance management
Administration • Communications with ops and planning
• Supplier performance
• Supply & materials performance
Logistics • Facilities and resources effectiveness
Influencers • Supply cycle time performance
Equipment • Maint, planning & scheduling
Availability Maintainability performance
(MTTR) • Availability of skilled workforce
• Equipment design & usage
• Effective Preventive/Predictive
Maintenance
Objective Reliability (MTBF) • Equipment ownership and operator care
• Root-cause and reliability analysis
Asset • Availability of skilled workforce
Effectiveness
Preventive &
• Balance of maintenance tactics
• Reliability and predictability
Capital Predictive • Planning and Scheduling effectiveness
Cost Mtce
Planned
• Planning and scheduling Effectiveness
• Materials management &
Corrective communications
Life-Cycle Maintenance Mtce
Cost Cost • Effective Preventive/Predictive Mainten.
Unplanned
• Effective preventive/predictive mainten.
• Mainten. Planning and scheduling
Corrective • Ops/Mainten. communications
Mtce
Operating
Cost • Effective preventive/predictive mainten.
Breakdowns • Ops/Mainten. responsiveness and
learning
24 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Operational Risk.
Domains of operational risk management

Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Domains of operational risk management

Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Elements of Operational Risk Management Program

• Field level risk assessment

– These are usually short documents completed by workers before they begin work. They
identify hazards and take corrective actions to remove the hazards

• Formal risk analysis

– A small group of people from diverse areas research activities from hazard identification
perspective, their probabilities and consequences. Similar to a facilitator led brain
storming where solutions, corrective measures are contemplated and recorded

• Quantitative risk analysis

– Risks are given a relative number based on a matrix of probability and severity of
consequence. Helps in prioritizing risks that need to be controlled.

28 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Hazard Identification

• For any industry to be successful it is to identify the Hazards to assess the associated risks and to bring
the risks to tolerable level. Mining activity because of the very nature of the operation, complexity of the
systems, procedures and methods always involves some amount of hazards.

• Many techniques ranging from simple qualitative methods to advanced quantitative methods are
available to help identify and analyze hazards. The use of multiple hazard analysis techniques is
recommended because each has its own purpose, strengths, and weaknesses.

• As the part of the project work, hazard identification and risk analysis can be carried out for an iron ore
mine and a coal mine to identify the hazards and risk analysis. The different activities can be divided in
to high, medium and low depending upon their consequences and likelihood.

• Hazard identification and risk assessment can be used to establish priorities so that the most
dangerous situations are addressed first and those least likely to occur and least likely to cause major
problems can be considered later.

• From the study carried out in the iron ore and coal mine and the risk rating which were made and
analyzed shows that the number of high risks in the coal mine was more than that of iron ore mine and
same goes for the events in medium risk.

29 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Analysis of Risk

• The risk assessment portion of the process involves three levels of site evaluation:
1) Initial Site Evaluation,
2) Detailed Site Evaluation,
3) Priority Site Investigations and Recommendations.

• The risk assessment criteria used for all levels of site evaluation take into account two basic factors:
 The existing site conditions
 The level of the travelling public's exposure to those conditions.

Risk analysis is done for

 Forecasting any unwanted situation
 Estimating damage potential of such situation
 Decision making to control such situation
 Evaluating effectiveness of control measures

30 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

The Risk Acceptability Criteria.

31 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Methodologies For Risk Analysis

The objective of risk analysis is to produce outputs that can be used to evaluate the nature and distribution
of risk and to develop appropriate strategies to manage risk.

 Qualitative methods- It is used as descriptive terms to identify and record consequences and
likelihoods of the events and resultant risk. Quantitative methods identify likelihoods as
frequencies or probabilities. They identify consequences in terms of relative scale (orders of
magnitude) or in terms of specific values (for example estimate of cost, number of fatalities or
number of individuals lost from a rare species).

 Qualitative methods- this approach to risk assessment are the most commonly applied.
Qualitative risk assessment methods are quick and relatively easy to use as broad consequences
and likelihoods can be identified and they can provide a general understanding of comparative risk
between risk events, and the risk matrix can be used to separate risk events into risk

32 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

A qualitative method for the classification of risks

33 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Evaluation and Prioritization of Risks

• All hazards that have been assessed should be dealt in order of priority in one or more of the following
hierarchy of controls.

• The most effective methods of control are:

1. Elimination of hazards
2. Substitute something safer
3. Use engineering/design controls
4. Use administrative controls such as safe work procedures
5. Protect the workers i.e. By ensuring competence through supervision and training, etc.

• Each measure must have a designated person and date assigned for the implementation of controls.
This ensures that all required safety measures will be completed.

• Hazard identification, risk assessment and control are an on-going process. Therefore regularly review
the effectiveness of your hazard assessment and control measures.

34 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Management and Mitigation plan of risk

According to the Risk Management – Principles and Guidelines, a six-step framework providing a uniform
structure and ensuring the process is an integral part of management, embedded in the operation‟s culture
and practices and tailored to the business process of the organization.
The six elements are:
• Communication and consultation
• Establishing the context
• Risk identification
• Risk analysis and evaluation
• Risk treatment
• Monitoring and review

The consistent use of this methodology enables people, at each level of the operation, to make informed
decisions on risk treatment options. By working through the risk management framework and answering
the questions posed within each prompt, the operation manager can review current efforts to eliminate
fatalities and address gaps in resources, staffing and systems – continuing the drive towards a goal
of eliminating fatalities.

35 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Relationships between the risk management principles,
framework and process [after ISO13001].

36 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Important points to be remembered

• All safety precautions and provisions of Mining Regulations shall be strictly followed during all mining
operations.

• Entry of any unauthorized person into mine and plant areas shall be completely prohibited

• Arrangements for fire fighting and first-aid provisions in the mine‟s office complex and mining area

• Provision of all the safety appliances such as safety boot, helmets, goggles, ear plugs etc. shall be
made available for the employees

• Mining will be undertaken in coexistence with the requirements of the Mining Plan which shall be
updated from time to time

• Mine faces shall be regularly cleaned so as to ensure that the same is safe to work

• Handling of explosives, charging and blasting shall be undertaken only by a competent person

• Adequate safety equipment shall be provided at the explosive magazine

37 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Important points to be remembered Cont…

• All the mining equipment shall be maintained as per the guidelines of the manufacturer

• Haul roads shall be water sprinkled in order to suppress dust and other fugitive emission

• Elevating the awareness of employees, contract workers and public as a whole by celebrating Annual
Safety Week which includes various competitions like posters, essay, slogan, quiz etc.

38 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

 Work process Evaluation

39 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Monitoring and Review Risk

• Risk Management is the name given to a logical and systematic method of identifying, analyzing,
treating and monitoring the risks involved in any activity or process.

• It helps managers to make best use of their available resources.

• The Risk Management process steps are a generic guide for any organization, regardless of the
type of business, activity or function.

There are
7 steps
in the RM
process

40 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Monitoring and Review Risk ….Contd ….

Establish the context

Identify the risks

Analyze the risks

Evaluate the risks

Treat the risks

Monitor the treatment

Update risk management process
© 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.
Monitoring and Review Risk Cont ….

• The initial assessment made of the existence and level of risks must be evaluated on a regular basis.

• You need to measure the effectiveness of risk profiles and update as necessary.

• Reliable reporting of examination results

• Compliance measurement activities
• Feedback from the business community
• Results analysis and data comparisons

42 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Preparation of a Safety Management Plan & Safety
Operation Procedures (SOP)
• To effectively improve and enhance the safety condition, the organization must develop a safety
management system. The organization should also write up a safety management plan and implement
the planned action for setting up the safety management system.

• A formal written plan should be there which, on the basis of identified potential accidents together with
their consequences, describes how such accidents and their consequences should be handled, either
on-site or off-site.

• As with any complex process, the procedure may be broken down into a series of more manageable
tasks or steps just as shown below.

Develop emergency Select emergency Develop agreed

Identify stakeholders Assess vulnerability management strategies into a
management policy
strategies plan

43 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Safety is business imperative

44 © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.

Contacts
Contacts

Dipesh Dipu
Director | Consulting | Mining
Main: +91 (0) 40 4031 2000
Direct: +91 (0) 98495 53404
Email : ddipu@deloitte.com

Deloitte Touche Tohmatsu India Pvt. Ltd.

1-8-384 & 385, 3rd Floor, Gowra Grand,
S.P. Road, Begumpet,
Hyderabad 500 003
India

46 Winning. In challenging markets and beyond. © 2011 Deloitte Touche Tohmatsu India Pvt. Ltd.