Mining industry's insurable risks coming to the fore

Commodity pricing, currency volatility, geological risks and labour related risks including HIV/AIDS remain high priority risks for the mining industry with insurable risks such as fire or breakdown risks, sometimes referred to as 'pure risk' in the language of Enterprise Wide Risk Management (EWRM) practitioners,  typically populating  the lower rungs of a mining companys risk register.

However, according to Neels Kornelius,  Business Unit Head: Natural
Resources for Aon South Africa, part of Aon Corp, a leading global
insurance broker and risk management company, a recent spate of mining related news items in June illustrate the growing importance of insurance for mining companies.

On 5 June 2007, it was reported that Zimbabwe's largest power station, Hwange, responsible for a third of that country's electricity supply, had shut down, causing widespread power interruptions in Zimbabwe. The shutdown was attributed to a breakdown in a conveyor belt supplying the station with coal from a neighbouring colliery.

"This event immediately highlighted the importance of machinery breakdown insurance, together with its associated cover, called business interruption, which is sometimes also referred to as loss of profit insurance," says Kornelius.

A week later the director-general of the Department of Minerals and Energy (DME), Sandile Nogxina, acknowledged that issues such as inadequate infrastructure, the strength of the Rand and a lack of skills in the industry were costing South Africa as much as R5bn per year in direct foreign investment. The mining industry itself, speaking through the Chamber of Mines, has pointed out that this problem is exacerbated by red tape and inadequate capacity within the DME itself, which leads to delays in the granting of mining permits.

Kornelius says developments such as these will no doubt directly influence South Africas country rating. "The rating is taken into consideration when pricing is determined for Political Risks insurance programmes regularly placed by foreign companies that do direct investments in the country's mining industry."

In mid-June, Angloplatinum announced that it was taking the unprecedented step of suspending production from its Rustenburg Platinum mine for a period of seven days in order to focus on improving the safety of certain sections underground. According to reports it had taken this stepbecause the mine had suffered five fatalities underground in the two weeks prior to the decision.

"This decision was applauded by both unions and the Chamber of Mines," says Kornelius. "Mining companies in South Africa typically supplement the legally mandated occupational injury cover (COID) through an insurance cover called group personal accident, a type of insurance which provides compensation in the form of multiples of annual salary in the event of an injury or death which occurs whilst the employees are at work. Angloplatinum's decision highlighted the fact that insurance on the lives and health of workers is as important as the cover taken out on plant and machinery."

Current mining laws require companies to carry out value added beneficiation on minerals locally, instead of simply exporting the raw materials mined.
Minerals and Energy minister Buyelwa Sonjica recently took this one step further when she announced on June 22 that she had appointed a task team to investigate ways of extending mining companies responsibilities to their surrounding communities.

"The task team will look into methods of amending both tax and mining laws to make it possible for communities to become active shareholders in the local mining companies, and forcing mining companies to comply," says Kornelius.

"If the proposed royalties payable on mining production are then coupled with this latest proposal, the result would be a legal framework in which company boards are literally forced into a dilution of their shareholders equity, as well as a host of other enforced investment decisions - all made against the background of an unprecedented boom in commodity prices, when investor interest in resources companies is extremely high," says Kornelius.

"This will effect the pricing and structure of mining companies Directors & Officers Liability insurance programmes, which protect the directors from claims made against them for actions they performed and decisions made in the scope of carrying out their duties. This is also particularly important when it comes to the law that assigns absolute liability for environmental damage to the directors of a company."

These four seemingly unrelated news stories during the month of June should serve to highlight the fact that, for any South African mining company, a well-structured and priced insurance programmes must form part of its strategic risk management programme and should be given priority.

"The structure of these insurance programmes can often be highly complex and need to take into account multiple factors which can impact directly on the success or failure of a mining operation. As such, they deserve the benefit of professional advice," concludes Kornelius.