Article

The benefits of stress testing to enhance resilience in the mining sector

Operational and financial stress testing can help mining companies proactively manage risks, enhance their resilience, and make informed decisions to promote the long-term sustainability of their projects and organization.

Operational and financial stress testing can help mining companies proactively manage risks, enhance their resilience, and make informed decisions to promote the long-term sustainability of their projects and organisation.

Stress testing varies in meaning across different sectors. In essence, it is an assessment of a project or organisation to understand the impact of volatility and, in some cases, extreme risk events.

Mining companies and their investors face unique risks and uncertainties not commonly experienced by other sectors. As well as being highly exposed to commodity prices and the economic cycle, mines are often located in remote areas with limited access for equipment and material extraction. Stress test models can be rapidly adjusted to account for these risks in order to estimate financial impacts.

The benefits of performing stress testing for mining organisations can include:

Risk identification: Highlighting an organisation’s vulnerabilities under various stress scenarios, such as commodity price fluctuations, equipment failures, and loss of transport.
Operational efficiency: Identifying bottlenecks and areas for improvement in mining operations.
Business continuity: Simulating extreme scenarios such as natural disasters, labor strikes, or geopolitical risks on a mining operation.
Capital planning: Assessing the sufficiency of an organisation’s financial resources to sustain normal operations even under disruptions.
Maintaining compliance: Understanding how an organisation may be able to continue to meet compliance obligations (such as reporting on stress testing in their annual reports) in various scenarios.
Strategic decision-making: Analysing decisions regarding resources, investments, and risk mitigation measures.

Turning stress testing into a competitive advantage

Viability scenario analysis

What: Assessment of an organisation’s or projects’ prospects and resilience by undertaking deterministic quantitative estimation of the impact that specific risk scenarios have on key metrics.

Who: Organisations willing to introduce a quants element to existing risk practices and looking to support project planning.

Why: Supports project funding and planning. Supports UK listing requirements.

Complexity: Moderate

Financial impact modelling

What: A more advanced version of viability modelling which allows statistical and deterministic modelling. Links risk modules to three key statements: income, balance sheet, and cash flow.

Who: Organisations looking to move to the most comprehensive form of stress testing.

Why: Supports organisational and project funding and planning. More informative modelling.

Complexity: High

Reverse stress testing

What: Exploring scenarios that lead to a pre-defined outcome such as an organisation’s business plan reaching a point of failure. Can be deterministic or statistical in nature.

Who: Organisations looking to identify weaknesses in their projects business model.

Why: Supports organisational project funding and planning.

Complexity: Moderate

Figure 1. Potential results from stress testing

^{Figure 1 shows how a future combination of market price shocks, flooding of mines, and loss of access routes could potentially severely diminish the projected baseline cashflow forecast and assumed production levels.}

^{The results of this stress testing can indicate whether the business survives, needs to close, or requires some form of restructuring.}

Common challenges with stress testing

How to test

The methods, tools, and complexity of stress testing can vary. It is important that the testing provides valuable insights, and organisations should gradually build their testing capabilities and maturity. An incremental approach can contribute to a thorough understanding and effective use of results.

Meaningful scenarios

One common pitfall is designing meaningful scenarios that are both severe and plausible.
Experience influences the scenarios which companies choose to test, which can potentially lead companies to overlook plausible stress scenarios simply because they have not occurred yet.
The creation of scenarios should involve internal and external stakeholders.

Solid foundation of data

Data should be sufficient to build a meaningful stress testing model, so that stakeholders can take the results seriously.
Where data is missing, justifiable assumptions can be made. Stress tests can also be run using different assumptions to better grasp margins of error.

Acting on results

The stress test should be clearly communicated and understandable. It must also be updated and maintained as situations change.
Based on the results, key management should be encouraged to prepare plans for early intervention in the event of risks occurring, such as raising funds or making operational changes.

The importance of risk mitigation

A challenging environment for mining companies can increase their vulnerability to risk, underscoring the importance of sound risk management strategies. By integrating stress testing with strategy and risk management frameworks, organisations can gain insights for planning purposes, optimise future projections, and reduce the potential impacts of adverse events. Organisations that get this right will be well-positioned to derive benefits from stress testing by building resilience against future potential scenarios.

To find out how Marsh can support your mining business with stress testing, please contact your local Marsh representative.

Exteme macro with 10x magnification of a Bornite surface. Bornite, also called Peacock ore, is a sulfide mineral

Article

The benefits of stress testing to enhance resilience in the mining sector

Operational and financial stress testing can help mining companies proactively manage risks, enhance their resilience, and make informed decisions to promote the long-term sustainability of their projects and organisation.

Turning stress testing into a competitive advantage