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All Mines Should Model These 5 Financial Risks

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Financial risk is inherent to all mining operations. However, the businesses that navigate it well often are the ones that employ mining financial risk modeling. It is important to understand which financial factors will feature in the analysis, though. Look at these 5 mining risk modeling concerns when you start the process.

Commodities Price Fluctuations

All commodity-based industries experience boom and bust cycles. An iron ore miner, for example, will see boom times when commercial, industrial, and infrastructure construction projects are all hot. The risk for such a mining firm, though, is what happens when cash flows decrease during macro-scale recessions or sector-wide declines.

Fortunately, mining financial risk modeling tools allow you to assess these scenarios. Stochastic modeling is a common tool to build high-, mid-, and low-performance cases for risks. A model might show a company needs to use boom times to cut its debt load so it can borrow advantageously during lean times, for example.

Equipment Depreciation

One notable downside of mining operations is a lot of its asset value is tied up in equipment that will depreciate. Assets often serve as collateral, but lenders will be sensitive to the depreciation of equipment values. Likewise, they will have concerns about the relative illiquidity of the equipment, especially in down markets. After all, the bank has to think about its risk profile, too. Skillfully modeling depreciation will make it easier to figure out how much capital and credit you'll have available when you need it.

Cash Flows

The fun times in mining come when cash flows are high. Mining risk modeling, however, always keeps an eye on the cash flows and their rates of change. If you see cash flows rounding off at the end of a boom cycle, you may take that as an early warning sign of a downturn to come.

Liability and Regulatory Risks

Mining is a physically risky business. It also has the potential to run afoul of environmental regulations. Consequently, a mining business may face financial risks involving civil lawsuits. A company needs to profile its exposure on both fronts so it can sufficiently insure the risk.

Black Swan Events

A black swan is an event that has a low probability of happening in any given year but will occur eventually. Likewise, it is an event that could wipe a business out. Mining operations with overseas interests, for example, have to hedge against the risk of war. Similarly, natural disasters, pandemics, and major political changes are all black swans. Your risk profile needs to account for how the company will persist when such events inevitably hit.