One common public perception of mining is that financially it is
an extraordinarily risky business. Another and contrary view, in
certain circles, is that price risk and other financial risks can be
relatively easily removed or shifted by a number of schemes or
devices. In reality, beyond the orebody discovery stage, mining
need not be any more risky than most heavy industrial
businesses. Nevertheless, as stated by Rappaport, (1986): Risk is a parameter of central importance in
establishing the economic value of any asset. The
level of risk is determined both by the nature of
the firm's operations and by the relative
proportions of debt and equity used to finance its
investments. These two types of risk are
commonly referred to as 'business risk' and
'financial risk' respectively. The term financial risk is used somewhat more loosely herein
to recognise the reality that any risk inadequately addressed in the
design, construction and operation of a mining project can have
significant financial consequences; usually negative. For
instance, a specific area of business risk in mining is often called
technical risk which definitely has severe financial consequences
if not managed correctly. The various risk shifting, hedging and risk management tools
available all have their place and range from merely useful to
almost indispensable. However, in the long-term, financial risks
are maintained at acceptable levels by the application of sound,
more fundamental business management principles. There are
many with a vested interest in perpetuating a perception that the
conceptual foundations of sound management practice are
extremely complex. In reality, most management concepts are
prosaic, but their application requires incredible discipline and
hard work. There is no magic formula or 'silver bullet'. It appears that a company whose activities are restricted to
mining can analyse the range of risks specific to mine
development and operations more clearly than companies in
which mining is just one of many businesses. The almost
universal failure of large oil companies in the mining business is
probably the best example of lack of any clear comprehension of
fundamental business characteristics and risks. Conversely, in
regard to risk management, choosing to be in other business as
well as mining does nothing to reduce the risks of the mining
business. The individual shareholder can probably make such
'diversification of portfolio' decisions better than most
management teams. It could be argued that diversification across
a number of disparate businesses may actually increase overall
corporate risk due to lack of management concentration and
focus. These differences between the perceptions of financial risks
and the realities in mining need to be further elaborated in
relation to some uncompromising business concepts.