A changing environment

underwriting the mining sector during challenging times

By Iain Guthrie, Risk Underwriter, Atradius

Although Australia is emerging from the Global Financial Crisis relatively unscathed, the same can’t be said for many players in the mining sector who were hit by the brute force of the credit crunch via a dramatic fall in prices and dwindling profits. These changes led to a change in the way Atradius approached the underwriting of the mining sector to adapt to the changing market.

The demand for cover in the mining industry was extremely high in the three years from 2005 to mid 2008. The industry was experiencing a boom and many of our policy holders were looking for cover on start-up exploration companies, despite these companies not yet having commenced production. Given this demand, Atradius developed a methodology to help deal with the requests. The circumstances of each individual miner were taken into consideration, but temporary cover could only be considered once the start-ups had completed feasibility studies and raised the capital required to fund the development of their projects while obtaining necessary licenses and environment approval. Limited cover was temporarily issued and Atradius monitored the progress of each company via their quarterly reports. As long as they had sufficient cash to complete their project and commence selling, Atradius remained on cover. It was a buoyant time for the sector.

Given this boom and the availability of funding for miners Atradius wasn’t concerned with the fall in prices until the financial year ended on 30 June 2008. It was then that worrying results began to appear. Losses were reported, companies began going into administration and prices were falling. It became apparent that the boom times were coming to an end and the combination of a sliding stock market and an emerging financial crisis heightened the risk posed by the mining sector. Policy holders could only be provided with cover on start-up exploration companies if they were part of a larger mining group. Established companies were also falling foul of the GFC and Atradius witnessed a substantial increase in claims lodged in 2009 compared to the previous year.

The companies that fared better than others during this sharp downturn were those with a spread of exposure, both geographically and across a variety of minerals. Companies with this diversity coupled with low cost production were impacted less than their peers who were producing high cost materials and concentrating on one area. This concentration posed a higher risk in an increasingly volatile environment.

Having emerged from a turbulent 2009, the market is continuing to change for the better and prices are improving. As the sector continues to adapt, so will our underwriting approach. Living through a crisis shows how quickly a sector can turn. With this experience however comes wisdom, and as the mining sector moves onwards and upwards lessons learned during the recent crisis will undoubtedly prove invaluable in understanding the sector and riding any waves that may come this way in the future.