U.S.REPORT (March 30, 1992)

Mining always has been considered risky and subject to cyclicality. The traditional categories of risk — price, technical and political — are familiar and reasonably well understood.

It is the task of the developer to control those risks that are controllable, and to manage those risks that are basically uncontrollable in such a way as to minimize their impact on the company. That can be done primarily through the selection of appropriate projects and their subsequent design, financing and marketing.

The nature of some of the risks facing the mining industry has changed over the past decade as have perceptions of risk. Twenty years ago, sovereign risk loomed large in the wake of widespread nationalization of mining interests, both in Latin America and Africa. Ten years ago, the common focus was on the problems associated with burgeoning state ownership and so-called “social” production.

Today much has changed. State ownership is generally on the wane, costs have been brought under control and demand has resumed its growth. It is true that recessionary conditions in North America and elsewhere have dented this growth, but the consequent problem is cyclical in nature. Prices remain as volatile, and movements in exchange and interest rates as frequent as ever. Arguably, the mining industry is more exposed than most to politico-economic shocks and surprises and sudden shifts in external conditions. Mining always will be risky, but, to quote a proverb, “Unless you enter the tiger’s den, you cannot take the cubs.”

The rewards in any industry go to those who are prepared to take the risks. Sometimes mistakes will be made, but a company whose policies are so conservative that it never makes any, eventually faces extinction. Environmental standards have tightened considerably in recent years, affecting many industries including mining. In some cases, the need for improvement has been demonstrable. In others, environmental legislation has been based on bad science. There is a clear danger that the value of prospective benefits has been detached from the cost of achieving improvement. Returning to the question of whether the risk/reward ratio has changed in new mining projects, my conclusions are:

— There always will be changes in the relative importance of risks, but for the mining industry as a whole there is no evident change in the risk/reward ratio.

— I except the North American gold market, where normal considerations about value and risk/reward ratios seem to have been put in abeyance. — Perceptions of two risks, in particular, are likely to change in the coming years — the geopolitical and environmental.

n High-quality mining assets, efficiently managed, are the best hedge against most types of risk.

— R.P. Wilson is chief executive of RTZ Corp. PLC. This article, excerpted from a speech he delivered to a Goldman Sachs & Co. seminar, was printed in the Washington Concentrates publication of the American Mining Congress.