The effective management of risk is integral to delivering our strategy
The Board and the Executive Committee provide oversight of our principal and emerging risks, and the Audit Committee monitors the overall effectiveness of our risk management processes and internal controls. As understanding and effectively managing the Group’s risks are fundamental to being able to execute our strategy, we are committed to a robust system of identifying and responding to the risks we face.
Risk management process
Our risk management process is designed to be a consistent and clear framework for embracing, managing and reporting risks from the Group’s business activities to the Executive Committee and the Board by allowing us to:
- Understand the risk environment, identify the specific risks, and assess the potential opportunities and exposure for Ecora.
- Determine how best to deal with these risks to manage overall potential exposure.
- Manage the identified risks in appropriate ways.
- Monitor the effectiveness of the management of these risks and intervene for improvement where necessary.
- Report to the Executive Committee and Board on a periodic basis on how principal risks have been managed, and are being managed and monitored, with any identified enhancements that are being made.
The impact of risk on our strategy and viability
Risk can arise from events outside of our control or from operational matters. Each of the risks described on the following pages can have an impact on our ability to deliver our strategy and the Group’s ongoing viability.
Identify
Material risks that we consider may lead to threats to our business model, strategy and liquidity are identified through our framework of risk management, our analysis of individual processes and procedures and a consideration of the strategy and operating environment of the Group.
Access
We analyse the risks and controls and evaluate the commercial, strategic, regulatory and other impacts, as well as the likelihood of occurrence.
Monitor
The executive management team is responsible for monitoring the controls and progress of actions to manage principal risks. It is supported through the Group’s audit and assurance programmes and the principal risks are reviewed by the Board on a semi-annual basis.
Respond
We respond to changes in the materiality of risk by reviewing the mitigating actions and checking that they are still appropriate for the level of risk.
Emerging risks that are currently being monitored are:
Cause
The physical impacts from climate change, together with the impact of the response to address climate change, may have a significant impact on the Group’s existing portfolio of royalties and streams together with its ability to acquire further royalties and streams in the future.
Commentary
During 2023, we again assessed the physical and transitional risks and opportunities associated with climate change detailed in the Annual Report.
Supporting our assessment of the physical and transitional risks and opportunities, together with our assessment of the resilience of our existing portfolio to these risks, was the scenario analysis undertaken in the prior year as detailed in the Annual Report.
While our assessment to date does not indicate that climate change will have a material adverse impact on the Group’s business model given the commodity mix underlying our portfolio, the assessment is an iterative process, as assumptions relating to both the physical and transitional impacts are refined. As a result, we continue to classify climate change as an emerging risk.
Cause
Severe supply chain and logistics disruptions have the potential to impact not only the production and distribution of our operators’ underlying commodities but also the timely delivery of development projects in the case of our non-producing royalties.
Commentary
Supply chain and logistics disruptions continue to be observed, typically resulting in higher capital expenditure and maintenance costs. While the Group is shielded from such costs through the royalty model, there is the potential for delays over the short-term of royalty related revenue.
This risk is closely linked with the principal risks of “operator dependence” and “geopolitical events”.
Cause
The world remains in a delicate position with the Israel Gaza conflict adding to the ongoing war in Ukraine. This has been followed by disruption caused to shipping routes in the Red Sea with targeted attacks on Western vessels. The potential for the middle east to escalate into a global conflict is as high as it has been in recent times and this would lead to heightened levels of macro uncertainty and economic turmoil.
Commentary
This risk is closely linked with the principal risk of “geopolitical events” but is more broader in terms of its impact on everyday life and not just on commodity demand. With significant elections scheduled for FY 24, the potential for regime and policy change is significant and this could impact (adversely or favourably) on existing conflicts and tensions.
Cause
Closely linked to ‘geopolitical events’ and ‘supply chain disruption; the real prospect of energy rationing could have a significant impact on the end users of the raw materials derived from the commodities underlying the Group’s portfolio.
Commentary
The temporary reduction in productivity or closure of end user operations in response to government rationing could result in a reduced demand for the commodities underlying the Group’s portfolio resulting in reduced or delayed revenues.
This risk is closely linked with the principal risks of ‘geopolitical events’ and ‘commodity prices’.
The Group's principal risks and uncertainties are:
A potentially catastrophic incident such as a mine shaft failure, slope wall failure, fire or flood at one of the operations underlying the Group’s portfolio or royalties and streams, which could result in the loss of life or the destruction or loss of ore body, or render it uneconomical.
Cause
Inadequate design or construction, adverse geological conditions, or natural events such as seismic activity or floods.
Impact
A major incident could result in our mining partner losing their licence to operate. In addition, such an incident could result in the loss of resource or destruction of the ore body together with a halt in production or metal deliveries, resulting in lower cash flows or potential impairments/ valuation losses, ability to service debt obligations and limiting the Group’s ability to pursue its growth strategy.
Mitigation
Although these risks cannot be easily mitigated or transferred, the Group undertakes extensive due diligence engaging both internal and external experts to assess the viability of the project, before proceeding with an investment.
The Group monitors, through ongoing engagement with our mining partners, technical and ESG-related matters. Any significant ESG risks and opportunities are reviewed and discussed by the Sustainability Committee.
Commentary
While such risks have a low frequency, their impact is potentially very high; as a result they are treated with the highest priority.
Ecora Resources’ success will depend on the Board making sound investment decisions to ensure that the royalties and streams acquired match or exceed expectations at the point of acquisition.
Cause
The actual performance of the royalties and streams acquired fail to achieve the expected returns, due to variations in the commodity prices, production volumes, and start dates assumed in the investment base case model.
Impact
The underperformance of an investment could result in the inability to achieve cash flow or profitability targets. In turn the Group’s ability to obtain funding for future growth, service its debt obligations and provide shareholder returns could be significantly reduced.
Potential damage to Ecora Resources’ reputation, and loss of support from stakeholders.
Mitigation
The Group undertakes a thorough due diligence and screening process when considering each investment opportunity, which is key to reducing the risks of making a bad investment.
Disciplined approach to investment, based on key criteria set out in the Annual Report with all material investments subject to review and challenge by the Executive Committee and the independent Directors.
Commentary
Over the past 2 years ~$0.4bn has been deployed to acquire the Voisey’s Bay cobalt stream and a portfolio of near-term development stage royalties addressing the Group’s critical strategic challenge of replacing the Kestrel royalty to secure earnings stability over the longer-term and reduce the Group’s exposure to coal.
Demand for royalties and streams may decline depending on macro-economic conditions.
Increased competition within the royalty and streaming sector may impact the ability to continue adding accretive assets to the portfolio.
Cause
High commodity price environments typically reduce the demand for near-term financing through royalties or streams, as operators have greater access to conventional sources of financing. Conversely, inflationary pressure and increases in cost of capital for operators may increase the demand for near-term financing through royalties and streams.
Increased competition in the royalty and stream sector could make it difficult to execute deals in a depleted pool of opportunities.
Impact
Royalties and streams are, by their nature, depleting assets; as a result failing to acquire new assets may lead to lower cash flows, profitability and valuation, which in turn limits the Group’s ability to pursue its growth strategy. Ecora Resources does not directly compete with the well-established precious metals royalty and stream companies, and it is uniquely placed, focusing on future-facing metals.
Mitigation
Disciplined application of investment criteria which includes the preference for long-life assets that will generate returns through the cycle.
Ecora Resources has built a credible global brand and network, backed by a successful track record of identifying and executing royalty transactions.
Commentary
The Group has a stable medium-term revenue profile to support growth initiatives, including the organic growth options within the existing portfolio (Piaui), however, competition within the royalty and streaming space remains strong which could result in higher acquisition costs/lower returns in future.
The capital needs of junior/mid-cap operators during the year increased and with stagnant equity and debt markets (impacted by both macrrco disruption and higher interest rates) the likely near-term demand for alternative finance should improve and provide opportunities for the Group.
As a result the risk for future demand reduced year on year.
Global macro-economic conditions leading to sustained low product prices and/or volatility.
Cause
Commodity prices react to many macro-economic events. Recent examples include armed conflict involving major economies, global trade disputes and sanctions, economic slowdown in a leading economy.
Impact
Low commodity prices can result in higher cost operations becoming uneconomic which can in turn result in lower levels of cash flow, profitability and valuation. Lower cash flows and valuations may in turn constrain the Group’s ability to fund the acquisition of new royalties and streams, or meet financial covenants associated with its borrowing facility.
Low commodity prices may also result in our mining partners delaying or abandoning uneconomic operations, which would also result in lower levels of cash flow and the impairment of the Group’s portfolio.
Mitigation
Maintaining a portfolio of royalties and streams that is diversified by both commodity and geography.
Regular updates of economic analysis and commodity price assumptions are discussed by the Executive Committee and the Board.
Disciplined approach to investment decisions, including the assessment of commodity price forecasts, with a focus on generating shareholder returns through the cycle.
Commentary
The Group’s diversified portfolio should reduce the impact of volatility in commodity prices. [In addition, by 2026 85% of the Group’s portfolio contribution will be from materials required to affect the energy transition and a number of the operations underlying the Group’s portfolio could command a premium given their low carbon emissions and other positive sustainability factors (e.g. ethically sourced cobalt).]
The significant decline in the nickel and cobalt prices over the past 12 months driven by new supply from Indonesian operations has resulted in the closure of a number of Australian operations, and created uncertainty around the scheduled start date for the Group’s West Musgrave project. However, the Group’s exposure to nickel and cobalt is through operations which are in the lower quartile of the cost curve and should remain economic at these price levels.
Lower commodity prices also provides opportunities for the Group to provide much needed capital to smaller operators at an opportune entry point in the commodity cycle.
The Group is dependent on our counterparties operating effectively while upholding high standards of ESG practices to provide the returns expected at the time of investment.
Of the Group’s 9 producing royalties and streams, 2 account for 63% of our portfolio contribution in 2023.
Cause
Ecora Resources is not directly involved in the ownership or operation of mines and mills underlying its portfolio. As a result it is generally the owners and operators who determine the manner in which the underlying projects are mined, including decisions to expand, advance, continue, reduce, suspend or discontinue production, together with decisions about the marketing of the minerals extracted from the projects.
Impact
The timing and quantum of cash flows may differ materially from those expected at the time of investment, potentially resulting in asset impairments/valuation losses, reduced profitability and lower corporate valuation. Lower cash flows and valuations may in turn constrain the Group’s ability to fund the acquisition of new royalties and streams required to pursue its growth strategy.
Mitigation
When assessing potential investment opportunities, the Group undertakes extensive counterparty due diligence. For our existing portfolio, we maintain ongoing engagement with our mining partners, to understand the mine plans and development timetables associated with our assets.
On certain royalties and streams, the Group has information and audit rights which it generally exercises on the identification of any unexpected royalty outcome. It has also developed an ESG Risk Assessment and Monitoring Framework which assist pre- and post-acquisition reporting on matters which are fundamental to the Group’s investment thesis.
The Group aims to include transfer restriction/change of control clauses into its new royalty agreements to help ensure its exposure continues to be to trusted counterparties underpinned by strong ESG principles.
The Group is actively expanding and diversifying its portfolio of royalties and streams to ensure that it has a well-balanced source of income.
Commentary
For further details on the Group’s operator engagement together with its information and audit rights refer to the Annual report.
As income from the Kestrel royalty begins to wind down over the next 2 – 3 years, the Group’s income profile and financing capacity becomes more reliant on the successful ramp-up of operations at Voisey’s Bay and the development of the Santo Domingo, West Musgrave and Piauí projects. As a result, the Group’s operator dependence and concentration risk is increasing.
Geopolitical events and tensions have the potential to negatively impact our business.
Cause
Geopolitical disputes including armed conflict involving world powers and restrictions or constraints to free trade can have a direct impact on commodity prices. Furthermore, significant elections are due to take place in FY 24 which could alter the outlook for commitments to climate change reduction and the speed at which countries commit to the energy transition. In other jurisdictions, economic stimulus packages targeted to shield economies from reduced demand or inflation can directly impact commodity demand and therefore prices.
The introduction of new policies linked to natural resources or capital controls as a result of changes in the domestic politics of the countries our counterparties operate may impact our business.
Impact
Commodity price and sales volume volatility experienced by the operations underlying the Group’s portfolio, as a result of trade actions (increased tariffs, retaliations and sanctions, could lead to lower levels of cash flow, profitability and valuation, which in turn could constrain the Group’s ability to fund the acquisition of new royalties and streams, or meet financial covenants associated with its borrowing facility.
If capital controls are introduced by a country, this could subsequently lead to a counterparty being unable to remit funds to the Group.
Mitigation
The Group’s portfolio of royalties and metal streams is diversified by both commodity and geography.
Commentary
The ongoing war between Russia and Ukraine, together with the changes in China’s trading policies although currently favourable in relation to Australian imports, creates uncertainty.
The increase in nickel supply from Indonesia has led to the Australian Government classifying nickel as a critical mineral which may provide some support to that sector. In addition, the Australian Government is pursuing a price premium to ensure the high standards applied in Australian mining and production of nickel and other critical minerals are reflected in future pricing on international markets.
The Group is dependent on access to capital in order to achieve its growth ambitions.
Cause
Sudden adverse change in capital market conditions, including higher cost of capital. Production issues or significant commodity price volatility.
Impact
The inability to access either debt or equity funding could materially impact the Group’s ability to achieve its growth ambitions.
Mitigation
The Group has a strong shareholder base and a syndicate of lenders which understand the royalty and streaming business model and are supportive of the Group’s strategy.
We regularly meet with advisers, shareholders and lenders to discuss the types of transactions we are considering to gauge their support.
Commentary
On 30 January 2024, the Group’s syndicate of external lenders agreed to the amendment and extension of its $150m and increased the uncommitted accordion feature to $75m. Following the amendment and extension, the facility will now mature in January 2027 with the potential to extend the tenor twice by up to 12 months on each occasion.
While the amendment and extension of the facility is positive, as income from the Kestrel royalty begins to wind down over the next 2 – 3 years, the Group’s income profile and financing capacity becomes more reliant on the successful ramp-up of operations at Voisey’s Bay and the development of the Santo Domingo, West Musgrave and Paiui projects. Developmentof these assets should result in an improved equity rating in time and therefore open up the potential for financing acquisitions through equity in a non-dilutive manner.
As a result, the Group’s financing capability risk is increasing similar to the operator dependence and concentration risk.
Ecora Resources needs to be well supported by all stakeholders including: operating counterparties, employees, shareholders, lending banks, brokers/analysts.
Cause
Failure to identify, understand and respond to the needs and expectations of our stakeholders.
Impact
A breakdown in the relationship between Ecora Resources and any of its stakeholders could materially impact its ability to achieve its strategy, fund future growth and execute on new acquisitions.
Mitigation
The Group’s Code of Conduct governs our interaction with all our stakeholders. In addition, the Executive Committee and the Board have regular and ongoing interaction with all of our stakeholders, with the support of external advisers.
Commentary
The Group has had considerable engagement with its largest shareholders during the year on a number of matters. In addition, the refinancing of the Group’s borrowing facility is testament to the support being received from the lending syndicate. Further information on how we engage with our stakeholders can be found in the Annual report.