4 common causes of major losses in mining

27 July 2015

While there are a wide range of reasons for large losses in the mining industry, there are several risk factors that frequently escalate or complicate claims, and give rise to unexpected coverage issues.

Below are list of the four common causes of major losses:

1. Extreme and remote locations

By their very nature, mines are frequently in remote, hard-to-reach locations, and often suffer extremes of weather. For example, in northern Canada, some mines operate in extreme cold, with only ice roads for access, while some Australian mines operate in temperatures of up to 45°C in the summer months. Such extreme weather conditions and remote locations have an important bearing on mining risks, and on how disruptive a claim will be to a mining operation. 

For example, when mines are in remote locations, supplying the spares, people or equipment needed to mitigate a loss may take longer, or come at an increased cost. “In countries where there are issues with seasonal extremes, mines will need access to materials and spare parts, which can be an issue,” says Ian Clendenning, director and engineer at mining loss adjuster Lloyd Warwick. Repair times can also be impacted, he says. “For example, if a processing plant were damaged by a fire, carrying out repairs in extreme cold or heat may be impossible, leading to delays in carrying out the work and much longer interruption periods.”

2. Supply chain disruption 

Supply chain disruption is another significant feature of many larger mining claims. Revenues can be severely impacted by damage to infrastructure, such as railways hit by floods or blocked ports. For example, the iron ore mines of the Pilbara region in Western Australia are spread over 500km² and all feed into a small number of ports through a network of railways. “The supply chains in the north of Australia are particularly vulnerable,” says Bill Green, managing director at Lloyd Warwick. “We have seen claims where train wagons have derailed and track has been damaged, or where bridges have been washed away by storms, taking out the only link to port for days at a time.” Green also cites the example of a mine in Africa, where obtaining supplies of chemicals to process gold depended on access by roads that were often impassable.

3. Human error

Human error is another important driver for major mining losses. A strong focus on protecting human life drives robust risk management in mature markets, but in countries where health and safety culture is less developed, this is reflected in losses. Patrick Plaisted, managing director and underwriter at International Mining Industry Underwriters, says: “Having the appropriate skills in place remains a challenge for some companies – especially in certain parts of the world, where there is considerable pressure to employ local staff. During the recent boom period, the demand for labour meant that some mines had little option other than to employ less experienced people, which increased the potential for things to go wrong.”

Many claims are the result of basic mistakes or not following agreed procedures. For example, a number of previous fire losses have involved a human element, such as employees smoking or a process involving the application of heat being carried out unsafely. Chris Stevenson, senior partner at JLT Mining, cites an example where a mining client suffered a USD 70 million property damage and business interruption loss because a workman failed to use standard precautions when working on a welding repair.

In contrast, when a contractor started a fire with a blowtorch at another mine, the mine was able to limit its loss to USD 7 million by borrowing spares, people and other resources from a nearby mine to resume operations within 30 days. “Clients have differing views on the level of detail they put into planning for potential losses, but in this case, the mine was able to draw on its risk management resilience and act quickly,” says Stevenson.

4. Regulatory Scrutiny

Increasing regulatory scrutiny – most notably for environmental and health and safety issues – is the big emerging issue for mining companies everywhere, according to Plaisted. “There is no doubt that environmental and health and safety regulations will have a significant impact going forward,” he says. “You can’t pollute and you can’t harm people – and mines must expect the intervention of regulators if they do. That’s the very clear message.” One outcome of this regulatory scrutiny is that business interruption periods are being significantly increased by the actions of regulators after losses that have any element of environmental or safety breach.

In one example, in 2014 a tailing pond on the Mount Polley copper and gold mine was breached, resulting in 10 million cubic metres of contaminated water leaking into Polley Lake in Canada. An independent investigation found that a lack of foresight in planning for raising the dam to accommodate higher levels of tailings material was a contributing factor. The mine has yet to reopen at the time of writing (July 2015), and future production is dependent on regulatory permission to restart mining at the site.

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For further information, please contact Simon Delchar, CEO, Property, Casualty, Mining & Power on +44 (0)20 7466 6226