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What is meant by risk management? 27
Over and above these risk factors, a company’s mining operations and exploration
activities are subject to extensive federal and state regulations. Management may
believe that it is in substantial compliance with all current laws. However, since laws
and regulations are subject to constant change, there can be no guarantee that future
changes will not have a material adverse effect on the firm by:
Reducing levels of production, or
Delaying or preventing the development of new mining properties.
Furthermore, if the mining company plans mergers and acquisitions in its industry,
then it is subject to business uncertainties and contractual restrictions as a result of
the anticipated merger. Uncertainty about the aftermath of the merger on employees
and customers may also have an adverse effect on the firm, even if management
intends to take steps to reduce such fallout.
For instance, the consolidation and downsizing of personnel usually following a
merger, might impact on the firm’s ability to attract, retain and motivate new qualified
personnel. Or it could cause customers, suppliers and others that deal with the firm
to seek to change existing business relationships. Seen from a senior management
viewpoint, these are business risk factors. (More on risk factors in section 2.2 and
Chapter 3.)
2.2 Risk management
Well-governed institutions look at risk as an opportunity to exercise authority by
being in charge of exposure; and at risk control as an ongoing process starting with
definition of business objectives, followed by policies on exposures which could,
should or should not be assumed; identification and assessment of risk factors, as
well as elaboration of ways and means for the management of risks associated with
financial activities.
Next to appropriate policies, and the authority to see them through, effective
risk management requires a first class infrastructure. This includes real-time data on
exposure; marking to market inventoried positions; statistics permitting extrapolation
of trends; and analytical accounting information. Moreover, quantitative information
alone while necessary is not enough. Risk is also perceived qualitatively by the risk
manager’s mind’s eye. In a nutshell, a strategy targeting business success starts with:
1. A strong commitment by the board to an independent risk management structure.
This means the firm’s risk management group should be organizationally inde-
pendent of risk-generating functions, such as trading or investment activities. To
assure independence of opinion and action, risk management must be reporting to
the executive committee, and should be audited by internal auditing. This risk man-
agement function is, in fact, the alter ego of internal control, charged with day-to-day
responsibility for:
Risk monitoring,

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