Mining, a changing landscape

8/14/2019 Mining, a changing landscape

1/30

MINING, A CHANGING LANDSCAPE

With metal prices at all time highs, new mines are opening up as mining houses

seek to add assets and boost shareholders value. Seven vital considerations arelisted here in reverse order. In the 21st century, these must always be borne in

mind as the feasibility study/due diligence is carried out.

Part 7: Digging with the locals: managing local community relations

Historically, mining companies viewed local communities surrounding a mine site

as a source of discomfort rather than as a stakeholder group with which they

needed to engage. If problems flared up and locals got restless, international

mining companies would often turn to the national government to resolve the

problem or step up their own security efforts, whilst protesting that they had

done all that could be expected of them by paying taxes and abiding by local

laws.

Few mining companies would adopt this attitude today. With growing awareness

of the importance of a social license to operate a nice phrase, the meaning of

which few can convincingly articulate mining companies increasingly appreciate

the importance of consent from local communities. Today, most mining

companies engage in long dialogues with local groups before starting a project.

1


2/30

The industrys change in mindset is evident in the contrast between the way in

which Rio Tinto was run out of Bougainville, amid an apparently poor

understanding of local communities concerns and the disintegration of a

relatively harmonious society into civil conflict, with that companys protracted

discussions with local communities in developing its mineral sands operation inMadagascar. The latter represents one of the most encompassing and engaging

discussions with stakeholders in the industrys experience.

However, notwithstanding the industrys increased awareness of the importance

of dialogue with local communities and of engaging with local groups during

mine planning, the industry has not yet found the formula to sustaining stable

local community relations. Local communities continue to voice concerns and

cause disruptions at mining operations around the world.

Conflicts arise in both the developed and developing worlds but tend to be

particularly problematic in poorer countries, where management has a more

limited understanding of the issues and governance and legal structures are

typically weaker.

2


3/30

Disagreements with local communities will almost certainly always exist; mining

is necessarily disruptive, social expectations change over long mine lives and the

interests of miners and communities will never be entirely aligned. However, the

industry can go further in revising its view of the roles mining companies play

and reducing social resentment of its presence.

Flaring up of problems with local communities rarely reflects changes in

companies activities and can be hard to trace back to specific events. As aresult, mining companies are frequently caught unaware and on the defensive,

assuming that as they have not changed behavior, they are not responsible.

The problem may lie in the way many mining companies approach local

community engagement. Often it is viewed as a one-off step to secure the right

to mine in the area. In fact, in entering a region, a mining company becomes a

rich and powerful member of its community and must play a role in its

development.

Many large mining companies are developing extensive corporate-level guides to

engaging local communities in new mining operations. Whilst a deeper

understanding of how to approach engagement is sensible, it is important to

appreciate that whilst local communities makes a nice name for a stakeholder

group, this is the most disparate group of stakeholders we have looked at in this

series. Whilst some themes are consistent, concerns vary by country, region and

3


4/30

community. As a result, every situation requires a very different understanding

of local attitudes and a different approach.

Looking forward, effectively managing relationships with local communities will

become increasingly important to both the sustainability of existing operationsand as a competitive advantage in securing growth opportunities through new

concessions.

As previous articles in this series have argued, the mining industry faces a

significant shift in the risk profile of its combined asset base over the coming

decades. One of those risks will be an increased exposure to operations

surrounded by local communities relatively unsupported by their national

Governments, unused to being governed by regulations over which they had

little influence and with little to lose if they feel they are treated unfairly.Analysis of Transparency International and World Bank data implies that new

copper mining projects in the next decade, as an example, will be in countries

with corruption levels and per capita income on average one fifth below the level

of existing production.

For instance, despite being illegal in most countries, mining companies in Africa

have struggled to keep artisanal miners off their properties for decades. Unsafe

practices resulted in injury and fatality rates far higher than those of the

companies own mines. Private militia firms played a role in combating theproblem for a long time. More recently, companies such as AngloGold Ashanti

have taken a different tack. Acknowledging that artisanal mining is unlikely to

have a material impact on the value of their own operation, they have provided

support to local miners and equipment to help improve safety conditions. In

recognizing that local communities frequently had a very different perspective on

property rights and expected the international company to act as a benefactor, it

assumed a more cooperative position. In the process it was able to turn a

potentially difficult problem into an improvement in community relations.

Local communities are increasingly empowered by civil society movements and

intergovernmental development agencies. Intergovernmental agencies including

the World Bank and the UN, realizing that many of their initiatives in recent

decades have failed to deliver improved living standards, are changing their

approach to development. A recent World Bank study has shown that projects

focused on grass roots development were most effective in improving living

4


5/30

standards in poor areas. In particular, local communities are being empowered

in preference to (often corrupt) national governments. One result is an

increasing legitimization of local communities and their right to ensure their own

development.

Those local communities are becoming increasingly organized in their

engagement with investing companies. Growth in local NGOs, usually small

groups based in developing countries, has been close to three times faster than

growth in international NGOs in recent years. Frequently, they have ties to

international organizations, giving them a voice in international circles. Local

problems can become international problems increasingly quickly and easily.

On the other hand, in many ways, mining companies have fewer options to

directly promote local development than was the case in the past. Increasinglysophisticated equipment reduces the need for local purchasing during

construction or operation. With the proportion of production from open pit

mining rising, the need for local labor is often reduced.

Companies need to ensure an equitable relationship with communities from the

outset of a project. That local consent is needed to build a mine is well

understood by most mining groups. However, it is still too often treated as

gaining consent to develop a mine than as an ongoing consent to operate.

Similarly, token engagement is likely to do more damage than good, raisingexpectations without providing a meaningful voice. Social Impact Assessments,

required by the World Bank and many project finance lenders are a useful step in

ensuring mining companies consider social issues at the outset of a project but

are only ever likely to provide a snapshot of a communitys view. Rather, SIAs

should be treated as a by-product of a much broader engagement process.

Linking environmental performance with community relations at a site level

provides a basis for recognizing their interdependency. Frequently, local

concerns are linked to environmental issues and the two should be viewed as

closely related. Whether through the impact of leaked tailings on local farmland

or through a mines use of limited water resources, local community livelihoods

are frequently dependent on agriculture and heavily affected by the externalities

of mining. For instance, with water shortages set to intensify in many mineral

rich regions, the issue of water allocation to mine or community is likely to

5


6/30

become more important. Early engagement on ways to improve community

wide water efficiency can head off future confrontation.

Ongoing on-the-ground monitoring is critical. A companys best view of local

community relations comes from those working in the field. It is important thoseeyes and ears are made aware of the importance of monitoring emerging

community concerns, given a channel through which to relay information to

decision makers and the corporate centre and are incentivized to manage local

relationships rather than simply to maximize immediate profits.

The benefits of a longer term view can be seen in the differences in relations

mining companies in Peru have with local communities. In 2004, Xstrata won

the Las Bambas concession in Peru, in one of the countrys least developed

regions and one which is also vulnerable to water shortages. Perhaps learningfrom the experience of Newmont, which has faced a barrage of criticism and

sporadic violence from local groups over the impact of its Yanacocha mine

further north in the country, Xstrata has instigated an extensive consultation

process. It is working with local farmers to improve farming techniques and is

supporting local business initiatives. It has also established an advisory board

comprising local figures and international experts to provide oversight and

recommendations independent of the companys management, which it will issue

publicly. Development of the mine, if it goes ahead, is years away; the initiative

is perhaps better viewed as investing in the option to develop the mine, at a costunnoticeable in the scheme of the Xstrata group. Whilst a sound example of

long range planning, all the good work could be lost if perceptions of the value of

having the company around change.

The voice and influence of local communities on mining operations is likely to

grow as their power increases. Mining companies have yet to find the ideal

framework to manage those relationships. Perhaps looking for a single

framework to deal with a disparate group of communities connected only by

their proximity to mining operations is one of the problems. As forward thinking

companies in the industry are showing, the best approach is likely to lie in

ceasing to seek to manage relationships and risks and rather in becoming better

neighbors in the local community.

6


7/30

Part 6: Eastern Promise

Western miners need to find strategies to compete with companies from

resource hungry emerging economies. Chinese companies in particular are

aggressively tying down mineral assets across the developing world, from wheremuch of the growth in mineral production will come over coming decades.

Unhindered by many of the social and environmental pressures facing western

companies, these competitors are able to invest in assets majors could not

contemplate. Going forward, they are likely to encroach further into the majors

backyards unless they can turn their relatively higher social and environmental

performance into a competitive advantage rather than a burden.

The developing world will be a major driver of growth in the mining industry.

The Minerals Economic Group estimates that in two decades, two thirds of theworlds mineral output will come from the developing world and almost as much

again from the Former Soviet Union and China. Africa in particular has huge

unexploited mineral wealth.

Aware that they are mostly badly positioned to take advantage of this growth,

Western mining companies are trying to grow their presences in the developing

world. For example, almost one quarter of Rio Tintos greenfield exploration is in

Africa and Europe (presumably mostly in the former), where under 10% of the

groups assets are currently located and Anglo American recently announcedplans to invest $3.5 billion in Africa.

Building large scale operations in the in high risk, developing countries will be a

substantial challenge. The western mining industry has been cast as a leading

villain in the story of failure of many developing countries to effectively exploit

their mineral resources. As a result, the western industry tends to face a

barrage of scrutiny and criticism from NGOs, the media, development banks and

governments when considering projects in developing countries. Rio Tintos

mineral sands project in Madagascar, for instance, has faced vigorous campaignsby environmental and human rights groups during its long assessment by the

company, whilst following an engagement process that sets new standards for

the industry. Indeed, it is hard to think of a recent mineral project by a major

mining company in the developing world that has not faced criticism.

7


8/30

As western companies are struggling to make headway in developing countries,

other players are storming into the region. Fuelled by a ravenous hunger for

minerals, Chinese companies in particular have been pouring money into mining

assets across the developing world. Demonstrating their much greater appetite

for country risk than western companies, consultancy Beijing Antaike hasidentified current or planned investments by Chinese mining companies in some

of the least stable countries in the world, including Afghanistan, North Korea,

Myanmar and Pakistan.

These are not countries in which western companies would likely have invested

in any case. More concerning is the entrance of Chinese companies into

established mining centers and mineral rich countries including Zambia, South

Africa and Chile.

If the experience of the oil industry is a guide, the encroachment of competitors

from China and other industrializing nations into more established mining

centers, in direct competition with western companies, is likely to increase. In

the oil industry, smaller investments by Chinese companies in marginal African

countries such as Sudan have expanded to include significant investments in

Nigeria and Angola, both important producers for the western industry.

In the past two years, more than $8 billion dollars of investments by Chinese

companies in African mining projects have been reported and the figures arebecoming larger. The Chinese are the largest investors, but Indian, Russian and

Eastern European companies are all making similar investments in the search for

new sources of supply to meet rising demand in those countries. To put the

figures in context, capital expenditure in Africa by Anglo American, BHP Billiton

and Rio Tinto totaled less than $2.4 billion last year.

Increasingly, these investments are in more established mining countries.

Having seen the level of fixed investment in the South African mining industry

drop 25% over the past 3 years, South African deputy president, PhumzileMlambo-Ngcuka, recently outlined the case for courting investment from Chinese

companies. Indias Tata Group announced plans to invest billions of Rand in

South African mineral assets last year, with the Indian government also planning

to invest billions of dollars in mineral exploration in Africa over the coming

years. Similar trends are taking place outside Africa. In Chile, an ally to the

8


9/30

western industry, Minmetals recently signed an agreement to develop copper

resources with Codelco.

These investments have not been without controversy. The Chinese States

Africa Policy is based on non-judgmental assistance, which effectively meansturning a blind eye to the host regimes track record. As the Sierra Leone

ambassador to Beijing put it: Chinese investment is succeeding because they

dont set high benchmarks. Operating under these conditions, Chinese

companies seem to have exported the safety and human rights records of their

own country along with the money they bring.

For instance, at one of Chinas largest African mining investments, the Chambishi

copper mine in Zambia, six workers were shot last year after rioting over miserly

compensation and overdue wages. In 2005, 49 workers were killed in anexplosion at the same plant, which unions blame on the operations reliance on

cheap and inexperienced labor. Undeterred, earlier this year the China

Nonferrous Metals Corporation (CNMC) announced that it would boost its

planned investment in the Zambian copperbelt from $800 million to $900

million. The situation contrasts markedly with the experience of Anglo American

which invested in the Zambian copperbelt (KCM) earlier this decade, only to

withdraw shortly afterwards once it became more involved in the operation.

Western mining companies are struggling to come up with a coherent answer tothis threat. According to the Times online, the heads of over a dozen global

mining companies, including Anglo American and BHP Billiton, have met to

discuss the rise of Chinese investment in mineral projects. One idea raised has

been to engage the World Bank and other multilateral institutions to provide the

roads, schools, hospitals and other infrastructure the Chinese government is

willing to build in exchange for mineral access.

Investment in infrastructure is important and much needed even without the

pressure of the mining industry. However, the more effective solution is likely tolie with the industry turning the expectations of tough social and environmental

standards it faces from a hindrance into an advantage. Stressing the importance

of responsible behavior to international organizations such as the World Bank

and western and host governments and committing irrevocably to higher

standards of performance and transparency could generate the political will to

push developing countries to demand those standards from investing

9


10/30

companies. This would shift some power back to western companies, which are

better able to meet those standards.

In itself, this will not address emerging economies demand for minerals. Off-

take agreements and investments by Chinese companies in individual projects,following the model Japanese companies followed in the post war period, should

quell some of these concerns.

Whilst access to the capital and technical expertise to develop and operate

projects previously key advantages of western companies have become

ubiquitous, the ability to operate profitably and responsibly remains a key

advantage that the industry should seek to turn to its advantage rather the

hindrance the pressures it is under are today.

Part 5: Money makes the w orld go round

Mining companies have always relied on lenders and shareholders to provide the

huge amounts of capital needed to develop mineral projects. The ability to raise

the billions of dollars needed to develop the largest and most attractive projects

and to do so at lower costs than competitors is a huge advantage from which

western mining companies in particular have benefited in the past. Increasingly,

this advantage is being eroded.

The mining industrys reliance on capital - via loans from international banks orshare offerings to institutional investors - has not changed. What have changed

are the conditions the financial sector attaches to the money it provides. As

investors and banks have come under pressure to ensure their funds promote

socially responsible business and have seen the business logic to avoiding social

and environmental risks, they have passed on tougher conditions to companies

in which they invest and to which they lend.

NGOs are increasingly targeting financial institutions and demanding they play a

greater role in sustainable development. Realizing financial institutions are keyactors in business, are fewer in number and are relatively easily pressurised;

organizations such as Amnesty International, Friends of the Earth and Global

Witness have turned their attention to the financial sector and launched

campaigns against irresponsible lending. Rainforest Action Network in particular

has achieved high profile successes by persuading JP Morgan, Citigroup and

Bank of America to adopt stricter environmental standards.

10


11/30

NGO pressure is only part of the reason for the change. Social and

environmental issues are becoming increasingly important to the financial

performance of companies. George Kell, Executive Head of the UNs Global

Compact, has stressed the importance of financial institutions to the debate,

They forge a much-needed link between corporate social responsibility anddecision-making in the financial marketsLong term investors are now

recognizing that in an inter-dependent world the price-risk analysis is changing

and unless and until organizations internalize sound principles in their own

organizations they are not well prepared to manage risks and opportunities.

Financial markets are now adjusting their risk paradigms to take this into

account.

Extractive industries are particularly affected by this increased attention to social

and environmental issues, given the significant impact of mineral projects on theenvironment and local societies, often in developing countries. Mining

companies are feeling pressure from both lenders and shareholders.

Borrowing money for a mining project is becoming increasingly complicated. The

Equator Principles, introduced in 2003, demand projects meet stringent

environmental and social conditions. Today, those principles cover over 80% of

project finance lending and have become a de facto standard for bank lending

where none existed five years ago. Some banks, such as ABN Amro, Barclays,

ING Barings and HSBC, have introduced their own standards that go further thanlegal or regulatory requirements.

Ratings agencies such as S&P and Fitch have also begun to incorporate social

criteria in their evaluation of credit risk, recognizing the real financial implications

of exposure to social risks. The ratings they assign are used by banks to

determine the interest rates to charge large companies.

Institutional shareholders such as mutual and pension fund managers are also

increasingly tying their investment decisions to social criteria. Investorsrepresenting close to $5 trillion of funds have signed up to the UNs Principles for

Responsible Investment. F&C, a large UK-based investor spends over 5% of the

fees it pays investment banks for research relating to the environmental, social

and governance performance of companies, a disproportionate amount of which

goes towards the analysis of extractive industry companies.

11


12/30

As much as tougher standards of investing, financial institutions demand

transparency of reporting. An Ernst and Young report published earlier in 2007

showed that two thirds of investors believe risk in the mining industry has risen

in the past 2-3 years and want companies to improve their communication of risk

management strategies and results.

Companies are responding by producing accelerating numbers of social and

other non-financial reports. The mining industry is particularly prolific, providing

investors with more reports than any other industry aside from Forestry &

Paper.

Reflecting the increased importance of social and environmental risks, investors

are increasing willing to take action against companies. The number of

shareholder resolutions has grown at over 10% annually over the past five years,with extractive industries particularly in focus. Institutional Shareholder Services

reports that shareholder resolutions demanding companies introduce human

rights standards have grown three times more quickly in the extractive industries

sector than in other sectors in recent years.

Going forward, the trend towards tougher environmental and social standards

will continue. Investors are becoming more demanding of the companies in

which they invest and banks are facing more pressures to verify the standards of

the projects and companies in which they invest.These trends apply principally to the western mining companies. As demands

from financial institutions on those established companies are increasing,

companies in other parts of the world, such as China, Eastern Europe and Latin

America, are finding it relatively easy to raise money from investors and to

borrow from local banks. Fuelled by state-directed lending, Chinese companies

have announced significant investments in the mining assets of other emerging

economies such as Vietnam, Afghanistan, Zimbabwe and Zambia. Companies

from Russia, Kazakhstan and India now rank amongst the largest miningcompanies on the London Stock Exchange.

To date, western miners and those from emerging economies have not really

bumped heads in international investment. The former have tended to focus on

relatively safe assets in stable countries and the latter more on higher risk

assets in the developing world. However, as the struggle to find growth

12


13/30

opportunities intensifies, the two groups are likely to face each other in

competition for assets more often.

As that happens, differences in the ease with which different companies can

raise money will become more important. The challenge for the industry is tolevel the playing field so the same regulations cover all companies. This is only

likely to be achieved through international agreements, which in turn will require

increased transparency by established mining companies of the social and

environmental impact of the investments they make and pressure from the

mining industry itself to establish political agreements across the developed and

developing worlds.

Part 4: The rise of the third sector: the increasing import ance of NGOs

to the mining industry

Non-governmental organisations (NGOs) are not stakeholders in the mining

industry in the same way as the other groups discussed in this series. They have

no power over mining companies actions and are not directly affected by mining

projects. Rather, they gain legitimacy and power from the stakeholders they

represent and influence.

Nonetheless, their voice in the industry is loud and growing as their funding,

sophistication and influence increase. Most of the mining industry has begun to

engage with NGOs, but few companies have perfected the relationship. As socialissues become increasingly important in the mining industry, strengthening NGO

relationships offers to provide important insights into those issues.

NGOs are becoming increasingly influential across the business world and society

as a whole. The number of NGOs has close to doubled globally over the past

decade and whilst the data is sketchy, funding for NGO of all types has reached

a level approximately equal to the GDP of Spain.

Their rising power coincides with a fall in societys trust that other institutions willrepresent its interests. Public relations firm Edelmans annual Trust Barometer

has tracked the rise in public trust in NGOs over recent years, overtaking

governments and the media to become the most trusted group in Western

society.

13


14/30

With funding and credibility has come increased power in international political

circles. At the UN, for instance, almost 3,000 NGOs have consultative status in

decision making, reflecting an increased acceptance of their usefulness in the last

decade.

Whereas, a decade or two ago, many mining companies viewed NGOs as tree-

hugging troublemakers, today most accept them as legitimate and influential

participants in their industry.

Groups like Partizans, set up three decades ago to crusade against Rio Tinto,

have colorful histories of civil action, but had relatively little impact on the

industry and have mostly become rather marginalised. Increasingly, mining

industry executives are sitting across the table from well-informed, influential

and professional organizations rather than dodging tomatoes outside shareholdermeetings.

Whilst a huge number of small groups continue to focus on specific projects and

issues, large organisations such as Amnesty International, Oxfam, Christian Aid,

Global Witness and No Dirty Gold are more likely use reasoned, libel-free reports

to advocate for wide-ranging industry change.

Evidence of the growing interest NGOs are taking can be read in the number of

mining-focused reports they produce referring to the mining industry, which

grew 4 times more quickly than the growth in reports of all types catalogued bythe Business and Human Rights Resource Centre over the past 5 years.

As their voices have reached higher political circles and they have become more

able to organise coalitions aligned around specific interests, NGOs have taken an

increasingly active role in policy level changes in the mining industry. For

instance, NGOs have recently provided key voices in the establishment of the

Extractive Industries Transparency Initiative, changes to the World Banks

mineral policy coming from its Extractive Industries Review and the Kimberly

Process.

Mining companies have responded by engaging with NGOs more regularly, both

directly and through industry groups. Rio Tinto, for example, has held annual

workshops with NGOs for over a decade and the International Council on Mining

and Metals lists several NGOs amongst its partners. Most large mining companies

14


15/30

now devote whole departments to corporate social responsibility and NGO

engagement.

Engaging with an increasingly diverse universe of NGOs can be a bewildering

proposition for many companies. NGOs come in a variety of levels ofsophistication and exist for seemingly every issue able to upset someone, from

environmental issues to human rights concerns, from project-specific campaigns

to industry-wide advocacy.

Tackling this kaleidoscope of perspectives requires companies to establish a

framework for engagement, based on an understanding of NGOs goals and

tactics and their own assessments of the key issues they face.

Larger NGOs are aware of the need for a pragmatic dialogue with the corporate

world they are trying to change. Indeed, these NGOs have themselves developedincreasingly corporate cultures and organisations.

One implication of the commercialisation of NGOs is an increased focus on

media coverage and an ability to demonstrate the impact they are having. Mining

companies should not assume NGOs focus solely on addressing the issues in

hand.

Successful campaigns identify a problem with which their audience can relate

and which is likely to gather most attention. This may not be the same problemcompanies perceive. For instance, terms like failed state instability and

resource security gather more attention in political circles than developing

world corruption these days.

Companies need to address the issue at hand, rather than answer a different

question.

Campaigns often focus criticism on the largest companies in the industry.

Whether or not they are the most guilty, the largest players usually have most

influence over the industry.

Smaller companies may escape initial criticism but they are often pulled into

changes resulting from successful campaigns, which are likely to have been

shaped by the industry leaders to their own advantage. Rather than view their

escape from initial criticism as an opportunity to lay low, it would often serve

smaller companies well to engage in discussions earlier.

15


16/30

For instance, the Conflict Diamond campaign launched by Amnesty International

and Global Witness in 1998 raised the issue of blood diamonds with Western

consumers. De Beers felt the brunt of the heat, despite the limited hard evidence

that it was amongst the most responsible.

The campaign began by calling for a widespread boycott of diamonds, a threat

real enough to persuade De Beers to take the issue seriously. The industry

ultimately found a solution in the Kimberly Process Certification, under NGO

monitoring.

Ultimately, that solution prompted De Beers to refocus its business model and

reduce its support for industry-wide prices, potentially undermining smaller

companies competitiveness in the long run.

Ideally, mining companies should head off issues before they becomecampaigns, by ensuring they remain above the bar of expectations they will be

expected to meet in the future. This is particularly difficult in the mining industry,

where projects can last many decades.

Regular discussions with NGOs are one of the most effective ways to identify

nascent social trends. Leaders in the mining industry are moving their

engagement with NGOs in this direction but most of the industry remains

reactive to pressure rather than proactive.

A clear framework to engaging with NGOs is an important part of strategic

planning, and becoming more so as social issues develop into a key area of

business strategy.

A whole industry of consultants and conferences has grown up to provide advice

on NGO engagement. The following are the authors opinion on the more

important principles:

1) Dont invest equally in relationships with every organisation that throws mud.

Whilst dialogue with a broad section of NGOs is helpful to establish the

landscape of social issues, companies need to clarify their own views of the most

important issues they face and engage with NGOs most deeply on those issues.

2) Dont limit discussions to corporate-friendly NGOs; be prepared to work with

extreme elements. Treat engagement with an open mind, as a fact-finding

mission and seek as wide a range of perspectives as possible.

16


17/30

3) Discuss, rather than negotiate, with NGOs. Campaign groups should inform

decisions but decisions should not be made to appease NGOs, who rarely have

the authority to agree solutions for the stakeholders they represent.

4) Do not make false promises. NGOs will pick up on and exploit any failure tofollow through on promises.

5) Be sure of facts but aware that facts are not enough. Inaccurate facts can

undermine an argument but a completely accurate description of the issues is

unlikely to get rid of pressures from campaigners, who can be more concerned

by outcomes than responsibilities.

6) Do not use meetings with NGOs for PR benefit. Seeking to leverage the media

attention campaigns gather serves to highlight an issue, often unnecessarily, and

undermines the frank dialogue engagement offers, at its most effective.

7) Treat engagement as a two way process. Relationships will be more fruitful

when each side understands the other and gets some benefit.

NGO engagement is in fashion across the corporate world, but achieves little if

not approached with a game plan in mind. As a PR exercise, it does little but give

credibility to a multitude of arguments. Approached as a joint-decision making

forum, it is likely to leave companies pulled in too many directions.

Rather, engagement should mostly be an exercise in understanding the socialpressures a company faces and will face, and how it can plan for those

pressures. As social issues assume increasing importance in the mining industry,

engaging with NGOs effectively and proactively can help the industry to lead the

debate rather than be led by it.

Part 3: Manage the right customers

The public is becoming increasingly aware of the mining industry. The number

of news articles referring to the mining industry almost doubled between 2005and 2006. Films such as Blood Diamond and An Inconvenient Truth painted

bleak pictures of the impact our industry can have on societies and the

environment. Record profits and corporate takeovers kept mining in the evening

news. Notwithstanding concerted efforts by many mining companies to improve

their image, several surveys have shown mining is amongst the least trusted

industries by western world publics.

17


18/30

The consumer is at the heart of most companies strategies. To some extent,

most industries use social responsibility as a marketing tool. Starbucks sells

Fairtrade coffee, Nike ensures its suppliers do not exploit underage workers and

IKEA ensures its wood comes from sustainable forests. They do this in large part

because it helps them sell more products.

The mining industry is different. Mining companies do not generally compete by

persuading consumers to pay more for products that contain their minerals.

Instead, mining companies compete by finding the lowest cost assets and

producing their products at the lowest cost possible.

Consumers do not usually take direct action when they perceive resource

companies to be irresponsible. A recent survey by Incite Marketing shows

consumers are less likely to alter their buying if they feel resources companiesare not acting responsibility than when companies in other industries behave

irresponsibly. Few consumers are even aware of the minerals they consume and

it is hard to image they would be willing to pay more for a product containing a

particular mining companys metal. Who can identify the source of the roughly

20,000 kg of non-fuel minerals consumed annually by the average person in the

western world?

Diamonds is the most consumer-sensitive sector of the mining industry. NGOs

Global Witness and Amnesty International pushed the conflict diamondscampaign which ultimately led to the Kimberly certification process and indeed a

change in the overall strategy of the dominant player, De Beers, from diamond

buyer to diamond seller. The film Blood Diamond painted a damning picture of

the impact the diamond mining has had on developing countries - but even this

doesnt seem to have made much difference.

Diamond sales have gone from strength to strength in recent years. A survey by

the Jewellery Consumers Opinion Counsel shows that virtually no consumers ask

jewelers for certification and the majority of viewers of Blood Diamond have nointention of changing their jewellery-buying patterns. If consumers are unswayed

in their buying of a luxury good with an obvious target in the face of a concerted

campaign, it is unsurprising that other consumer campaigns, such as No More

Dirty Gold, are having limited success. It is hard to imagine how a boycott of, for

instance, Codelcos copper would even work.

18


19/30

This does not mean consumers views are not important. Consumers may have

little impact on the purchase of most commodities but, increasingly, the public is

applying pressure to banks to lend responsibly and provide socially responsible

investments, influencing politicians decisions and providing financial support to

NGOs. The Incite Marketing survey shows that consumers are more likely topressure politicians or provide support to NGOs if they view resource companies

as behaving badly than is the case for other industries.

The performance of the Cooperative Bank, which adheres to tough social and

environmental criteria and has been one of the fastest growing banks in the UK

in recent years, is evidence of consumers demands for socially responsible

banking. Most of the industry has responded by introducing social and

environmental criteria into its lending and then publicising this change widely.

Similarly, demand for socially responsible investment funds is growing fasterthan any other area. This in turn influences the hoops through which mining

companies must jump through to borrow for projects in sensitive parts of the

world.

Fuelled by rising public interest in environmental issues and international

development, and a rising mistrust of the corporate world in general, funding for

NGOs is at a record level and politicians are taking these global issues and the

role of multinational companies more seriously. The Edelman Group surveys

public opinion towards different groups in society and reports that NGOs havebecome the most trusted groups, as trust in business, media and government

has shrunk. Governments are increasingly responding to rising public interest in

the environment and international development. Climate change and third world

development were the pillars of the UKs G8 Presidency, for instance.

Mining companies are not directly affected by consumer pressure in any of these

examples. In all, public opinion is changing the background environment for

mining companies through the way they interact with other stakeholders. It is

therefore important for mining companies to monitor public opinion, even if the

effects are not direct.

The public is not the most important direct stakeholder for the mining industry

but it is dangerous to ignore changing public opinion, which will ultimately affect

it through other stakeholders.

19


20/30

Part 2: Host governments decide the guest list

Of all stakeholders, host governments have the greatest potential power over the

mining industry. They decide which companies are able to exploit resources in

their countries. Many are becoming more willing to exercise those powers.Disillusioned by the frequent failures of the free market policies pushed by the

West, empowered by a global recognition of those failures and given a mandate

to assert power over foreign investors by political change in many parts of the

developing world, the mining industrys engagement with governments in

resource rich countries is becoming increasingly complicated.

As an investment analyst in the late 1990s, the announcement that the South

African government planned to renationalize mineral assets, raise royalties and

mandate a transfer of mineral wealth to local black businesses ignited thereaction, what are they playing at? The impact on share prices was immediate

and negative. Since then, many more governments in resource rich countries

have taken steps to ensure more of the wealth generated by resource companies

stays in their country. The failure of past policies, political change and the

attraction of sharing in the industrys ample profits are likely to lead more

politicians down similar paths.

Free market policies designed in part to open developing countries to western

investment in recent decades have failed. A report published by the World Banklast December concluded that its programs have been unable to lift incomes in

many poor countries. The growing evidence that the policies promoted by the

West have not worked is providing both an impetus for change and a validation

to governments pursuing alternative policies. For instance, South Africas

upheaval of its mining sector legislation and the relatively muted international

criticism of the move largely reflect the failure of mining sector profits to benefit

most of the countrys population in the years since apartheid.

Partly in reaction to the continued poverty of many developing countries, theglobal political landscape is changing quickly. Democracy is spreading to more

corners of the world and with it, in many cases, the election of governments

willing to adopt more assertive approaches to the management of their nations

resources. Freedom House, a US NGO, calculates a close to doubling in the

percentage of politically free nations in the world. Over the last 13 months,

20


21/30

twelve countries in Latin America have held elections, with a well-publicised

move towards more left wing, nationalistic policies.

This changing political environment has important implications for the mining

industry. The growth in overall mineral output will come from countries that areless politically stable than the industrys current production base. For instance,

the countries providing new copper mine output in the next four years are

roughly one-third less politically stable than the average of current producing

countries, based on Brook Hunt production forecasts and Economist Intelligence

Unit political stability indices.

The mining industry is an obvious target for many governments. Unlike most

companies, which are able to choose where to locate their operations, miners are

bound to follow the most attractive resources and once they have made aninvestment, it is extremely costly to leave. Furthermore, resource rich countries

have frequently failed to convert their mineral wealth into economic

development, whilst extractive companies have often earned significant profits.

The World Banks Extractive Industries Review noted that, mineral wealth has

been detrimental to many countries development.

In reaction, governments in many resource rich countries around the world have

imposed windfall taxes on the resource industry, taken harder lines to ensure

foreign companies behave responsibly or gone further by raising the prospect ofnationalization.

In 2006, South Africa proposed revenue based royalties ranging from 1% for

coal to 6% on certain platinum group metal products. Zambia has increased

mineral royalty from 0.6% to 3% and imposed a 15% tax on concentrates being

exported. Namibia proposed a 5% royalty on unprocessed mineral products

destined for export. Mongolia passed a law taxing up to 68% of profits during

periods of high prices. Bolivia and Venezuela nationalized energy assets and

Peru contemplated a windfall tax. Indonesia seems to have pursued most of thelarge mining companies in recent years, prompting Rio Tinto and BHP Billiton to

exit their coal operations there and currently tying Freeport and Newmont in red

tape. The trend is a global one, with countries around the world using similar

tactics.

21


22/30

Those countries adopting stricter policies towards mining companies have faced

vociferous criticism and many have backed down. However, in many cases their

actions are entirely logical.

For instance, the Peruvian government was criticized last year for implementing

a plan to extract $757 million from mining companies over five years, in lieu of a

proposed windfall tax. However, the idea of sharing more of the high returns

earned by the countrys mining sector has logic. The Economist has put thevalue of taxes and royalties paid by mining companies in Peru last year at $879

million. The total value of mining investments in the country over the past

decade totals over $10 billion and based on its profits, over $3 billion last year, it

is not unreasonable to assume a value north of $15 billion for the Peruvian

mining industry. This is higher than the present value of future royalties. Put

another way, looked at in isolation, there is an economic rationale for

nationalizing the assets, although the impact on future investments would likely

outweigh these benefits eventually. By adopting a softer stance and instead

securing additional payments, the Peruvian government allows the industry to

earn attractive returns and is unlikely to have significantly affected future

investments, which are rarely driven by countries tax rates. Whilst criticized by

many in the industry, the move to share more of the profits generated by its

mining industry should not have been a surprise.

22


23/30

More broadly, countries are likely to take action when the mining sector is an

important component of the overall economy, when their revenue from that

industry falls short of level they might expect, where operating assets are

already well established and profitable and when the economy as whole has

failed to develop significantly. Past agreements are becoming less importanthurdles to governments and replaced by a readiness to ensure an equitable

share in the resource sectors profits. This analysis also implies that mining

companies might find it increasingly difficult to generate very high returns in

countries that are not developing economically.

These trends imply important changes for the way mining companies view their

investment in developing countries susceptible to political change which is

most of them. First, political risk is growing in many resource rich countries.

Second, whilst the risks may be higher, investing companies able to managethem can create a competitive advantage. At the heart of any strategy to

manage these political risks should be a focus on achieving equitable outcomes

throughout the life of the project; in establishing any arrangement, mining

companies must ensure the host country benefits. Past approaches based on

securing and fighting to retain long term royalty arrangements are becoming less

valuable. It is also insufficient to assume paying taxes is sufficient; unless

economic development filters through the population, a reaction in the future is

likely and mining companies should play a role in promoting effectivegovernance.

The bulk of the moves we have seen so far have been indiscriminate; most of

the mining industry in a country has been affected by governments actions.

Going forward however, there are some signs that initiatives to share in the

industrys wealth will be more selective. For example, in South Africa, allowance

was made for companies past initiatives when the government introduced black

economic empowerment requirements.

In summary, the mining industry needs to rethink its relationship with host

governments in developing countries. They are increasingly exerting their power

over resource companies and it is becoming more critical to build partnerships

with those governments, rather than negotiate contracts. The moves we have

seen so far might otherwise seem tame compared to the power they could

exert. With a more conciliatory approach, mining companies could instead

23


24/30

develop relationships with host governments that translate into real competitive

advantage in securing assets.

Part 1: New project management sk il ls needed: the rising importance

of social engagement to the m ining sector

It is becoming increasingly important for the mining industry to understand the

roles it is expected to play in the societies in which it operates.

There was a time, not too long ago, when all a mining company needed was a

permit from the host government and everything else would fall into

place. Today a wide range of stakeholders have a voice; governments, non-

governmental organisations, local communities, banks and shareholders are all

able to scupper a project.

As different stakeholders become empowered to apply greater pressure and

some industry leaders accept broader roles and responsibilities, the lines of

expectation and acceptability are changing. In this respect, the mining industry is

24


25/30

like many others; corporate social responsibility (CSR) is assuming greater

importance throughout the business world.

However, the issues our industry faces differ substantially from most sectors. By

looking at the goals, strengths and tactics of the stakeholders in the miningindustry, we can begin to understand the future mining companies will face, and

can help shape.

As a commodity industry, competition between companies in the mining sector

focuses on securing more attractive assets than their peers, rather than higher

selling prices. With a few exceptions, such as the diamond industry,

consumers are rarely aware which companies produce the minerals they

consume and show little tendency to alter their buying based on social concerns.

However, stakeholders in the development of new projects are becomingincreasingly concerned by social and environmental factors. As a result, whereas

consumer industries have grasped CSR as a way to differentiate their brands and

the products they sell, in the mining industry CSR can become a way to produce

the same commodities at lower cost, through access to attractive assets.

Mines are not generally found in easily accessible places and are by nature

disruptive. As such, managing their impact presents both risks and opportunities

to the industry, across both developed world assets where environmental and

social issues have long been important and in the developing world where theyare becoming more so.

An effective strategy should view social responsibility as a central element of

strategic planning if risks, many not yet apparent, are to be avoided and

opportunities grasped.

Unlike most risks mining companies face such as price and exchange rate

movements social factors can be managed as well as measured, making their

effective management a source of competitive advantage.

There is a demonstrable link between companies CSR credentials and financial

performance. Whether social responsibility drives profits or vice versa is unclear

and the business logic remains unclear.

For instance, the evidence to date that CSR makes much difference to a mining

companys ability to secure attractive mineral assets or to lower costs is, frankly,

25


26/30

limited. Nonetheless, this promises to be one of the most important issues the

industry faces over the coming decades.

With capital becoming ubiquitous throughout the global mining industry and best

operating practices increasingly easily being shared between projects, miningcompanies used to competing on their ability to access finance or their operating

expertise will find social responsibility a key way to differentiate themselves in

the future.

As operating costs rise and reserves dwindle in the West, and developing

countries open to foreign investment, the battle for growth will increasingly be

taken to the developing world.

Mineral Economics Group has estimated that in two decades, a third of the

worlds mineral output will come from the developing world and almost as muchagain from the Former Soviet Union (FSU) and China.

The issues in the West are relatively clear; environmental, health and safety

standards here are tough and getting tougher. In the developing world, they are

a work in progress and, as they develop, may become either a platform to

establish a competitive advantage or a burden to western mining companies.

With rising scrutiny of their activities at home and faced with increasing

competition from cash-rich competitors unencumbered with social andenvironmental standards, western mining companies are struggling to compete

in the developing world and are substantially under-represented in the projected

output from that region the driver of growth in coming decades.

Unless they find a way to operate there effectively, large western mining

companies share of industry output will fall significantly.

For instance, Brook Hunt data shows developing countries producing one quarter

of the worlds copper hold more than half of the industrys resources.

Amongst the ten largest copper producing countries, the US, Australia and

Canada have resource lives of around 20 years or less at current rates of

production. Peru, Indonesia, Kazakhstan and Zambia have resources lives more

than twice as long. Mongolia and the Democratic Republic of Congo remain

largely untapped.

26


27/30

As supply from the developing world increases, costs will decline. In 2000,

copper mining costs in the developing world were higher than those of the

developed world. By 2010, the developing world will have an approximate 25%

cost advantage.

Put another way, whilst the industry made essentially no profit mining copper in

the developing world at the start of the decade, it will contribute close to one

quarter of the industrys profits by 2010 and likely rise further over subsequent

decades.

This picture is evident across most commodity markets. Clearly, it is critical to

the mining industry that it finds a way to compete in the developing world.

Corporate Register, which monitors non-financial reporting, shows that, relative

to the size of the sector, mining companies already publish more social reports

than any other industry, aside from forestry. The industry has formed trade

bodies, regularly tells its message to the financial and political communities and

makes the right noises in the press.

Recent surveys indicate that mining industry executives place this issue amongst

the most important facing their companies. However, surveys show resource

companies continue to be viewed as one of the least trusted and the sector is a

frequent target of development and environmental advocates.

27


28/30

The industry will be unable to ignore these pressures or view a CSR strategy as

an add-on to strategic planning. As leaders take up the debate, the rest of the

industry will be unable to ignore the raised expectations on the industry as a

whole.

Over the coming months, we will discuss the issues facing the mining industry

from the perspectives of different stakeholders, focusing on the developing

world. We will look at the power of different groups, their goals and the

approaches they are using to achieve these goals. Tying these together will paint

a picture of the likely result of these competing pressures.

Financial institutions

Finance has always been the lifeblood of the capital-intensive resources industry.

Under its own pressure to act responsibly, the banking industry is attachingincreasingly stringent conditions to the funds it lends for investment in the

developing world. For instance, the Equator Principles, which were updated last

year, are designed to ensure signatory banks investments are socially and

environmentally sound.

Similarly, shareholders are paying increasing attention to social issues when

investing and taking a more activist stance with companies, in which they invest,

reflecting the recent greater profitability of socially responsible investment

strategies when compared with more mainstream investment routes.

Consumers

The diamond industry might feel differently, but consumers are rarely able to

have much effect on a mining companys sales. In most industries, CSR

strategies focus on changing consumer perceptions and the opportunity to

increase sales or prices. In contrast, few commodity markets have sufficiently

concentrated production to put them at risk from consumer action.

Consumers rarely make the link from the finished product to the raw materials it

contains, and are anyway unable to trace it to a specific company. The No Dirty

Gold consumer campaign, for instance, appears to be stalling, partly for lack of

a clear villain.

28


29/30

Consumers bigger influences on mining companies come through their support

for other stakeholders such as NGOs or the pressure they apply to financial

institutions and governments.

Developing world governmentsRecognising that many of the open-market policies pushed by the international

community have not resulted in improved economic growth, many governments

in the resource-rich developing world have, in recent years, become more

assertive in managing their resources

From the prospect of creeping nationalisation of Latin American resources to

South Africas Black Economic Empowerment Bill or Indonesias tougher line with

investments made during the Suharto era, terms of investment are becoming

more fluid.

Emboldened to demand more and to `renegotiate` where they do not perceive

they are benefiting sufficiently, governments have, on the one hand, raised the

risks of investing in their countries. On the other, they have presented a new

challenge to mining companies to find a way to shift the emphasis of their

engagement away from negotiating long-term contracts and towards developing

a partnership that will contribute to a countrys long-term prosperity.

Local communitiesMining is a necessarily disruptive activity to local communities and one that has

too often failed to bring them much benefit, particularly in the developing world.

Those communities were often ignored in the decision to invest or a projects

ongoing operation and rarely had much recourse. In recent years, however, local

communities have proven highly disruptive forces in many mining operations and

exploration projects.

With the World Bank and other international development agencies stressing the

importance of grass roots development and the importance of social stability, the

platform for local communities to make their voice heard is likely to grow

stronger.

29


30/30

Developed w orld governments, international agencies

Increasingly concerned by the failure of resource-rich developing nations,

developed world governments are applying tighter regulation to the international

activities of companies with operations under their jurisdictions.In the US, mining companies must contend with the Patriot Act, the Foreign

Corrupt Practices Act and increasingly transparent reporting requirements from

financial regulators.

NGOs

The mining industry is well used to NGO pressure. For decades, Rio Tinto and

other major mining companies have faced criticism from pressure groups such as

People Against Rio Tinto and its Subsidiaries (Partizan).As western societies trust in businesses in general has collapsed in recent years,

NGOs have assumed increasing importance as a voice for civil society. The

number of NGOs focused on the mining sector has grown sharply and they have

become well funded, knowledgeable and responsible participants in debating

social issues.

Competition from emerging economies

The international mining industry is becoming increasinglycosmopolitan. Continuing a trend begun by the South African mining houses in

the 1990s, producers from Eastern Europe and Asia are increasingly moving to

western financial markets.

Not only have they lost their advantageous access to cheaper capital, but the

majors increasingly find themselves in competition with newcomers from

transition economies such as China. Those players are well-funded and not

governed by western levels of social and environmental regulation or

expectations.Chinese companies, for instance, have become major investors in the Africanminerals industry in recent years. As the Sierra Leone ambassador to Beijing putit: Chinese investment is succeeding because they dont set high benchmarks.Establishing a firm basis for international regulation of the global miningindustrys social and environmental impacts may be the only effective way forthe western industry to compete.

Date post:	30-May-2018
Category:	Documents
Upload:	ramoutar-ken-seecharran
View:	216 times
Download:	0 times

Mining, a changing landscape

Documents