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SOCIAL LICENSE TO OPERATE RISKS MATTER IN MINING

by RL Expert Leesa Soulodre

#myindustry The mining industry again faces a confidence crisis. While commodity prices, returns on capital and cost control are keeping CEO's awake at night and 80% of industry players are reported to be planning deep cuts to jobs in the year ahead, it's the reputational risks associated with the their social license to operate that has both their Boards and their Investors on edge.

Many argue that the industry's impact on ecosystems, landscapes and communities and role in local pollution are a "license to operate" norm, given the very nature of the mining industry's value chain. But it is these exact "social license to operate" risks that have the potential for their undoing.

Last week the Philippines South Cotabato's provincial government banned open-pit mining in any part of the province putting on hold operations at Sagittarius Mines' USD 5.6-billion Tampakan Copper and Gold Project. Communities raised the concern that the project's operations could reportedly lead to large-scale deforestation of over 9,000 hectares of mountain range and cause land degradation, a loss of biodiversity and local water depletion. Glencore's 62.5% stake in Sagittarius Mining is reportedly being acquired by Alsons Prime Investment, with the takeover to be completed by August 2015. Government funded corporate projects that result in environmental degradation, contamination of rivers, flooding of residences, absence of consultation and lack of benefits to citizens are at the roots of the community unrest.

Guard stands by Tampakan Copper and Gold Mine - Photograph ©Michael Coyne
Photograph ©Michael Coyne

In Peru, more than 200 social conflicts are ongoing due to communities' opposition to Government backed corporate mining projects. One example is the resistance of indigenous communities against Southern Copper's Tia Maria Project, which has been opposed since 2011. This has resulted in continuous conflict between police and protesters (2). In another incident, hundreds have been reportedly injured following the deployment of the government army against protesters, who have been called by the company President "anti-mining terrorists" (3). While this has had a negative impact on its financial performance, many would argue the reputational impacts have been far worse. According to its stakeholders, Southern Copper has a 50-year history of causing environmental damages through its Peruvian mining projects.

Protestors at Southern Copper Tia Maria Mining Project - RL Expert Reputation Risks Managed

There is growing evidence that these such environmental and social issues bubbling alongside major Mining projects can result in stranded assets for their investors. According to the Smith School of Enterprise and Environment, "Stranded assets" are assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities (5). One such example was in 2011 when local violent protests pushed Newmont Mining to postpone the Conga Copper Mine, an expansion of the Yanacocha Gold Mine, which allegedly contaminated their water with mercury and cyanide. Newmont have recently faced renewed criticism for its Conga project. The operation has faced ongoing protests and five of its opposition protesters are allegedly reported to have been assassinated (6).  Newmont alone are not the only ones with exposure. For 2015-2016 Ernst and Young predict that "social license to operate" is the 3rd highest risk for the copper segment and the top 5 risk for the industry overall (8).

Top 10 Risks - EY Mining 2015-2016 - RL Expert - Reputational Risks Managed.
Image Credit: Ernst & Young 2015 (8)

Asset Risk Management

The Equator Principles, used in Project Finance have become the benchmark for responsibility in project finance. 80 of the world's largest Financial Institutions have voluntarily signed up to comply since its launch in 2003. This risk management framework for determining, assessing and managing environmental and social risks in projects is outlined by the International Finance Corporation (IFC), an institution of the World Bank Group that is responsible for transactions with the private sector. It requires investors to

  • evaluate the impacts of Environmental and Social risks and the set up of systems for managing these impacts, 
  • conservation of biodiversity and sustainable management of natural resources, 
  • consultation with affected populations, creating a process for managing forced relocations, protection of vulnerable indigenous communities, preservation of cultural heritage and grievance management, 
  • pollution prevention and control, 
  • fundamental principles and rights of employment, health, safety and security of local communities.
Investors and Mining Industry magnates would also be wise to take heed of the likely "outrage" factor when assessing project related risks. 

The Investor Quandary

According to the FT, although individual financial analysts may be following the Equator Principles and aware of the issue of stranded assets, the awareness often is not escalated to the board. Industry insiders argue that an understandable preference for looking for opportunities instead of mitigating the risks may also be to blame for investment managers choosing to ignore the issues (7). 

Just last month, Adani Mining, an Indian conglomerate has had to halt its work on its $16 billion dollar Carmichael Project in Queensland, Australia, where it was hoping to mine one of the world’s biggest untapped thermal coal deposits, close to Australia's Great Barrier Reef. The company has cited uncertainty and delays in approvals, which has been at the centre of an ongoing the battle with environmentalists and the fossil fuel industry (9). In April this year, the State Bank of India (SBI) reportedly turned down the company's $1 billion loan request for the project. SBI are not a signatory to the Equator Principles. Five foreign banks had previously denied credit to the group for the project (10). 

With access to capital considered the #3 risk for the industry and social license to operate #5 (8) Mining Executives and their Investors should take note.  These examples are testimony that social license to operate issues really do matter in mining.

References:

(1) ABC News, 31.07.2015 "More mining job cuts to come" Accessed 1 August 2015 at http://www.abc.net.au/news/2015-07-31/fifo-workers-wlakjpg/6661884

(2) (3) Elbein, S. "David & Goliath: Locals resist multinational dams, mines—sometimes win" Accessed 1 August 2015 at http://goo.gl/BQNa9O

(4) Pensamiento y Acción Social Arbeitsgruppe Schweiz Kolumbien, 2015 "Shadow report on the Sustainability of Glencore's operations in Colombia". Accessed 1 August 2015 via RepRIsk AG

(5) “What are stranded assets?” smithschool.ox.ac.uk, Accessed 1 August 2015 at http://goo.gl/tiDdgK 

(6) "7 major environmental disasters caused by Newmont in the world," Con Neustro Peru, July 6, 2015. Accessed 1 August 2015 at http://goo.gl/YhTgdP

(7) Grene, S, "Investment consultants told to ‘man up’ on stranded assets", Financial Times, March 22, 2015. Accessed 1 August 2015 at http://goo.gl/KfN3io

(8) EY Business Risks in Mining and Metals 2015-2016. Accessed 1 August 2015 at http://goo.gl/yPhRmX

(9) Jamasmie, C, "Adani confirms work halted at controversial coal project by the Great Barrier Reef" June 25, 2015. Accessed 1 August 2015 at http://goo.gl/tiiNzK

(10) "Good decision - SBI Bank quietly buries its controversial 1 bn loan pact with Adani" F. Business, April 20, 2015. Accessed 1 August 2015 at http://goo.gl/a3N2aO

Database sources: Factiva, LexisNexis, RepRisk AG.

#reputation risk #retail #mining #equator principles #CSR #risk management #audit #standed assets `#project finance

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I appreciate that you are reading my post. Here, at LinkedIn, I write about board related issues - corporate strategy, human capital, reputation risk, technology, corporate governance and risk management trends.

Managing Partner and Director of RL Expert Group, an international reputation and risk management think tank and consulting practice and Asia Associate of the Reputation Institute.

A Member of the Global Advisory Council of NY Investment Advisory Firm,Cornerstone Capital; an Innovation Advisor to the University of Illinois Urbana Champaign Advanced Digital Science Centre, Singapore and Board Advisor to Belgian PR Software firm, Prezly and US Sports Analytics firm, Autoscout.

TIAS - the School for Business and Society, Research Fellow working to deliver predictive reputation risk analytics for financial strategies and complex global supply chains - r3Intell.

Connect: Leesa Soulodre, Managing Partner, RL Expert Group - ls@rlexpert.com

www.leesasoulodre.com

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