Paul Skinner, chairman, Rio Tinto
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The politics of mining
David McKay
Posted: Fri, 09 Nov 2007

[miningmx.com] -- CRYSTALLEX International is a Toronto-listed firm that has the right to operate Las Cristinas, an enterprising gold resource in Venezuela. This year the company’s management is hoping to win an environmental permit to develop the mine at a time when the gold price is through 28-year highs. It’s important it does so now as the market needs fresh sources of gold. But a sobering thought is that Crystallex has owned the deposit since 2002 and has been waiting for its permit for more than three years.

Defunct mining company American Mineral Fields gained profile in the late Nineties. Its claim to fame? It had the rights to develop highly prospective copper and cobalt fields in the Democratic Republic of Congo’s Katanga province.

But that was before the five-year civil war that rubbed out any chance it had of ever realising the metals from the deposit and continues to haunt current incumbents in the DRC.

What links the two companies with prospects continents apart is frustrated ambition. Nobody doubts the value of the minerals they hoped or hope to develop but there’s no legislating for so-called force majeure, a common occurrence in the developing world, where global mining companies must increasingly go to explore for mineral deposits.

Pierre Lassonde, non-executive chairman of Newmont Mining, one of the world’s largest gold producers, puts it aptly: No matter where you go in the world expect a legal battle to develop natural resources. Ultimately, that has significant market consequences. The minerals pipeline – from exploration through to production – has at least doubled. In the current metals hungry market the factors that affect the struggle for property are lengthening the commodities cycle.

Force majeure (factors beyond a company’s control) is a fact of business life. However, in addition mining firms are discovering there’s an entirely separate suite of factors for which they rarely thought of controlling but now must. Those are the investment mores of sustainable development, an umbrella term under which matters of safety, environment and global warming, health, corporate social investment are housed.

Paul Skinner, chairman of Rio Tinto, one of the world’s largest mining companies, says: “Ten years ago if you used the words sustainable development people would roll their eyes in wonderment. Now it’s beginning to be a determinant of investment strategy.”

Everywhere there’s evidence of mining industry stakeholders, including financial services, attempting to get to grips with the direct economics associated with sustainable development.

For example, take the Enhanced Analytics Initiative (EAI), an index established in 2004 to provide fund managers with better research regarding the future prospects of industry sectors. Skinner says the EAI places considerable weight on issues such as corporate governance, social responsibility, environmental risk and employment standards. Assets under management for the initiative were recently reported at $1 trillion. “It’s not something for show. It’s a business reality,” says Skinner.

It’s not the only attempt industry has for measuring the effects it has on global warming – and its effectiveness in countering it.

Citigroup has developed an index that seeks to differentiate between mining companies that create value and those that destroy value through their respective approaches to sustainable development.

Fatalities isn't a case of business as usual
The FTSE 4Good index is another and recently it developed a methodology to include companies involved in the production of uranium. The Dow Jones Sustainability World index, developed in 1999, is another; while the World Business Council for Sustainable Development and the International Council on Mining and Metals (ICMM) have long been in operation.

Karin Ireton, who manages Anglo American’s sustainable development initiatives, says the quality embracing all matters of sustainable development is that it’s a mark of stable mining operations. Fatality rates in underground mining operations are obviously an indication that management’s eye is off the ball.

But unsafe mines are also inefficient mines. And while protecting the employees should be the most important goal of any mining company it’s also worth remarking that safety also has business consequences.

“My job at Anglo is to make sustainable development everybody’s business,” says Ireton. Certainly, the sustainable development debate has been an early hallmark of Cynthia Carroll’s eight month term as CEO at Anglo American.

The most public expression of Anglo’s interest has been its response to mine deaths at platinum subsidiary Anglo Platinum. An investigation into 11 deaths in the first six months of the calendar year – resulting closing shafts and losing production – is thought to be behind the resignation of Ralph Havenstein, CEO of Anglo Platinum.

“The important sign Carroll has wanted to show is that underground fatalities isn’t a question of ‘business as usual’,” says Peter Major, a hedge fund manager at Cadiz.

The resignation of Havenstein might be an extreme step – quality CEOs are difficult to find in today’s mining market – but it was a crucial marker, says Ireton.

Says Skinner: “The extractive industries are particularly sensitive to reputational risk. The speed with which a slide in a share price can follow damage to reputation is remarkable.”

But there are a number of other business reasons for sustainable development. A good track record in sustainable development provides good access to resources in the future – and provides access to talent. Nobody wants to work in a dark and dirty industry for a company with a tarnished reputation. Access to capital is also increased because financial institutions know a responsible mining company knows how to manage its risks.

CSI matters

MARGIE KEETON, CEO of Tshikululu Social Investments, says R3bn will be invested this year by South Africa’s listed companies in corporate social investment (CSI). The figure has been growing steadily.

The CSI Handbook (available on the website www.cismatters.co.za) shows CSI totalled R1bn in 1995, increasing to R1.63bn in 1999 and then to R2.4bn. That growth is in line with inflation and amounted to 1% of the companies’ pre-tax profits during 2006, the website reports. Tshikululu’s job is to administer the CSI funds of several major companies in South Africa, including Anglo American.

Keeton, a former CEO of the Anglo American Chairman’s Fund, says there are still problems with CSI in South Africa. “Non-governmental organisations can’t often get a hearing, fund fashions change, there’s corruption and quite often there’s big spending on issues that have no legacy,” said Keeton at a recent presentation in Johannesburg.

“Business has an ambivalent attitude to CSI, which you feel is still not a central issue. Having money and a mission isn’t necessarily enough – regardless of how good a company’s intentions are.”

One way in which business gets the wrong end of the stick is that it invests in projects that have no means of sustaining themselves. Keeton refers to a hypothetical instance of a company ceding computers to a school, only to return a year later to find the machines hadn’t been maintained while the students struggled to properly use them, if at all. In such examples the noble giving of old computers is useless if the school has no skills to teach their uses.

Keeton also warns business about treating “the poor” as a homogenous whole. “You have to make decisions and remove sentimentality from the picture,” says Keeton of companies’ need to pick the correct social investments for itself.

It’s also worth noting that CSI can’t replace the responsibility the South African government has. Business can help sharpen the government’s perspective, but compare this year’s estimated CSI of R3bn with South Africa’s education budget of R50bn. The South African government has enshrined social investment in its charters – though not all as the Mining Charter, the first of its type, didn’t provide specifically for CSI.

However, Keeton is critical of the government’s charters. One “short-sighted” consequence of South Africa’s various empowerment codes is that too much emphasis is placed on job creation and enterprise. “That’s the most difficult thing to achieve,” says Keeton, who says more could have been done concerning social investment. “It’s a pity.”

Ultimately Keeton’s contention is that business must treat CSI as it would any other investment: it must provide returns and it requires professional staffing “even though the assets are social, not financial”. “CSI doesn’t need to be massaged into a ‘good for business’ idea – it is business. CSI is all about reputation.”

Carbon world

Some people live out their views. Hennie Stoffberg, who studies climate change at Unisa in Pretoria, has hot water preheated – so making a cappuccino in a smart, automatic coffee-making machine consumes less energy. “It’s our little contribution to humanity,” quips Stoffberg.

His department contributes data on South African companies to Britain’s Accountability Rating, an audit published as a ranking system that identifies companies with the best sustainable development strategies, systems of governance and so on. “We look at performance management, stakeholder engagement and public disclosure,” he says.

But Stoffberg’s remit is essentially understanding the impact businesses have on carbon emissions. “When mining is finished do businesses have a carbon credit or not? If they have a credit they can offset it against, say, transport emissions.”

Stoffberg’s positive regarding how mining companies manage their impact on the environment. The Accountability Rating that his department helped provide data for last year contained five mining companies in its top 10, suggesting they were already aware of the pressures of responsible mining. But he also wants to make a broader point. “Mining companies hand out HIV/Aids retrovirals as part of a humanitarian issue. So should climate change also be viewed as a humanitarian issue?”

The threat posed by global warming is, he says, potentially more catastrophic that the HIV/Aida pandemic. “Why is climate change not being addressed as HIV is being addressed?” And although mining firms have made great strides in attempting to control carbon emissions he’s still critical.

Stoffberg wonders why Anglo, in its latest annual report, says it can’t be responsible for the greenhouse gas emissions of companies in its supply chain. Don’t British retail chain Marks & Spencer carbon label in their supply chain?

Anglo’s Ireton counters that it’s impossible for Anglo to sometimes know who an end customer is because it often sells coal, for example, through trading companies. But Stoffberg’s point is that he sometimes believes mining companies passively wait for legislation before responding to environmental challenges.

There’s no quarrel here necessarily, because mining companies buy into the climate change debate. However, there’s always more that could be done. For example, Stoffberg’s keen to publicly acknowledge the environmental work mining companies have done.

BHP Billiton has designed a large desalination plant that’s powered by renewable energy. The plant means the company doesn’t compete for valuable water with rural communities near its mining operations.

“That’s clearly an example of a company staring climate change in the face,” says Stoffberg. But he believes BHP Billiton should ensure the plant provides extra water for the community in general.

In its carbon disclosure project Anglo identified the potential scarcity of water, particularly during periods of drought, to be “the most significant impact of climate change on our operations”. Anglo takes that view in the context of the 50 years or so of life of many of its mines. But over the short term legislation that could restrict carbon emissions on businesses will have a greater impact on the group’s coal, it said.

Ireton says Anglo is researching near-zero emission coal technologies. So it might. Norman Ndaba, Ernst & Young’s energy, chemicals and utility director, says there’s no escaping South Africa’s reliance on coal, particularly given Eskom’s planned R150bn investment in new power production, the majority being coal-fired. Currently, 90% of Eskom’s generating capacity is coal-fired.

Talk that alternative, renewable energy could be developed is wide of the mark as a short-term mass solution, says Ndaba. Though that’s a controversial view Ndaba believes it’s a realistic one. Renewable energy is often neither accessible nor affordable relative to coal. “There are three big considerations for us in respect of alternative energy sources: they’re accessible, affordable and acceptable.”

Alternative energy sources are almost always acceptable – even nuclear generated power, which appears to be putting the Three Mile Island and Chernobyl disasters behind it. But not all of them are affordable. Ndaba says South Africa ought to take heed of Europe’s power generation mix. France is 78% powered by nuclear technology; while Britain and Germany have a three-way balance between coal, nuclear and gas, says Ndaba. And while Italy leads the world in renewable power – 25% of its power comes from that source – the balance is from fossil fuels.

“While there are good and entirely necessary intentions behind renewable energy sources the grim reality in South Africa is that, on a yield basis, renewable energy is simply not feasible to meet our requirements.” For example, solar power is out of the reach of most of us, owing to its cost, says Ndaba.

There’s also criticism of bio-fuels, such as ethanol from maize, mostly regarding issues related to yield. Ndaba says the effort to produce ethanol displaces much-needed agriculture. “And we have 40m people to feed. At the end of the day, coal is still our best source of energy over the next 10 to 15 years. However, governments and coal companies need to pull out the stops in finding cleaner uses of coal.”

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There’s other evidence that industry’s concerned about how its coal market may be affected by carbon emission regulations. In May, BP and Rio Tinto launched feasibility studies for the potential development of a $1.5bn coal-fired power generation project at Kwinana, western Australia. Rio Tinto says the project would be fully integrated with carbon capture and storage to reduce its emissions of greenhouse gases.

For its part, BHP Billiton is pumping part of $300m set aside to tackle climate change over the next five years into developing low emission technologies. That’s part of a new climate change policy that includes reducing the energy and greenhouse intensity of its products by 13% and 6% respectively by 2012.

“We’re on track to exceed our current target of a further 5% improvement by the end of this financial year,” former CEO Chip Goodyear said at the time of that policy’s launch in June.