The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™
The politics of resources redefined™

‘The financial value of trust’

By Juliet Hepker – This article first appeared in Mining Environmental Management –Click here to view

The downturn is a time to cut back – but not to cut stakeholder relationships

The reaction to cut-backs companies need to avoid

In a few short months, the operating environment for the mining industry has changed dramatically. After five years of growth and optimism, mining companies are now adapting rapidly to the falls in commodity prices, and restricted access to capital. In an attempt to conserve cash, major mining companies have cut capex by some $30 billion, according to one recent estimate. The upshot is that many mines across the world are facing cut-back and delay.

Companies focused on cost-cutting may be tempted to treat management of socio-political and sustainability issues as a luxury they can forego, particularly for projects being put on hold. But research based on Critical Resource’s LicenseSecure™ methodology – a decision tool to help companies protect the ‘socio-political license to operate’ of resource projects – indicates the need for a more strategic approach. Our analyses of past projects (of which there is space to mention only one or two here) suggest that a foreign company’s handling of social and political concerns, including during periods of delay, can be critical to the way the business is treated by its hosts when conditions improve.

The seeds of tomorrow’s resource nationalism

For when it comes to their treatment by foreign extractive companies, host governments and communities in resource-rich countries tend to have long memories. The feeling that multinationals have put short-term business interests too far ahead of the host country’s broader socio-economic needs, particularly during times of economic downturn, has often sown the seeds in past decades for subsequent waves of resource nationalism. Depressed mineral prices of the 1980s and 1990s, for example, provided the context for deals often highly favourable to foreign mining firms – but a number of these deals were then torn up when rising prices shifted power back to host governments. In the oil sector, some 80% of the world’s proven oil reserves are now in the hands of state oil firms – that is largely out of bounds to foreign firms– as the result of local perceptions, fair or not, of past exploitation at the hands of such foreigners.

As companies struggle to deal with the new economic conditions, resource nationalism may have slipped far down their list of concerns. Indeed with FDI to developing countries predicted by the World Bank to shrink by 30% this year, many resource-rich governments are likely to lower their demands to attract much needed foreign investment. Several countries, such as Zambia and South Africa, have already retreated on plans to raise mineral taxes.

Yet mining companies ignore sustainability issues and stakeholder relationships at their peril. Angry reactions to a number of small Chinese metals companies in the DRC, for example, where projects have recently been abandoned without, it appears, paying regard to local concerns, are reminiscent of the past and full of foreboding for the future. In an interview with the Financial Times, the governor of mineral-rich Katanga province, asked if the companies would be welcomed back when the price rebounds, replied emphatically, “No, no, no. Not as long as I am governor. Katanga is not a jungle. They worked as if it was a jungle.”

Avoiding a legacy of resentment

Our research suggests that where delays are necessary, they need not result in such alienation and can instead be used productively to actively build stakeholder support. BP, for example, managed to hold back development of its Tangguh project in the late 1990s, despite pressure from the Indonesian government for operations to begin, in a way that did not harm BP’s long-term prospects. A firm but flexible negotiating position that took some of Indonesia’s priorities into account, and a pre-emptive approach to tackling sensitive local issues including potential human rights concerns and unmanaged migration into the area helped persuade the government to accept the delay. In another example, at its Climax project in the US, Freeport McMoRan’s continued environmental management, beyond the minimum legal requirements, and targeted engagement with the local community during long periods of delay (recently extended) were rewarded with enthusiastic local support for the mine’s reopening.

Mining companies should seek, in short, to balance the need to adapt quickly to the current change in operating environment with their longer-term interests. Well-focused sustainable development programmes and other relationship-building activities can help ensure that local and national support – which may have taken years to build up – is not lost or damaged. Such activities, provided they are well targeted, typically cost a small fraction of overall capital expenditures and yet can be equivalent to buying an option to reopen projects smoothly when conditions change – an investment, in other words, that could prove cheap at the price.

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Please note that, as with other Critical Resource news content, this article does not necessarily reflect the views of the Senior Advisory Board for LicenseSecure™

Photo: © istockphoto.com/Casarsa