In a wide-ranging interview with Critical Resource, Nick Holland predicts more industry pain before gain, and calls for companies to prioritise long-term stakeholder concerns over short-term investor demands.
Gold Fields, headquartered in South Africa, is one of the largest gold mining firms in the world. The company has assets in South Africa, Ghana, Australia and Peru. Mr Holland became the company’s CEO in 2008, having served as an executive director (CFO) since 1997.
Gold miners could be in for more pain before things turn around
“I don’t think the gold price has hit the bottom yet, unfortunately. In the near term the industry could face more pain before things turn around. That’s likely to mean another difficult year in 2016.
Equity financing and debt, the financial lifeblood of the industry, have dried up. Companies are struggling to access equity markets because the money’s not there. As for debt markets: the balance sheets today of the majors and intermediates have got too much debt on them, too much leverage. As an act of desperation, companies that can’t access the traditional funding markets anymore are turning to royalty companies and/or pre-selling their production at pre-determined values, that can be lower than prevailing market prices. That means they may be writing away a lot of the optionality and volatility that they would typically get when prices move up.”
The industry is facing a structural decline – but there is cause for long-term optimism
“The gold industry will go through a structural decline over the next 5 to 7 years. Exploration has been slashed repeatedly over the last 20 years and there is a dearth of new projects coming through, particularly among the majors. Then there are the juniors, which have typically been the source of new projects through very innovative and entrepreneurial exploration. They are really hanging on by a thread. Across the board, we’re seeing capital being cut back which will impact production. This lack of investment means the supply of gold will likely decline significantly, although we won’t see the effects of that for another three years or so.
I’m a great believer in gold over the long term. Demand from the East will continue. It might continue at a slower rate, but there is still big urbanization and moderate growth in China and India. 45% of the world’s population continues to grow at two or three times the pace of the rest of the world. Central banks are buying, particularly the likes of China and Russia, as they look to diversify against the US dollar, and in some cases for political reasons.”
Current cuts are setting the stage for the next, economically-damaging price-spike
“We almost have to get into a crisis before people realise how important mining is to the global economy. I wonder how many people understand that our industry contributes directly and indirectly to a very significant proportion of global GDP. When we see mining pull back, projects not being built, mines being closed and exploration dropping, has anyone ever thought what the knock on effect of that will be in 10 to 15 years’ time? I don’t think many people have. One morning some guru like Warren Buffet will wake up and say ‘gee whiz, the world is short of raw materials’. Everyone will say ‘gee whiz, now we need mines’.
Sooner or later we are going to face serious problems because we’re dealing with finite materials. Mines aren’t factories that keep churning out widgets or cars. You need to find and develop resources in the ground. You need to go into areas where maybe there’s no infrastructure; you need to focus on greenfield sites.”
Companies shouldn’t be seduced by short-term investor pressures
“Often investors with short-term interests, hedge funds in particular, will push you to do things which you ordinarily wouldn’t do to try to get some short-term return. Investment bankers will always find a way to generate deal flow. That kind of seduction, which we’ve seen a lot of, can be damaging to the industry.
We have to be responsible to all of our stakeholders, not just shareholders. Companies need to pay attention to communities, employees, governments and longer-term investors. Shareholders and investors can come in and out of our registers with alarming turnover, but these other stakeholders are with us for the long term. We’ve got to manage our businesses for all of these people. If you operate only with shareholders in mind your business will come to a grinding halt very, very quickly.”
Future CEOs will need to spend more time on stakeholder management
“The typical diaries of CEOs are going to become more focused on managing stakeholders. Whereas today much of their time is spent poring over the daily operational statistics and being focused on the physical outputs of the business, in the future there’s going to be a lot of emphasis on talking to governments, communities and NGOs. One or two decades ago mining companies wouldn’t let NGOs through the door! When I went to the United Nations Conference on Sustainable Development back in 2012, I couldn’t believe how many CEOs were presenting on the podium with NGOs next to them. Today, companies – including Gold Fields – are partnering with NGOs; we’re understanding their concerns and they’re helping us in our business.
Although in the future there’s going to be a lot more devolved culpability and authority to much lower levels in the business, CEOs will have to be in touch with their businesses. They will also become portfolio managers, managing the different risks and stakeholders. That’s how the job is going to evolve: not taking direct operational decisions but being more of a strategist, a coach, and a mentor.”
Extractive firms should learn from past mistakes and proactively engage stakeholders
“For any mine to be successful in the long term, it needs to have good partnerships with communities, its workforce and the government. Everyone’s got a role to play amongst those constituent parts and we need each other. It’s a symbiotic relationship.
The industry only really started to think about communities when they found their voice. I think it’s only when things got tough and these communities started showing their muscle and getting NGOs involved that the companies reacted. We should have been more proactive. We’ve all learned hard lessons and are doing better today. I think the industry has made big strides, for instance with the formation of the International Council of Mining & Metals (ICMM), a group of like-minded resources companies driving the sector forward in a positive way.
As an industry, we haven’t communicated clearly enough to governments the risks and opportunities in our businesses. We shouldn’t only go to see governments when there’s a problem. We should get them involved through the different stages of our business, from planning a new mine to its operation. Let them know that they’re a critical partner. We need governments to provide stable and consistent laws that are competitive; we need them to provide infrastructure; and we need them to create a framework for investment.”
The industry needs to get better at transparently telling its story
“Companies need to be more transparent about what they’re doing, what they’re achieving, their problems and how they’re dealing with them. If the industry is more transparent we can build up trust. We really do walk the talk on safety, health, environmental and stakeholder management – what I call the four non-negotiables. Let’s be transparent on how we’re managing those, because at the end of the day if we’re seen as blood-thirsty miners driving every extra ounce at whatever cost, then we won’t be able to sell our story and show the benefits of mining.
The industry also struggles to explain the multiplier effect of mining: the upstream and downstream benefits of all of the linkages to other businesses and economic sectors. We’ve started telling the story a little bit better. For example, the World Gold Council and ICMM have been key players in promoting the importance of mining. But we still need to get better at it, because the public still has an overwhelmingly negative image of the sector.”
South Africa: can dialogue save a sector in crisis?
“I’m quite worried about regulation and policy in South Africa. It’s not clear if the Department of Mineral Resources will honour their agreement to allow the courts to provide a clearer interpretation of the 2004 Mining Charter, which is a set of fairly opaque laws and guidelines. The result of that decision will determine whether the industry will have to renegotiate billions of rands worth of deals.
The other concern is about whether the government is going to raise the bar again and subject the industry to new regulations and requirements. If you look at gold and platinum in South Africa, with increasing electricity tariffs, wages, etc., the industry can’t absorb any more impositions either from the taxman or in the form of additional empowerment credentials, because the cake that we have to share is just getting smaller and smaller.
New forms of dialogue might help to identify the pressures and levers in the industry and among stakeholders. Some initiatives are already happening that I’m supportive of. For example, there’s Operation Phakisa, which is a tripartite initiative of major players, including government, companies and trade unions, working together to change the trajectory of the industry. It’s exactly the kind of dialogue that I’ve been saying for years needs to happen. I don’t know if it will give us the solutions we need, but it’s a step in the right direction. The fact that it’s been championed and led by the presidency is positive and we should grab it with both hands.”
The long-awaited ‘African Renaissance’ is now, bit by bit, underway
“Africa is challenging because of the lack of infrastructure and the major inequalities that exists in many countries. But, that said, a large proportion of the world’s resources are in Africa. I think that the continent’s long awaited renaissance has finally started. It might be happening slowly, but I think the advent of technology improvements have meant that it’s going to gather pace. In 30 years’ time, I believe we’re going to be staggered by the changes in Africa.
We’re on the right path, but if mining companies want to succeed in Africa, partnerships are going to have to be forged to develop projects. You’re going to have to be prepared to work on public-private partnerships in infrastructure, social investment, skills training. But that’s certainly not insurmountable.”