In a Q&A with Critical Resource, Tom Butler, CEO and President of the International Council on Mining and Metals (ICMM), discusses lessons from the Samarco tailings spill in Brazil, the need to look closely at buyers’ sustainability commitments during asset sales, and the need to streamline transparency reporting.
The BHP Billiton/Vale tailings spill in Brazil is a wake-up call to the entire industry
“The Samarco tailings spill in Brazil is incredibly tragic and everyone was shocked and disappointed that such a thing could happen. Certainly, I think it is a wake-up call to the companies involved and perhaps to the industry as a whole. I don’t think it’s possible to completely eliminate the risk of such an event happening again, in the same way you can’t eliminate the risk of an airliner having some technical failure. While the reaction of both companies has been proactive, it behoves us to be responsible and to apply full due diligence in trying to close down as many gaps as possible and minimize the risks as far as we can.
For example, at some operations elsewhere, the emergency evacuation systems have never actually been tested in a downstream community because the company doesn’t want to alarm residents. That kind of approach doesn’t make sense to me. You need to be able to talk to communities about the risks and drill them for emergencies the same way that when people get on an airplane you say this is where your life jacket is and here’s your safety belt. If the risks are too high you need to evaluate whether it makes sense to have a community downstream.”
Junior companies must be careful not to destroy value in the early stages of a project
“The average development time from discovery to production is between 20 and 25 years. During that time, an asset can pass through a number of different hands. Very often it passes through the hands of junior mining companies at the start. The people who are making the discovery and the people who are doing the early stage exploration need to think longer term about how to engage with the surrounding community and how to manage expectations so that they don’t actually destroy value as they develop the asset.”
Buyers of mining assets should be chosen based on their sustainability commitments
“An interesting challenge arises when companies sell assets. That’s perhaps something we haven’t got quite right as an industry and need to think harder about. One of the questions ICMM members often ask themselves when they’re doing due diligence on buyers is what kind of capacity the buyer has to manage the social and environmental aspects of the operation.
For example, one company I know of is selling a mine in a complicated social situation. They’re not just saying give us the money and here are the keys. They’re taking a responsible approach to the transition, by asking the buyer to commit to the standards they have upheld and by holding their hands for quite a lengthy period to make sure the transition goes well. But not everybody takes such a responsible approach.
Transparency reporting needs to deliver on objectives – not just produce reams of paper
“The World Economic Forum and Resolve put out a report about voluntary reporting initiatives in the mining industry and found that there are more than 40 already. One of the things we’re getting slightly concerned about is that if you have so many initiatives you get into a situation where you’re just generating reams of paper and losing sight of the original rationale for reporting. There are ways to streamline reporting while still delivering on the objective. Companies recognize that there will be more requirements, but the plea from industry is to make it as efficient as possible.
I welcome the EITI’s plans on beneficial ownership, having struggled with it at the IFC for a long time. When we were doing due diligence it was always a nightmare trying to work out who actually held the companies and whether any of them were the wrong sort of people. The base erosion and profit shifting initiative from the OECD is also very welcome, but my concern with implementation is that a lot of countries don’t have the capacity for assessment. Profit shifting and transfer pricing is very complicated and subjective. There is always room for interpretation and so there will always be disagreements. You need the capacity to be able to resolve these in an efficient way.”
With regards to EITI, a country that is EITI compliant is showing that they are committed to moving in the right direction. When I was at the IFC, if we had a project coming to us in a country that was wasn’t EITI compliant or wasn’t trying to be part of EITI you had to make the case much more strongly to the IFC Board that this country was committed to good governance and to using revenues responsibly. Some EITI countries haven’t quite got to the end point but they’re better off than countries that haven’t even begun the process.”
Mining struggles to compete with other sectors for generalist money
“While there are a number of investment funds focused specifically on mining, the pool of generalist money is obviously a lot larger. We are competing against other sectors for a bigger slice of those generalist funds. That can be a challenge. Generalist fund managers know a lot less about mining than the people at mining funds. They tend to be scared off by the sort of high profile risks which are more evident in mining than, for example, in supermarkets. We recently had a meeting with a very well-known fund manager. He basically said that if he were to walk any mining investment across the hallway to his generalist colleagues they wouldn’t even let him through the door.”
Socially conscious investors focus on the risks of mining but often miss potential upsides
“There is a lot of focus on the risk of the mining industry, but there isn’t enough focus on opportunity when investors, communities and societies think about what the mining industry can bring to a host country, particularly a poor country. ESG indices tend to mark down companies that are in risky places. But there is no measurement for positive impacts in these countries. So, if you’re in DRC you’re going to get marked down because it is riskier than being in Devon.
But I don’t think that investors who are concerned about putting money into a responsible enterprise or an enterprise that is going to have an impact — whether they’re a man on the street or institutional investors – understand just how positive the impact of a mine in a place like DRC can be in terms of employment, infrastructure and skills development. They could easily just be put off thinking about risks. The Church of England is trying to strike the right balance with their ethical investment policy. They recognize the upside and positive impact of investing in mining companies in very poor parts of Africa, and are willing to take some additional corresponding risk. But I don’t think the broader investment community has got the same understanding yet. We need to change that.”
Some governments are still demanding bigger slices of a shrinking pie
“In regards to the downturn, I think some governments are definitely playing catch-up — still demanding a larger slice of the pie when it was actually getting smaller. If you look around the world the Peruvians have done a good job of being reasonably encouraging to the mining industry and to investors. They’ve got a new government now so only time will tell, but I think both parties were making the right noises about continuing that. But some African governments have been less realistic. I think South Africa is challenged in terms of the debate going on in the country, which is not positive for investment.
The Venezuelans may finally be coming to the table in terms of realizing that they need to make a change. The current situation in the country is very depressing to watch. Some of the developed countries are sufficiently diversified to be able to withstand the downturn. It’s less of an issue for places like Australia and Canada so it really depends on which part of the globe you’re looking at.”
In the downturn, everyone is being asked to do more with less
“There is no doubt that the commodity market downturn has put pressure on everyone. Some of the nice-to-haves — scholarships and community foundation funds — are falling by the wayside. But ICMM members are not going back on the essential commitments that have been made, like managing environmental obligations responsibly, managing closure properly, managing emissions, and delivering on existing promises made to the community.
Companies are also seeing the need to communicate with communities as much as possible about the downturn so that expectations can be managed. Some projects might take much longer to develop than we thought two or three years ago. You’ve got to convey the reality that things are going to move more slowly than originally projected.”
The International Council on Mining and Metals (ICMM) brings together 23 mining and metals companies and 34 regional and commodities associations with the aim of improving the social and environmental performance of the mining and metals sector. Tom Butler is ICMM’s President and CEO. He was previously Global Head of Mining at the International Finance Corporation (IFC).