Mining Journal report of a speech by Critical Resource founder and Managing Director Daniel Litvin – in which he argues that resource investors should assess each individual project on its own risk profile.
Below is an article published by Mining Journal – reproduced with their kind permission
Taking long-held assumptions around stakeholder engagement is costing miners billions in value and, in the worst cases, causing project failure, according to Critical Resource founder and managing director Daniel Litvin.
Speaking at the inaugural Mining Journal Select conference in London this week, he said miners were facing a multi-layered challenge and obligation in terms of establishing and maintaining stakeholder relationships.
That effort started with community groups around the immediate project areas, then naturally radiated outwards as permitting requirements overlapped with local and national bureaucracies, which also regularly looked to tighten or exploit the fiscal framework. Investor and NGO concerns and objections were then an influence at an international level.
“We just work on the licence to operate for mining and energy companies,” Litvin said. “The fact that we’ve thrived and continue to grow is testament to the growing importance of these issues in the sector and the growing recognition among senior executives that they need to be dealt with in both a systematic and rigorous way, the same as geological or finance is dealt with.”
Regardless of the increased recognition of socio-political challenges, he said their mismanagement was all-too common in the mining sector and the results could be seen through the destruction of value, as has been the reality in high-profile cases such as Acacia Mining in Tanzania and Newmont Mining in Peru, to name two examples.
Litvin said it was important to assess each project on its own merits and resist the temptation to apply broad brush industry assumptions when making investment decisions.
“There is a lot very good work by mining and oil and gas companies in this area but, nonetheless, we see a passiveness in assumptions being made that aren’t quite right,” he said.
Litvin said there were four “dangerous assumptions” that were too optimistic and represented “project killers”. These are: projects will be pushed through because of their national interest; Western administrations are easy to navigate; being well-connected ensures a smooth path to production; and that the past will stay in the past.
He said resource economies were not always friendly to miners and even the largest projects with the greatest potential tax input could attract negative attention.
“The problem is by having a high profile you become a politically nice target to hit,” Litvin said. “So even if it hugely damages investor confidence in the country, if you’re a populist politician … the political gain is so tempting that large projects are still at risk.”
This brand of nationalistic and populist policy shift is more prevalent in third world and emerging jurisdictions but it is a mistake to think it is absent in the first world. Litvin cited wide-spread and well organised protests against fracking in Europe and knee-jerk tax hikes on North Sea petroleum in the UK as examples but the most relevant case study was no doubt the proposed tax hikes in Australia since 2011, which has seen a Mineral Resource Rent Tax tabled, along with increased royalties on iron ore and gold across various state boundaries.
“The assumption is in OECD countries like Britain, the US and Australia, the rule of law is paramount,” he said. “The trouble is, the rule of law may be stronger than some developing countries but it does not prevent politics from intervening in the processes to get consent for projects.”
Regardless of the jurisdiction, many leadership groups have proceeded on the assumption their in-country connections guarantee success. This, according to Litvin, is another fatal error. Though it was certainly helpful to have a guiding hand through the process, relationships could be “fragile”, personnel could change, and attitudes toward resource development often varied across government departments.
“There is an illusion created by the access that mining and oil and gas companies often get to the very top levels of government that that translates to a stable climate of support,” he said. “The reality is not just that governments change with elections and coups, but even if they don’t change, politicians at some stage need to listen to popular opinion.”
The final fatal flaw, according to Litvin, was the misguided assumption that past problems with an asset or within a company will not be revisited. However, scrutiny by activists, regulators and hostile political interests could mean long-distant or indirect incidents could result in high-profile allegations.
Litvin said miners also risked sleepwalking past valuable development opportunities because those opportunities were situated in jurisdictions exposed to risks that executives had been taught to routinely sidestep.
There were three of these assumptions to watch: conflict and corruption are unmanageable; populists hate miners; and it is impossible to negotiate with hostile stakeholders.
He said headlines about violence or bribery issues in a jurisdiction often portrayed a national story about localised incidents and it was worth investigating whether focused security issues could be effectively managed or an “island of integrity” established. There are track records of both these being accomplished, most notably by Randgold Resources in West Africa, and Mali specifically.
While admitting populist politicians often followed big talk with tough action, he said it was worth looking past the headlines and into the detail of investment frameworks established under populist regimes, citing both Brazil and Poland as places where populism had aligned with development.
And, finally, Litvin said the idea mining developments needed to “defeat” opponents was erroneous and it was often best to look for ways to work with stakeholder groups who had been aggravated by a mining proposal. He said a “bold, creative approach can turn opposition into an advantage, making a project ‘part of the solution’ for stakeholders”.
“Often the best strategy is to engage,” Litvin said. “And not just to engage but to think carefully about what wins you can give critical stakeholders in a way that they can show their own stakeholder community they have had a victory – to be as clever as politicians in the way you play these licence-to-operate issues.”
He said from an investment standpoint, it often came down to spotting the opportunities to be clever about relationships or identify locally welcoming environments in otherwise hostile jurisdictions that opened the door to big profits.
Daniel Litvin is Founder and Managing Director of Critical Resource, and author of ‘Empires of Profit: Commerce, Conquest and Corporate Responsibility’.