In this exclusive Q&A with Critical Resource, the former CEO of Western Mining and Chairman of Arete Capital, Hugh Morgan, discusses the heightened salience of license-to-operate risks in the mining sector, and the impact of a retreat of majors from difficult jurisdictions.
Hugh Morgan is the Executive Chairman & Founder of Arete Capital Partners. He was formerly CEO of Western Mining, Director of Alcoa, Chairman of the World Gold Council, Chairman of International Council on Metals and the Environment (the predecessor to ICMM) and an Executive Committee Member of the World Business Council for Sustainable Business Development.
License-to-operate challenges have heightened for the mining industry
“The mining industry is going through monumental change with one of the most significant developments being the challenges now posed by license-to-operate issues. Environmental, social and political issues are now recognised as critical for business success and not just in places like Africa, South America and Russia, but increasingly in developed countries, too. In the US, litigation constitutes a major hazard, while in Australia, the government has behaved appallingly in several instances, which has dramatically pushed up operational costs and led to issues that are now being exploited by anti-mining groups.
Mining is all about moving that mountain down that railroad onto that ship, while keeping costs low. In the eyes of employers and employees in the sector, it is a rigorously engineered process. However, they often fail to see the hazards that exist in the public sphere, license-to-operate issues and the public’s impressions of the sector. Companies still don’t understand that the real risk is not the price, the ore body or their operations – it is their stakeholders. As a result, they systematically undervalue stakeholder relations and do not adopt the appropriate behaviour patterns.”
Industry governance will be weakened if the western majors retreat from difficult jurisdictions
“As license-to-operate risks have heightened, companies have tended to respond in one of two ways. Some have tried to involve external groups more in their response to environmental, social and governance issues – a sort of “brand protection”. The other common response is the “retreat programme” whereby companies limit their exposure to jurisdictions they perceive to be risky. Too little credit has been given to companies for managing issues well when things have gone wrong and the result is that the major international mining companies – many of whom are among the best performers on environmental, social and political issues – are now moving out of the more difficult countries.
An important driver of this retreat has been the increasingly antagonistic relationship between companies and NGOs. However, the unintended consequence is that when a company leaves, Chinese investors arrive, and the capacity for developing countries to deal effectively with issues like corruption is hugely diminished. This represents a hazard for the host countries, as well as for the companies themselves. We need to see more instances of effective partnerships between companies and NGOs to enable the industry to operate in difficult parts of the world in a way that is beneficial to host governments and communities.”
Risks are not reflected in shareholder returns
“Mining finance is difficult for a raft of reasons. Firstly, shareholder returns do not reflect the business risks, in particular the fact that there is no alternative use of the investment. In the building sector, if you construct a residential building but find there’s a shortage of office space, you can adapt your investment and provide offices instead of apartments. In mining, companies forget what they’ve spent. They talk about marginal cost and book value but lose sight of what it really costs to develop an operation.
You also have a shrinking percentage of the finance community that actually understands the industry. Mining happens in remote places and employs only a small proportion of the workforce. Additionally, the mining industry by its nature, provides a lot of opportunity for the press to talk, and much of this coverage tends to be negative.
Streaming has become very popular as a source of finance but my view is that many of the CEOs that have entered streaming deals don’t fully understand what they’re getting into. Streaming and royalties firms have been extremely successful but it has also been a very expensive manner of raising money for companies.”
There are some great opportunities in politically difficult countries
“There are some great opportunities in politically difficult countries. For example, Russia offers some great opportunities in gold, but it would be very difficult to go there at present. A lot of people like the US, but I can’t see past the litigation system there. It is all about claims and local elections. You need a pretty good understanding of the system to succeed there.
Personally, I think countries go through cycles. Mozambique had its civil war, then became the darling of the UN and is now looking a bit more fragile again. That is a transition period of about 40 years. I would have gone to Tanzania six years ago, but not now. The country is likely to fail in the next seven years, but then it will start to turn around again.
I am deeply involved in a project in Nigeria, where I’ve worked for 15 years. I’m comfortable there and would much rather go to Abuja than Johannesburg. It’s not just about the country, however, but becoming accustomed to the area, understanding the local people and developing good relationships with the right people. It also takes time and money to establish a reputation as a company that doesn’t engage in bribery and corruption.”
Governments need to support the public image of the mining sector
“Whilst safety is the number one issue for reputation within the mining industry, public acceptance can make or break a company particularly if loss of acceptance is at the local level. People pontificate on television how we should stop mining activity and decarbonise the world, even though their whole built environment came out of the ground. Generally, governments don’t do enough to promote the industry. They get their huge tax returns and royalties for being the landlord of the resources, but often they contribute nothing to public relations. When an issue arises, they run and leave their tenants to flounder.”
The threat of undersupply is a political imperative
“One issue on the horizon is the insecurity of supply, and this is perhaps best illustrated by the US’s exposure to rare earth metals. The threat of undersupply is well recognised but nothing has been done: the response times to these issues are massive and from a military view, the US is basically incapacitated to do anything about it. This is currently still going under the radar but it is a political imperative. In the meantime, the Chinese remain very good at making available the resources they’ve cornered in return for further investment.”