Navigating political and regulatory risk while operating abroad has become imperative for mining operators. Julian Turner talks to Rob Foulkes and Charlie Pembroke of consultancy Critical Resource about licence to operate issues and how to avoid the mistakes of the past

Managing risk and instability in the mining industry

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Anyone in search of a cautionary tale about the myriad risks faced by energy and mining companies operating abroad need look no further than Acacia Mining and its ongoing travails in Tanzania.

In 2017, the East African nation accused the London-listed gold miner of under-reporting output at its three mines and banned it from exporting powdered gold concentrate. The embargo cost Acacia’s chief executive and chief financial officer their jobs, and the company around $1m (£760,000) a day.

Fast-forward a year and Acacia blamed the export ban for its recent decision to scrap its 2017 dividend, after the company posted a $700m loss, and full-year, pre-EBITDA earnings fell 38% to $257m. Acacia argues it has invested $4bn in Tanzania over the past 15 years but President John Magufuli appears determined to negotiate a greater share of the wealth for the country from its natural resources.

“The Acacia situation in Tanzania is really interesting and is being followed closely by companies in the country and elsewhere, particularly because Acacia and its majority shareholder Barrick Gold have been such huge investors in the country for so long and were pretty confident they could handle the political situation there,” says Rob Foulkes, associate director at Critical Resource.

“However, pressure has been mounting politically and within the population in support of the view that Tanzania is not getting enough out of the mining sector – and events have come to a head in the past year. That this can happen to Acacia, which is so important to the country’s economy, is telling.”

The rise of resource nationalism

With commodity prices rebounding, multinationals and junior operators are once again looking to invest in regions where political instability, corruption and resource nationalism are commonplace. Critical Resource provides strategic support to energy and mining clients, helping them understand and negotiate stakeholder, political and reputational risks prior to investing in foreign jurisdictions.

The London-based consultancy has appointed incoming Rio Tinto chairman Simon Thompson and BlackRock’s Evy Hambro, one of the world’s leading resource investors, to its senior advisory panel. “The panel is a reflection of how important licence to operate (LTO) issues are on the mining industry agenda at boardroom level,” says Critical Resource senior associate, Charlie Pembroke.

“The price turbulence over the past five to six years has put more pressure on relationships between industry stakeholders and governments, and mining operators and equity investors are beginning to recognise that these issues can directly impact the profitability and sustainability of their assets.”

“In the years when companies were focused on cost-cutting and trimming their portfolios, there was little temptation to go to difficult locations and unpick projects that had become stuck for political or stakeholder reasons,” adds Foulkes. “The recent uptick has made some companies less risk-averse.”

“When commodity prices were lower there was more acceptance globally that governments would need to work hard to attract investors and market their resource sectors,” he continues.

“But as prices have recovered it is becoming more difficult for governments in resource-rich countries to maintain that political narrative domestically, and there is more public pressure to start moving back toward a more resource-nationalist model.

“However, I don’t think mining companies are anywhere near that late-cycle thinking yet, so things are out of kilter in terms of their expectations for countries such as Tanzania, where the population may be thinking ‘now’s the time to ramp up the pressure and get a better deal for our country’.”

The recent uptick has made some companies less risk-averse

Acacia Mining hit problems in Tanzania over accusations of under reporting levels of output. Credit: Acacia Mining.

It is important to assess countries on a project-by-project basis

Accountability and political instability

In addition to resource nationalism, miners are under increased scrutiny to ensure they are paying more than mere lip service to corporate social responsibility (CSR), due diligence and sustainability.

“Investors, NGOs and foreign governments are all starting to pay more attention to environmental, social and governance (ESG) issues, and political risk as part of their decision-making when they invest in mining companies and projects,” Foulkes confirms.

“Several years ago, legal cases involving mining companies were largely focused around extraterritorial corruption, but now, particularly in Canada, these are being expanded to encompass a broader set of sustainability and LTO issues.”

Foulkes is referring to three civil cases that may ultimately make a trio of Canadian-based miners – Tahoe, HudBay and Nevsun – accountable on home turf for alleged human rights violations abroad.  

“Mining companies are not just under pressure from the governments of the countries where they work but also from their home governments, to act in a way that maintains the standards set by that jurisdiction,” explains Foulkes. “In Canada, there is also a longstanding plan to set up a stronger ombudsman to oversee the corporate responsibility performance of mining operators abroad.”

But what of the broader issue of political stability? As Critical Resource founder Daniel Litvin recently pointed out, if mining firms get their response to political turmoil wrong, it can cost them billions.

“Issues of political stability are very complicated and difficult to understand, let alone manage,” says Foulkes. “We’ve been working in Brazil, where the Odebrecht scandal is a really big deal; in Kenya, where there are disputed elections, in Argentina, the scene of clashes between the president and congress; and in Guatemala, where the industry is heavily constrained by the lack of a mining code.

“In Brazil, however, companies mainly deal with provincial authorities and so political issues in the capital may not impact them. So it is important to assess countries on a project-by-project basis.”

Companies struggle due to differing standards of their home country and that of their operation. Credit: NevSun Resources.

You can play a really important role in the mining lifecycle by getting this stuff right early on

Junior priorities and building trust

Mining risks of all kinds are no respecter of size or status, as Anglo American and Rio Tinto have found out to their cost. Both companies walked away from the Pebble project in Alaska – the world’s richest undeveloped gold deposit – in the space of seven months, writing down a combined $430m in the process, after scrutiny from the Environmental Protection Agency and local pressure groups.

Enter First Quantum, a relatively minor operator, which snapped up an option on the Pebble play in December. What does the Canadian firm know that Anglo and Rio Tinto don’t? Foulkes is intrigued.

“First Quantum’s decision to acquire an option on the Pebble mine is interesting given the cost and reputational damage that Anglo and Rio risked there,” he says. “In times of less market optimism that was enough to put both companies off, but First Quantum is optimistic it can turn things around.”

“Smaller mining companies operate under a different set of incentives,” adds Pembroke. “They find a project, secure a permit and then develop it to the point where a major is happy to come in and invest. They won’t be around to deal with longer term community or governmental issues.

“What has become clear is that the valuation of such projects has a huge amount to do with how the LTO is looking. Our message to juniors is: ‘you can play a really important role in the mining lifecycle by getting this stuff right early on and giving larger companies the long-term comfort they need’.”

As some commodity prices continue to rally, Critical Resource reports higher levels of interest in new deals and final investment decisions being contemplated for shelved projects. Is Foulkes confident that energy companies and investors now take LTO issues seriously and can avoid past mistakes?

“We’ve been doing a lot of work on climate change with oil companies, helping them to think about future policy development and what makes a successful business in a carbon-constrained world,” he says. “We tell all our clients that building trust with communities and governments is important and that environmental issues and stakeholders’ perception of a project are now closely tied together.”

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You can play a really important role in the mining lifecycle by getting this stuff right early on

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