Resource Nationalism or a Big Adjustment?

24 January 2019

In their report looking at the top 10 business risks facing the mining industry in 2019 -2020, Ernst & Young (EY) elevated ‘licence to operate’ to the top position.

At Henderson we agree with this analysis that securing license to operate should be among the main priorities for mining organisations.

At a time when the term ‘Resource Nationalism’ has re-entered the lexicon, is it a sound business approach to rely on CSR projects and the threat of international arbitration as the carrot and stick of engaging with a host nation?

The rule of law should not be diminished, but if the law is bad, or the conditions under which agreements have been made have changed fundamentally, rigid enforcement will lead to conflict and, in the current climate, loss of value.

The ability to engage with communities and Governments in order to generate true shared value in mining operations is increasingly important.  The election of Governments with a ‘populist’ mandate to adjust the relationship between the mining industry and the State is not born out of happy, content local communities.  Business requires certainty and stability to thrive.

Whilst neither is easy to achieve, early and continued engagement at the social and Governmental level must be seen as a primary activity.

At the same time, investors in mining operations have an absolute right to protect their investments and to expect a reasonable return.  In the case of Sub Saharan Africa, a region which – according to UN projections – will account for half of the global population growth between now and 2050, the issue is increasingly around what constitutes a ‘reasonable’ return.

So in places where we have seen attempts in the past by Governments to cash in on rising commodity prices through the introduction of windfall taxes, the future looks very different.

Rising populations, greater transparency, greater ‘direct’ democracy and rising aspirations of communities are generating demands on Governments for better infrastructure and wider state-funded initiatives such as basic health care and education.

Building shared value under these conditions requires commitment and leadership. Trying to defend a stability clause or MDA written under very different circumstances and signed by a predecessor Government requires sound judgement and not just legal advice.   It requires an informed and ongoing engagement cognisant of the potential for corruption and adept at avoiding it.

Some mining operators do this well. Many do not.

Of course, adopting a strategy that places license to operate as a main objective requires some consideration.  The risk profile changes if a more politically attuned approach is taken.

A well-executed engagement strategy can enhance the long-term prospects for an existing asset. Played poorly and it impacts the discounting of future value creating as many questions as it answers.

One thing is clear however: traditional sources of capital are facing increasing competition, particularly from Asia. Meanwhile, greater demands are being made by responsible, mainstream lenders to ensure transparency and ethical content to major projects.

This is a bonus, not a handicap.

In driving shared value as a principle, capital markets and shareholders who work with local miners can offer an attractive, sustainable and politically sellable solution. Direct foreign investment that imports its own labour from overseas and provides little in the way of trickle-down economic benefit to the local community is increasingly untenable.   

Choosing to initiate a 21st century approach to host nation relations and building long term shared value may be the pragmatic and most effective guarantor of value to all stakeholders.

Yet while placing the licence to operate as a primary objective is a step in the right direction, delivering it requires resource.

We have argued for several years that all above ground risk factors are linked. Where CSR, security, political engagement and community relations are run in silos as separate fiefdoms, fissures start to emerge. Identifying how best to integrate all operations to work towards the principles of shared value requires deliberate planning and support from the top.

Henderson Risk is a highly experienced professional risk management group, with the expertise to help its clients build trust, mitigate critical issues and manage perceptions in order to ensure the smooth running of high stakes projects.

If you would like to discuss the issues raised in this article, or any other aspect of your above ground risk landscape, email, call +44 (0)207 730 5446 or meet us at the 25th Anniversary Mining Indaba in Cape Town, 4-7 February 2019.

Share this article