The Weekend Essay: Are global miners ignoring their most important risk?
Published by MAC on 2019-04-14Source: Ernst & Young
Question comes from a leading financial agency
"Is license to operate the disruptor you have missed?"
That's the major challenge for the mining and minerals sector, posed by one of the world's leading financial service agencies at the close of last year. Ernst & Young (E&Y) promoted this to the top of the industry's current and near-future risks from the previous year's lower ranking stating:
"A narrow, legacy focus on license to operate may be the strategy that puts you out of business. The stakeholder landscape is shifting. There is more information, bigger platforms and more at stake than ever before. Underestimating the power of even a single stakeholder would be a mistake.
"The sector needs to redefine its image as a sustainable and responsible source of the world’s minerals".
It goes on to declare:
"The large movements across the radar are clear indicators that disruption is already here. Societal change, new technologies and the race to transform business models are driving a whole range of disruption for mining and metals companies.
"Pressure on technology and automotive companies to secure the supply of New World commodities is opening another avenue of potential disruption to current business models. Over 30% of our survey respondents thought that technology companies have the potential to disrupt the sector. We agree. They have good access to capital and are already investing in the innovation and technology that mining operations need to be more effective".
The following article is a shortened version of Ernest & Young's report.
Top ten risks facing mining and metals 2019-2010
Ernst & Young
December 2018
A narrow, legacy focus on license to operate may be the strategy that puts you out of business.
Applying just the social and environmental lenses, seeing it as a soft issue or allocating it to one section of the business will directly threaten your ability to operate.
The stakeholder landscape is shifting. There is more information, bigger platforms and more at stake than ever before. Underestimating the power of each and every single stakeholder would be a mistake.
The issue of license to operate is now an issue that is broad with far-reaching implications, and should be at the top of the agenda of CEOs, their executive teams and boards.
The evolution of license to operate
License to operate will continue to evolve as a number of critical changes are redefining stakeholders’ expectations, and miners need to ensure they are proactively and strategically managing this.
These include:
• An increase in societal participation (beyond local communities): The expectations of society have increased, and social media and the internet are now able to move information quickly, which rallies issues-based stakeholder participation en masse.
• The rise of minority voices: The increase in societal participation in the sector has not only brought into focus the rights of groups, such as indigenous communities, but has also allowed for the amplification of these voices through the combination of smaller groups.
• The advancement in technology: With the fast pace of progress in technology and digital capabilities, initiatives, such as the automation of jobs, will have an impact on stakeholders and the broader community.
• A shift of ownership: New business models will be sought whereby national or even community-owned operations could be favored over traditional models.
• An increase in the expectation of shared value outcomes: The increase in nationalization may lead to an expectation that there are true shared value outcomes from mining — society sees its role as granting access to resources, and expects more than just tax and employment opportunities in return.
• The mushrooming of disclosure regimes: The disclosure of the impact of any project (positive or negative) is required. Also, organizations will need to start thinking about how they disclose the value being created for local, regional, national and global communities, including tax contributions. Investors will also be relying heavily on such disclosures.
• The founding of governance on an accountability framework: Frameworks will measure the financial, environmental and social impacts of a project. The quality and extent of stakeholder engagement will also be measured.
• A rise in litigation: There will be more litigation, especially for past damages. Provisioning will become a key issue for companies and regulators.How do you manage license to operate? The time to more holistically address license to operate is here. A whole of business approach to license to operate is required, driven from the top down.
In the same way as safety, license to operate needs to become part of a mining company’s DNA; the commitment and contribution to community, government, employees and the environment needs to span beyond life of mine. We offer seven key takeaways that organizations should consider to preempt and avoid license to operate risks in the future...
Think global and act global
Identify the leading indicators of license to operate to pre-empt and avoid an issue — provide a single source of truth —what we promised, what we delivered and how we measured it.
Make an objective, detailed assessment of your activities — be purpose-led.
Don’t just listen to the loudest voices, listen to the important voices. Empower the business to make decisions that consider more than just financial returns and give them the tools to better value the broader returns.
Urbanization and rising demand for infrastructure, such as buildings, roads and railways, have been key drivers of demand for Old World commodities. More recently, however, technological disruption and the ongoing transformation of downstream sectors, within an increasingly ”green” economy, have resulted in a change in commodity demand.For example, the rise of electric vehicles has boosted demand for critical minerals such as cobalt, lithium and copper.
On the other hand, an increasing focus on recycling, as companies seek to become more sustainable, is likely to result in reduced demand for certain commodities.
For example, it is estimated that 20% of cobalt demand may be met by battery recycling by 20256. In addition, this shift to recycling is likely to impact iron ore demand as steel companies, particularly in China, increase their use of electric arc furnaces, resulting in higher demand for scrap steel.
Understanding the impact of these changes on miners’ portfolios, and keeping a balance between New and Old World commodities has become a complex task in such a rapidly changing environment. Competing for the next wave of demand is only going to increase as they become central to the production of an ever-growing variety of high tech and green technologies, from batteries, smart phones and laptops to advanced defense systems.
And it’s not just mining and metals companies seeking to secure new projects. Countries and regions, such as the EU, South Korea, Japan and the US, are deeming some minerals as ”critical” to ensure they are available for their future. Executive Director of M&A, Global banking and financial services company EVs will underpin the growth of alternative metals and demand for copper.
Chinese state-owned enterprises are also already taking a significant proportion of the lithium-ion battery supply chain by purchasing and funding lithium and cobalt mines as well as downstream processing. In addition, downstream sectors, such as technology and automotive, are exploring how they might secure supply.
The mining and metals companies that will be the winners in the future will ultimately be those who have collaborated with many sectors and captured value across the chain. Some miners are either using VC firms or setting up specialist internal teams to identify more specialized mining prospects as they seek to capture value beyond their core portfolios.
Rio Tinto Ventures, for example, is assessing new opportunities based on key new technologies that will influence future metal demand.
Portfolio optimization is critical. Miners need to understand the interaction among various parts of their portfolio to enable decisions on investment, divestment and rationalization to enhance value of the entire portfolio. Decisions around where to invest and allocate capital will need to be taken long in advance. Miners will, therefore, need to adopt a level of flexibility in their business models to be agile to change and regularly review their portfolios, considering all future growth assets — new and old.