MAC: Mines and Communities

Ethics test miners' mettle

Published by MAC on 2006-04-01

Ethics test miners' mettle

1st April 2006

As Australia's resource giants spread their operations into more remote regions, overcoming political and civil unrest is paramount. But when does a social welfare program become a bribe? Jamie Freed reports.

ANGRY locals are rioting at the mine's gates. The government is investigating environmental violations. And just as the situation seems to calm slightly, a landslide kills three workers.

It's a mining company's worst nightmare, but for Freeport McMoRan Copper & Gold, operator of the Grasberg mine in Indonesia's Papua province, this scenario is an unfortunate reality and no amount of royalty payments to the government or gifts to local schools and hospitals has managed to pacify the situation.

Within the mining industry, the Freeport crisis is not unique. Indonesian locals recently torched one of Newmont Mining's exploration camps. The American company has also settled a civil suit over allegations of environmental violations at an Indonesian mine.

In well-publicised disasters in Papua New Guinea, BHP Billiton and Rio Tinto were forced to abandon the Ok Tedi and Bougainville Copper mines respectively.

As deposits in traditional mining provinces like Australia, North America and South Africa are depleted, it's only going to get tougher.

"It's becoming one of the big questions facing the board and CEOs," says Alex Gorbansky, the managing director of Frontier Strategy Group, a consulting firm in Boston.

"Not only the below-ground issues, such as what is the amount of oil or gold in the ground, but what is the environment in a political and social perspective?"

Managing geopolitical risk factors is becoming so important, Gorbansky says, that it could eventually determine the mining industry's winners and losers.

BHP executives have made it clear they have learned from past mistakes and that country risk - including the ethical and financial implications - is a serious consideration before a new project is approved.

When working in some of the world's most dangerous regions, this involves a careful balancing act. But after incidents like Bougainville and Ok Tedi, Australian and British investors have increasingly called for BHP and Rio to be industry leaders in sustainability.

BHP's head of minerals exploration, Ian Maxwell, grapples with such dilemmas daily. Since joining BHP in late 2004, the former mining analyst has spent half his time travelling overseas to visit some of the company's 200 or so exploration projects in about 30 countries.

Deciding to enter a country is not a decision BHP takes lightly. "You can't make a judgement call on an African country, based out of Melbourne, if you've never visited that country and never visited the project site," Maxwell says.

"The days of management not knowing what is going on are long gone. You have to be in touch with the programs and with what is happening on the ground."

Assessing the operating environment isn't always easy. Maxwell must find out if BHP can enter a country without compromising internal business conduct standards that strictly prohibit bribes. BHP has avoided certain countries for this reason. "Every country has its own way of doing business which is quite different from every other country," he says. "BHP Billiton has a way it would like to do business according to its conduct guide."

Determining the difference between a bribe and a gift that is meant to foster goodwill can be difficult.

A bribe is technically defined as a payment made to an official in return for a favour, but Gorbansky deems it a fairly indistinct line.

Testifying at the Cole inquiry into the Australian Wheat Board last month, the former BHP chief executive John Prescott shed some light on the differences between gifts and bribes. "It's common practice to make gifts in communities where companies operate … or hope to operate," he said.

Referring to a $US5 million wheat donation BHP made to the Iraqi Government to foster "goodwill" in 1996, Prescott said the company was not assured it would have access to oilfields once United Nations' sanctions were lifted, and there was no suggestion the gift would line the pockets of officials.

The former legal counsel for BHP Petroleum, Jim Lyons, likened the wheat shipment to a philanthropic gesture. "People - some well-known, high-profile people - give substantial donations to charities such as hospitals, etc," he said. "Maybe at some point they receive … maybe they expect to receive - but maybe even if they don't expect it, they receive some favourable treatment at some point."

Ten years later, under a new regime at BHP, Maxwell admits that business practice issues can be tricky to manage. "You're obviously aware with what's going on with AWB," he says. "We obviously place a lot of store on trying to get that right."

Apart from the ethical arguments, some investors may be surprised to learn that paying bribes is often not in a company's financial interest. Bribes may allow access to a seemingly lucrative project, but once officials receive payments they are likely to ask for more. Eventually, extortion could make the project unjustifiable in economic terms compared with other opportunities.

And as Freeport, BHP and Rio have learned the hard way, keeping a local community happy can be just as important as pleasing officials.

"It's not just about building a fluffy corporate responsibility image, it's about dealing with the problems that are going to arise," says Elizabeth Maitland, who teaches a course on geopolitical risk management at the University of NSW's School of Organisation and Management.

Managing risks from the start helps a company protect investments worth hundreds of millions of dollars that could be jeopardised by civil unrest like that seen at Grasberg and Bougainville.

Many risks can be dealt with, but there are some beyond the control of natural resource companies. In many developing nations, governments are vulnerable to coups.

The government of Mauritania - a West African nation in which Woodside Petroleum and Hardman Resources have large investments - was overthrown last August. When the new government came to power, the former oil minister was sacked and accused of accepting bribes from foreign companies in exchange for waiving certain taxes and charges.

There has been no evidence that Woodside was involved with the scandal, but it was drawn into a dispute with the new government to ensure production-sharing contracts signed under the purview of the former oil minister were not modified to the company's detriment.

Woodside and Hardman yesterday agreed in principle to make some changes to the agreements to settle the dispute. The companies will reportedly pay the Mauritanian Government an immediate $US100 million ($140 million) bonus once the final deal is signed.

"It's $US100 million you can say is somewhat lost, but at the end of the day keeping good relations with the government is important, given the potential that exists in the region." ABN Amro oil analyst Aiden Bradley says.

Coups and civil wars are not the only source of political instability placing projects at risk. Governments sometimes decide to change mining legislation virtually overnight.

In Zimbabwe, the government led by the international pariah, Robert Mugabe, last month proposed seizing a majority stake in the country's mines. "It would be disastrous for the mining industry. No question," says Zimplats' chief executive, Greg Sebborn, who is based in Harare.

The Australian-listed Zimplats and other Zimbabwean miners have discussed the proposal with the government and are hopeful it will be abandoned, or at least watered down significantly - and without bribes.

"I think there will be a situation we can live with," Sebborn says . "I think sanity will prevail." He says Zimplats has never paid bribes, or even been asked for them by high-level officials.

Sebborn is fairly confident his mine will not be nationalised because Zimplats' interests and those of the Zimbabwean Government are in many ways aligned. If the proposal to expropriate the country's mines is approved, Zimplats will likely leave the country, depriving Zimbabwe of a lot of revenue and potentially destabilising the cash-starved government.

Most governments which depend heavily on mineral revenues are loath to see international mining companies quit their country, but citizens in communities surrounding the mines often feel differently.

Much of the civil unrest at Grasberg, Ok Tedi and Bougainville Copper results from the capital cities, Jakarta and Port Moresby, reaping the financial benefits while locals in the far-flung provinces near the mines are left with the social and environmental damage.

By now, mining companies are well aware of the so-called "resource curse" and are working together to combat the problem. BHP, Rio and Freeport are members of the International Council of Mining and Metals, an industry organisation which researches sustainable development issues.

The ICMM's secretary general is Paul Mitchell, a former chief executive of CARE Australia. He says research has shown that community support is crucial for the security of mining investments over the longer term.

In some countries, it may not be possible for a company to run a sustainable operation due to political or social issues, he says, citing Zimbabwe, the Democratic Republic of Congo, Indonesia and the Philippines among the more difficult operating environments.

"Where there is weak governance, there is only a limited amount that companies operating independently can do," Mitchell says.

Other countries are trying to use the minerals sector to turn around their economy in a constructive manner which benefits communities near the mine and the nation as a whole.

Chile has already done so over the past 15 years. In contrast to neighbouring Peru - a country that has had a lot of mining but little reduction in poverty because of the way royalties are distributed - Chilean copper mines have helped transform the country into South America's economic powerhouse.

Investments in the minerals sector have created a mining province that can increasingly rely on local expertise. Five years ago, BHP employed about 80 expatriates at its Escondida copper mine in Chile, but that has fallen to three as the country has produced its own geologists, mining engineers and services companies.

"You have to make that transition," says BHP's chief organisation development officer, Marcus Randolph. "We're progressively seeing ourselves transfer from being a very Western-dominated company to one that has a substantial influence of locally empowered employees that are connected to the culture of the areas where we will develop projects."

Ideally, within a few decades Madagascar could prove a similar success story to Chile under Rio's leadership.

The company spent years studying political, social and environmental issues before committing to the development of a $US585 million mineral sands project in the former French colony off the coast of southern Africa last year.

At the moment, working in Madagascar is not easy. The country lacks decent infrastructure, and the health-care system could be considered sub-standard at best. Rio's project represents the largest investment in Madagascar's history.

Once, remote Madagascar might have escaped the attention of non-governmental organisations, but in today's globalised world, Rio had to modify portions of the project following pressure from environmentalists, who argued the mine would irreparably damage a coastal forest and its unique wildlife. In response, Rio created conservation zones to help alleviate fears of some, if not all, of the project's critics. Additionally, Rio decided to make the port it is building available to the public. Because Madagascar's infrastructure is so lacking, the port has the potential to be crucial to the country's economic future. It will allow locals to export products and could help support a burgeoning tourism industry by allowing cruise ships to dock there.

The mine will also bring typical economic benefits, such as 600 jobs for locals and annual payments to the government of more than $US20 million.

Importantly, 70 per cent of the royalties will be paid to the region surrounding Rio's mine, and the company will provide extra health-care services in the area.

The idea is that if Rio deals with the situation properly at an early stage, it can avoid later complaints that could destabilise the project.

Alison Kitchen, a partner with KPMG in Melbourne who advises the mining industry, says community welfare is an important consideration before a company commits to a new project.

"Mining companies very clearly understand they have a licence to operate from the local community, and the local community is a very important stakeholder," she says. "The mining companies are one of the better industries at not doing the rhetoric [but] at doing the reality."

The increasing importance that mining companies like BHP and Rio are putting on sustainable development programs is starting to attract notice from the industry's traditional critics.

The Mineral Policy Institute is an Australian NGO that works to combat environmentally and socially destructive mining. Its director, Techa Beaumont, says: "On an isolated basis, there are positive examples we look towards", noting Newmont's successful program with traditional landowners surrounding its Tanami goldmine in the Northern Territory and BHP's efforts at its Tintaya mine in Peru.

However, Beaumont adds that impoverished locals in the developing world are not always assured positive outcomes.

"From some of the communities we work with, there's a lot of cynicism when companies give children books and pens, which is a nice PR exercise," she says. "[Environmental impact] questions are sidelined with baubles and mirrors … and we receive more complaints than we can deal with."

It is common practice for mining companies to contribute about 1 per cent of revenues to local communities, yet this isn't always enough to avoid civil unrest.

Since riots caused $US3 million of damage at Freeport's Grasberg mine in 1996, the company has donated nearly $US200 million to a community development fund in Papua and has built two hospitals on the island.

Some of this money has gone to local schools, although an independent audit of the facilities by the International Center for Corporate Accountability on behalf of Freeport last year found them wanting.

On a visit to the mine, inspectors found the dormitories had not had electricity for several months, the kitchens did not have running water, the bathrooms did not have doors and there was no security for the girls' dormitories.

"The program must be considered as [an] unequivocal failure, both from [an] operational and fiscal management perspective," the report says.

Rioting locals have more serious grievances than inadequate schools and hospitals. At the same time as Freeport was donating money to social programs, it paid more than $US20 million in kickbacks to Indonesian military and police officials, a detailed investigation by The New York Times found last year.

As well, the Grasberg mine has produced billions of tonnes of waste which has polluted a nearby river in a similar manner to the Ok Tedi mine abandoned by BHP in 2002.

"It would have to be one of the worst current mining operations in the world," Beaumont says of Grasberg.

Although the mine is operated by Freeport, Rio has a 40 per cent stake in reserves discovered after 1998 and it contributed $US232 million towards Rio's profits last year.

Even though the strong criticism of Grasberg often overshadows Rio's efforts at sustainable development, the company has no plans to abandon its investment in the troubled mine.

In contrast, after exiting Ok Tedi, BHP clearly stated that it would no longer be involved with mines that dumped tailings into rivers without a proper storage dam.

Environmentalists can take comfort in the fact that their efforts have had a noticeable effect on BHP's plans in the past few years.

A nickel project on Gag Island off the coast of Papua became the target of a public opposition campaign fronted by the television personality Andrew Denton in 2003. BHP is still studying Gag Island, but there are no firm development plans.

"We continue to consult with the local community, local government and our Indonesian partner as these studies progress," BHP says. "As we have said previously, we will not use deep sea tailing placement and we will not proceed with any development on Gag Island if it is gazetted as a world heritage area."

Other mining companies with projects in Indonesia are carefully monitoring the political situation to help avert protests before they start.

"It's always on our radar screen," says Newcrest's chief financial officer Jeff Smith, whose company owns the Toguraci goldmine in Indonesia.

With companies like BHP moving into remote, risky areas like the Democratic Republic of Congo and Angola to explore for diamonds, it's clear the operating challenges will not go away.

Risk-management experts like UNSW's Maitland warn that excuses will no longer pacify stakeholders, so companies that have learned from their mistakes will be the ones best placed to manage potential problems.

"[When disaster strikes] it's kind of increasingly hard for companies to say, 'We didn't expect that to happen'," she says.

"The more that you've built up expertise in dealing with risks, the less time you are dealing with crisis management."

Submitted to the editor of the Sydney Morning Herald: Re "Ethics test miner's mettle" [not published at time of writing]

Techa Beaumont, Executive Director, Mineral Policy Institute

I was quoted out of context in Saturday's edition of the Sydney Morning Herald "Ethics tests miners mettle" as pointing towards projects operated by Newmont and BHP Billiton as indicative of the importance these companies place on their sustainable development programs. In contrast, my experience with the sector makes me deeply skeptical of 'voluntary' progress made on social and environmental issues in the mining sector.

Ethics is best judged by consistency in action, yet it is the same companies who have improved practices at one mine who have the worst social and environmental practices in their mining projects in other countries where regulations are weaker or local people less organised.

Factors such as the legal recognition of rights of Indigenous Peoples and the existence of experienced representatives groups remain the clearest preconditions to the isolated instances of positive improvements in mining industry community relations (as can be found in instances of positive community programs on Aboriginal land in the Northern Territory). While the industry PR would seek to convince us otherwise, community experience suggests that improvements in the practices of the mining industry have by and large been won by force; whether it be the force of laws aimed to protect the public interest, the force of community opposition to certain practices or in the saddest of cases the forces of community violence and unrest.

One only needs to look as far as Indonesia, to Newmont's Minahasa mine and Rio Tinto's Freeport involvement, (where toxic streams of mine waste are dumped directly into the country's oceans and rivers) to uncover the double standards and gap between rhetoric and reality. In another instance of ethical sleight of hand, BHP Billiton is seeking to sell out of the Tintaya project in Peru before realising the commitments in agreements made with local communities that promised to fairly resolve outstanding issues of land dispossession, environmental harm and social exclusion. Rather than a model of improved conduct, BHP Billitons Tintaya operations looks more like a sad repeat of the broken promises at the Ok Tedi mine. BHP offloaded its shares into an unaccountable trust company when the problems created by the project threatened to bite the bottom line. I watch closely for the moment when mining industry ethics can be said to consist of more than 'what we can get away with' in a silver lining of motherhood statements and empty promises.

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