Mining in the 21st Century
The Quest for Sustainable Profits
Peter Demura
αlpha εconomics
Disclaimer
The views represented in this presentation are those solely of
the author and do not reflect the views of past or previous
employers, clients or associates
αlpha εconomics
Today we will discuss
• Overview of the global mining industry
– Strong demand and prices shaping strategies and risk tolerances
• The investment decision
– Complexity driven by more than resources
• Sustainable development need not be a zero sum game
– Remains in realm of profit maximisation
– Filling institutional voids
• Policy recommendations
– Building governance frameworks
– Trust and transparency
αlpha εconomics
Why sustainable development?
• The development of the resources a pathway to economic
and political development
• Not without its costs – “resources curse”
“Although leaving oil [or other resources] in the ground means that
interest is forgone, the ground may just be the safest place for the asset,
especially if there exists the risk that governments may use the revenue for
their own purposes rather than the good of society, as has happened so
often already.” Humphreys, M., Sachs, J. D. and Stiglitz (2007), What is the Problem with natural resource Wealth, in
Humphreys, M., Sachs, J. D. and Stiglitz (eds.), Escaping the Resource Curse, Columbia University press New York.
• Not an option and inconsistent with the Brundtland
definition of sustainable development
• Future generations benefit from the conversion of natural
wealth to human and physical capital
αlpha εconomics
Today we will discuss
• Overview of the global mining industry
– Strong demand and prices shaping strategies and risk tolerances
• The investment decision
– Complexity driven by more than resources
• Sustainable development need not be a zero sum game
– Remains in realm of profit maximisation
– Filling institutional voids
• Policy recommendations
– Building governance frameworks
– Trust and transparency
αlpha εconomics
Acceleration in world mineral and energy production
Commodity, tonnes
1988
1998
2008
Annual growth, %pa
1988-98
1998-2008
Iron, Ferro-Alloy Metal
552,943,675
584,429,987
155,206,897
0.6
7.1
Non-Ferrous Metals
143,352,635
172,650,484
269,931,869
1.9
4.6
Precious Metals
16,742
19,585
24,031
1.6
2.1
Industrial Minerals
503,053,766
496,427,135
654,995,301
-0.1
2.8
Mineral Fuels
9,280,770,174
10,092,044,633
13,125,278,324
0.8
2.7
Total
10,480,136,992
11,345,571,824
15,205,436,422
0.8
3.0
Source: World Mining Data 2010
αlpha εconomics
Australasia dominates regional production of mineral
and energy commodities
Region
1988
1998
2008
tonnes
tonnes
tonnes
1988-98
1998-2008
Europe
3,184,733,421
2,363,877,415
2,422,274,124
-2.9
0.2
Asia
3,618,769,570
4,383,349,574
7,352,040,477
1.9
5.3
Australia
339,287,866
513,335,633
769,994,315
4.2
4.1
Africa
600,753,723
795,108,264
979,356,578
2.8
2.1
South America
602,131,742
924,997,794
1,187,385,006
4.4
2.5
North America
2,134,460,670
2,364,903,146
2,494,385,923
1.0
0.5
Total
10,480,136,992
11,345,571,824
15,205,436,423
0.8
3.0
Source: World Mining Data 2010
αlpha εconomics
Annual growth, %pa
China is a dominant supplier and user of commodities
Commodity
Country
% of Total
Country
% of Total
Alumina
Country
% of Total
China
26.1
Australia
22.1
US
8.0
Aluminium
China
33.7
Russia
9.8
Canada
8.0
Bauxite
Australia
32.0
Brazil
14.1
China
10.8
Coal - Coking
China
51.6
Australia
17.5
Russia
7.8
Coal - Steaming
China
45.8
US
20.6
India
9.1
Cobalt
D.R. Congo
46.8
China
9.1
Canada
5.6
Chromium
South Africa
38.7
India
17.0
Kazakhstan
14.8
Copper
Chile
34.6
US
8.5
Peru
8.2
Gold
China
12.1
US
10.2
Australia
9.4
Iron Ore
China
23.5
Australia
19.2
Brazil
Lead
China
39.9
Australia
16.6
Manganese
South Africa
20.3
Australia
Nickel
Russia
18.3
Platinum
South Africa
Silver
Demand
% of Total
China
17.3
China
50.1
19.1
China
57.4
US
10.6
China
35.6
15.7
China
15.0
Canada
17.3
Australia
13.4
China
28.2
74.8
Russia
13.5
Zimbabwe
4.9
Peru
17.3
Mexico
15.2
China
13.1
Uranium
Kazakhstan
20.7
Australia
20.4
Canada
18.5
Zinc
China
27.5
Peru
13.8
Australia
12.7
China
35.1
Source: World Mining Data 2010, US Geological Survey, AME Mineral Economics
αlpha εconomics
Industrialisation is driving demand for
commodities
Source: IISI, AME Mineral Economics
αlpha εconomics
Price trends reflect industry structure and
supply and demand balance
Source: LME, Bloomberg, ABARE, Author
αlpha εconomics
Global mining industry is flexing its muscles
• Trend is for consolidation and diversification
– Top fifteen companies in 1995 accounted for 30.7% of nonfuel mine production, in 2000 it had fallen to 28.8%, by
2006 it was 38.6% and rising
– Driven by economies of scale, cost reduction, access to
resources and capital markets
• The rise of the diversified miner
– The top 6 miners in 2009 had a combined market
capitalization of $700 billion, 53% of top 40
– BHP Billiton and Vale accounting $350 billion
αlpha εconomics
Top six mining companies BHP Billiton, Vale, Rio
Tinto, China Shenhua, Anglo American and
Xstrata – dominate minerals production
Commodity
Company
% of Total
Alumina
Chalco
14.4
Aluminium
Rusal
13.1
Company
% of Total
Company
% of Total
Top Ten % of Total
Alcoa
13.9
Rio Tinto
12.9
81.2
Rio Tinto
11.8
Alcoa
10.2
59.7
8.5
Teck
Resources
7.7
50.3
7.7
China
Shenhua
7.2
54.5
8.5
BHP Billiton
7.5
46.9
Internationally
Traded Coking
Coal
BHP Billiton
Coal - Steaming
China
National Coal
8.7
Copper
Codelco
8.7
Xstrata
Freeport
McMoran
Iron Ore
Vale
12.4
Rio Tinto
7.6
BHP Billiton
5.5
36.4
Nickel
Norilsk Nickel
19.5
Vale
17.0
BHP Billiton
11.4
79.6
Uranium
Areva
17.1
Cameco
15.8
Rio Tinto
15.7
89.4
10.9
Mitsubishi
Source:AME Mineral Economics, World Nuclear Association, CRU, National Mining Association.
αlpha εconomics
Challenges facing the global mining industry
•
•
•
•
•
Continued access to resources
China as a competitor and geo-political response
Rise of resource nationalism and state capitalism
Capital and commodity market volatility
Pressure from NGOs and local communities
αlpha εconomics
Today we will discuss
• Overview of the global mining industry
– Strong demand and prices shaping strategies and risk
tolerances
• The investment decision
– Complexity driven by more than resources
• Sustainable development need not be a zero sum game
– Remains in realm of profit maximisation
– Filling institutional voids
• Policy recommendations
– Building governance frameworks
– Trust and transparency
αlpha εconomics
Mining is an economic activity
“The main purpose of mining is to satisfy basic human needs and
wants and create wealth for all potential stakeholders…..Unless
they can fully cover their cost of capital, and earn an
acceptable rate of return, mining companies will be unable to
attract sufficient funds to sustain their investment and their
output. Nor will they be able to satisfy many of the wants and
aspirations of the wider community Crowson, P. (2010), Mining Unearthed, Aspermont UK,
London
• The presence of mineral resources does not imply their
development
– For decades high grade copper deposits in Sub-Sahara Africa went
undeveloped
– Salient lesson to governments to ensure right frameworks in place
αlpha εconomics
Only when resources become probable or
proven reserves can they be developed
JORC Framework
Indentified Mineral Resources
(In Situ)
Ore Reserves
(Mineable)
Inferred
Increasing level of
geological data,
knowledge and
confidence
Indicated
Probable
Consideration of economic,
mining, metallurgical, marketing,
legal, environmental, social, and
governmental factors
Measured
Proven
Source: Rudenno, V. (2009), “The Mining Valuation Handbook, 3rd edition, Wrightbooks, Melbourne
αlpha εconomics
Moving from exploration to production is a
costly, complex and prolonged process
Exploration
Concept
Pre-feasibility
Feasibility
Construction
Indicative cost and time profiles for feasibility studies
Studies
Cost
Time
Accuracy
Scoping/Concept Studies
$100,000s
Months
Low
Pre-feasibility
$ millions
Months
Fair
Final/bankable feasibility and engineering design
$10 millions
Years
Good
Construction phase
Variable
Years
Very Good
Rudenno, V. (2009), “The Mining Valuation Handbook, 3rd edition, Wrightbooks, Melbourne
αlpha εconomics
Beyond geology and project economics is
political risk
“From my own perspective, this [proposed mining tax in Australia] is my number one
sovereign risk issue on a global basis,” Mr Albanese, CEO Rio Tinto
Worldwide Governance Indicators , selected countries, 2008
Country
Australia
Botswana
Brazil
Canada
Chile
China
D. R. Congo
Indonesia
Kazakhstan
Mexico
Mongolia
Peru
Russia
South Africa
United States
Zambia
Voice and
Accountability
94.2
62
61.1
95.7
76.9
5.8
8.7
44.2
18.8
50.5
55.3
49
21.6
67.8
86.1
45.7
Political Stability
85.2
81.3
38.3
83.7
66
33.5
2.4
15.8
64.1
24.4+
57.9
19.1
23.9
41.6
68.4
54.5
Government
Effectiveness
Regulatory
Quality
96.7
73.5
54.5
97.2
84.8
63.5
0.9
47.4
38.9
61.1
27.5
46.4
45
75.4
92.9
29.4
97.6
67.1
58
95.2
92.8
46.4
5.3
45.4
39.6
65.2
43.5
62.3
31.4
71.5
93.2
41.1
Rule of Law
95.2
68.9
46.4
95.7
88
45
1.9
28.7
23.9
29.7
34.9
25.8
19.6
56
91.9
38.8
Control of
Corruption
96.1
80.2
58.5
95.7
87
41.1
5.3
31.4
16.4
49.8
32.4
49.3
15.5
65.2
91.8
36.7
Each number represents the percentile rank of each country on the selected governance indicator. Percentile rank indicates the percentage of countries worldwide that rate below the
selected country. Higher values indicate better governance ratings. Percentile ranks have been adjusted to account for changes over time in the set of countries covered by the governance
indicators. Source: World Bank
αlpha εconomics
A long way between the top and bottom performers
Quebec
N Brunswick
Finland
Alberta
Nevada
Sask
Chile
Nfld & Lab
Manitoba
S Australia
Yukon
Sweden
Wyoming
Northern Terr.
Utah
Nova Scotia
Ireland
Alaska
W Australia
N S Wales
Botswana
Ontario
Tasmania
Queensland
Arizona
Michigan
Mali
Mexico
Spain
Victoria
Norway
Idaho
New Zealand
Ghana
Turkey
Burkina Faso
Namibia
Br Columbia
Peru
Brazil
New Mexico
China
Nunavut
Tanzania
Russia
Montana
Wisconsin
Colombia
South Dakota
NWT
Kazakhstan
Zambia
Minnesota
Colorado
Washington
Panama
PNP
Kyrgystan
Argentina
India
South Africa
Indonesia
California
Guatemala
Honduras
Bolivia
Mongolia
DRC
Zimbabwe
Philippines
Ecuador
Venezuela
A region’s policy climate has taken on
increased importance in attracting and
winning investment. The [Fraser Institute]
Policy Potential Index serves as a report card to
governments on how attractive their policies
are from the point of view of an exploration
manager
0
10
20
30
40
50
αlpha εconomics
60
70
80
90
100
Today we will discuss
• Overview of the global mining industry
– Strong demand and prices shaping strategies and risk
tolerances
• The investment decision
– Complexity driven by more than resources
• Sustainable development need not be a zero sum game
– Remains in realm of profit maximisation
– Filling institutional voids
• Policy recommendations
– Building governance frameworks
– Trust and transparency
αlpha εconomics
Sustainable development need not be a zero sum game
“sustainable development is development that meets the
needs of the present without compromising the ability of
future generations to meet their own needs”
• If handled correctly, the transformation of natural capital
into productive physical and human capital can propel
nations forward, and meet the profit maximising
objectives of shareholders
• handled incorrectly it can lay the foundation for decades
of misery for countries and shareholders alike
• there is an alignment of interests between host nations
and companies in ensuring sustainable development
αlpha εconomics
Virtuous Cycle of Poverty Reduction
Sustainable National
Economic & Political Development
Sustainable Mining Companies
Maximising Shareholder Value
αlpha εconomics
The business case for sustainable development
Benefits of SD
Reputation
Brand Integrity
Value drivers
Lower risk profile
Cost efficiencies
Recruitment
Finance
Licence to operate
Access to resources
Avoid regulation
Revenue growth
Operating
margins
Sustainable
Shareholder Value
Asset efficiency
Risk reduction
Deloitte (2007), A mine of information, An analysis of sustainable development reporting in the mining industry, London
αlpha εconomics
The welfare case for sustainable development
• Resource Curse is a barrier to sustainable development
and successful countries have avoided the extreme forms
• Many manifestations
– Dutch Disease and overvalued real exchange rate
– Protectionist policies
– Dependence on volatile and declining commodity prices –
deterioration in terms of trade
– Over-consumption and failure to account fro resource depletion
– Development of rent seeking culture prompting corruption,
social unrest and civil war
• Mining, supported legislation, can kick start the
development and emergence of a diversified economy
αlpha εconomics
Mining commitment to sustainable governed by
sustainable development frameworks
• The dominant frameworks are the ICMM Sustainable
Development Framework and Extractive Industries
Transparency Initiative
• Voluntary, but “compulsory”
• Focus on reporting more than assurance
Principles
Measurement
&
Reporting
αlpha εconomics
Assurance
ICMM Principles of Sustainable Development
•
•
•
•
•
•
•
•
•
•
•
Implement and maintain ethical business practices and sound systems of corporate
governance.
Integrate sustainable development considerations within the corporate decision-making
process.
Uphold fundamental human rights and respect cultures, customs and values in dealings with
employees and others who are affected by our activities.
Implement risk management strategies based on valid data and sound science.
Seek continual improvement of our health and safety performance
Seek continual improvement of our environmental performance
Contribute to conservation of biodiversity and integrated approaches to land use planning
Facilitate and encourage responsible product design, use, re-use, recycling and disposal of
our products
Contribute to the social, economic and institutional development of the communities in
which we operate
Implement effective and transparent engagement, communication and independently
verified reporting arrangements with our stakeholders
Source: International Council of Mining and Metals, www.icmm.org
αlpha εconomics
Growing interest in the assessment of national
performance to inform policy
• ICMM Resources Endowment Initiative – toolkit for
assessing impact of mining on economies
• Understanding the influence of mining on governance
and institutional conditions
• Six stage process
–
–
–
–
–
–
Defining country’s economic structure
Profile of mining activities
Documenting economic and social outcomes
Understanding proximate causes of national outcomes
Assess project level impacts of mining
Assess implications of mining on governance processes
αlpha εconomics
Today we will discuss
• Overview of the global mining industry
– Strong demand and prices shaping strategies and risk tolerances
• The investment decision
– Complexity driven by more than resources
• Sustainable development need not be a zero sum game
– Remains in realm of profit maximisation
– Filling institutional voids
• Policy recommendations
– Supporting private investment
– Building governance frameworks
– Trust and transparency
αlpha εconomics
Private and public dimensions to facilitate
sustainable mining
Private Dimension
Public Dimension
• In isolation policy addressing
• Stability and certainty
individual dimensions will be
• Holistic approach
ineffective
• Need not involve a race to
• Developing effective
the bottom
governance processes and
• Risk and return sharing
institutions
• Macroeconomic frameworks
• Balancing profit with
legitimate sovereign
• Trust and transparency
requirements
Good investments embedded in an environment of weak
governance and institutions may fail to spread their
benefits to the country as a whole – ICMM REI
αlpha εconomics
Importance of Trust – revise ICMM Effective
Governance framework ?
A fundamental source of political decay in oil-rich countries,
she [Terry Karl] argues, is the absence of productive relations
between governments and their citizens; technocratic fixes
are likely to have little effect absent a basic level of trust
between citizens and rulers. A first step toward establishing
this trust, she argues, is the provision of basic information
about what monies governments receive and how it is
used….. [Empirical research] suggest that the first step
towards reversing the oil curse is to remove layers of secrecy
that continue to surround so many aspects of the industry
Humphreys, M., Sachs, J. D. and Stiglitz (2007), Future Directions for the Mangement of Natural Resources, in Humphreys,
M., Sachs, J. D. and Stiglitz (eds.), Escaping the Resource Curse, Columbia University press New York.
αlpha εconomics
Lack of political freedom and civil liberties will make
developing trust and transparency difficult
Better and Worst Performing Mining Jurisdictions* and Political Freedom, 2010
Electoral Democracy
Political Rights
Civil Liberties
Freedom Rank
Better Performing
Chile
Yes
1
1
Free
Botswana
Yes
3
2
Free
Malaysia
No
4
4
Partly Free
Tunisia
No
7
5
Not Free
Ghana
Yes
1
2
Free
Mexico
Yes
2
3
Free
Bolivia
Yes
3
3
Partly Free
Central African Republic
No
5
5
Partly Free
DR Congo
No
6
6
Not Free
Liberia
Yes
3
4
Partly Free
Niger
No
5
4
Partly Free
Papua New Guinea
Yes
4
3
Partly Free
Philippines
No
4
3
Partly Free
Sierra Leone
Yes
3
3
Partly Free
Zambia
Yes
4
3
Partly Free
Worst Performing
*Based measures of economic growth and poverty alleviation, # 1-most free &-least free
Sources: Freedom House(2010),Freedom in the World 2010 at www.freedomhouse.org and International Council on Metals and Mining (2006), Analytical
Framework, August London
αlpha εconomics
Growing interest in partnerships to fill the
governance void at the local level
is partly compensated by the emergence of new forms of global governance above
and beyond the state. International organisations, civil society groups, and private
business in cooperation with state agencies, or without their support, have started
to voluntarily contribute expertise and resources to fill gaps in global regulation and
to resolve global public goods problems. At the same time, NGOs that were once
focussed on pressing governments have begun to target business firms to make
them more responsive to social and environmental concerns. Scherer, A. and Palazzo, G. (2010), The New
Political Role for Business In a Globalised World: A Review of a New Perspective on CSR and its Implications for the Firm, Governance and Democracy, Journal of
Management Studies (Forthcoming)
To address these issues, the ICMM has recommended a series of partnerships
between host governments, companies, donor agencies, NGOs civil society and
communities to address poverty reduction, revenue management, regional
development planning, local sourcing, social investment and compensation and
dispute resolution
αlpha εconomics
Good outcomes are possible
Better Performers
Worse Performers
Better
Generally Better
Weak - Better (E)
Economic (S) Social
Indicators
Poor Performers
Chile
Colombia
South Africa (E)
Bolivia
Botswana
Guinea
Tanzania (E)
Central African Republic
Malaysia
Jamaica
Guyana (E)
Dem. Rep. Congo
Tunisia
Mali
Mauritania (E)
Liberia
Ghana
Morocco
Gabon (E & S)
Niger
Mexico
Mozambique
Peru (S)
PNG
Namibia
Suriname (S)
Philippines
Senegal
Togo (S)
Sierra Leone
Jordan (S)
Zambia
Zimbabwe
αlpha εconomics
We have come to the end
• Industrialisation will ensure the demand for
commodities
• Traditional mining areas are important but so are
frontiers - but risks increased
• Industry consolidation and diversification will continue
• Mining offers potential for economic development and
poverty reduction
• Pitfalls are well understood but will governments
respond to ensure effective governance ?
• Alternative models will fill the institutional gap.
αlpha εconomics