Resource nationalism and mining – issues and potential re - PowerPoint Presentation

Slide1

Resource nationalism and mining – issues and potential responses

Jon Samuel, Head of Social Performance, 19 February 2013Slide2

Anglo American’s Footprint

2

Platinum

Diamonds

Copper

Nickel

Iron

Ore

and Manganese

Metallurgical Coal

Thermal Coal

Corporate

and rep offices

Key

E

Exploration

Offices

ESlide3

Resource nationalism – some definitions

“Resource nationalism…encompasses efforts by resource-rich nations to shift political and economic control of their energy and mining sectors from foreign and private interests to domestic and state-controlled companies”

“The threat of tax increases, renegotiation of terms, larger participation of state-owned companies and ultimately nationalisation.”

“Resource nationalism, the terms used to describe situations where governments assert increased control over the natural resources located in their territories”

“Resource nationalism is a term used to describe a tendency of people and governments to assert control over natural resources located on their territory.”“Situation where producer countries want to maximise their (future) revenues from present production by altering terms of investment”Slide4

Economic drivers:

High

perceived profits

in the mining industryLack of perceived benefits to host countries / communities: “fair share”Changing balance of power between resource owners and developers: general industry shift from capital to opportunity constraints as demand has grown

Socio-cultural / technological drivers:Communications revolutionGrowing intolerance of poverty, and greater expectations on business to play a constructive role in its alleviation other than through “business-as-usual” measuresMining generally perceived to be a part of the problem on many global issues (climate change, water availability, biodiversity, food security, human rights etc)Negative legacies

Political drivers:Emerging economies striving to have their voice heard, and to assert their national interests as their economies and foreign interactions growRise of democracy and local empowerment

As an industry we communicate poorly: We don’t articulate the benefits we bring in a credible mannerThe risk / reward trade-off is not understood, so profits are deemed excessiveResource nationalism – driversSlide5

How the world sees the mining industrySlide6

Resource nationalism – in practice

Taxes and royalties

Local content / value-add requirements (labour, procurement, beneficiation)

State participation in mining projects

Expropriation

Indigenisation (private)

From our perspective…

Changing the

rules of the game

while playingSlide7

Resource nationalism – manifestations in selected countries

7

Country

Tax / royalty changesLocal content requiredState participation

IndigenisationAustraliaMRRT (2010)Royalty increase (carbon tax)BotswanaDesires for greater beneficiations

Debswana 50/50Brazil

Currently under review (incl internal debate between federal and state level)Pressure for local supply contracts (especially in oil and gas)Vale government shareholding, state ownership of PetrobrasChileVoluntary royalty increase in 2010

CodelcoColombiaUnder discussion/reviewMozambiqueTalk of increase

Will be an important part of license to operateDegree of free carry (5-20%)Slide8

Resource nationalism – manifestations in selected countries

8

Country

Tax/royalty

Local content requiredState ownershipIndigenisationPeruNegotiated voluntary windfall taxesSeveral local benefit schemes in place (often negotiated locally)

South AfricaSIMS report suggests increasing both

Range of requirements under mining charter (likely to increase)Nationalisation debate and state mining companyBroad-based Black Economic Empowerment (26%)Venezuela

Strong focus on community and union benefitsNationalisations and expropriations. Mixed companies required in oil and gasZimbabweYes 51% requirement (threat of expropriation)Slide9

Resource nationalism and oil and gas

Private share of global oil resources

National Oil Companies account for ~55% of production and ~88% of reserves globally (in the 1970s it was the other way around)Slide10

Did high oil prices lead to nationalisation?

OPEC led oil market

?

Source: OPM analysis for Anglo American Slide11

Ownership patterns in oil and gas

In 1960

:

World oil reserves were 291

bn bbls;of which: 85% were privately held; and

two-thirds were in OPEC countries, and also privately heldIn 1980:Reserves were 668

bn bbls;of which: two-thirds were in OPEC, and state-owned.

1960

1980Source: OPM analysis for Anglo American Slide12

Could the same thing happen to mining?

Nationalisation

Privatization

Pressure on rents and state-owned equity

?

Source: OPM analysis for Anglo American Slide13

Our view is that large-scale nationalisation in the mining sector is unlikely:Prices rises do not appear to have been the trigger for nationalisation in oil and gas (in fact the converse appears to be true)

There was a spate of nationalisations in mining, but these tended not to be successful and led to subsequent privatisations or closures

The economic rents from mining are generally much lower than in oil and gas,

Mining operations are technically challenging to run, and require very high levels of ongoing capital expenditure to sustain themVery limited ability to control markets, given wide distribution of most minerals across the worldThe increasing inter-connectedness of the global economy makes the cost to implementing countries of unilateral nationalisations much higherGovernments have realised that they don’t need to nationalise: the tax system and other policy tools provide other meansWe have a better understanding of what we need to do to respond to the threats posed by resource nationalismCould the same thing happen in mining?Slide14

Be clearer about the existing economic impacts of the mining sector, at both local level and at more macro levels, including addressing the resource curse debate

Ensure that mining is seen as a responsible industry:

Sound business ethics

High standards of safety, health and environmental managementFair treatment of workersGood neighboursPerhaps most importantly, deliver more effective responses to the demand for a greater share of benefits by enhancing the industry’s contributions to local and national socio-economic developmentHow should mining respond?Slide15

Resource curse: potential causes

Resource Curse

Terms of Trade

Dutch Disease

Rent SeekingImpacts of Mining

Volatile MarketsSlide16

Volatility can and has been managed by instruments such as hedging and stabilisation funds

Resource curse: RESPONSES

Terms of Trade

Dutch Disease

Impacts of MiningVolatile Markets

The price of manufactured goods is also fallingProductivity improvements can increase benefits to local economiesReallocating factors of production to resource sector may be efficientOnly a problem if adjustment after resource

extraction is not planned for and / or not possibleResponsible management of impacts and proactive development initiatives can create positive economic contributions

Revenue transparency and governance reform can help to reduce rent seekingRent Seeking

Resource CurseSlide17

What routes are there for delivering developmental benefits from mining?

OPERATION

INFRASTRUCTURE

BENEFICIATION

JOBS / WAGES

CAPACITY

BUILDING/TRAININGPROCUREMENT

TAXATIONSOCIAL INVESTMENTSME DEVELOPMENTSlide18

Anglo American’s approach to supporting local socio-economic development

Our approach to community development is based on understanding local contexts and leveraging our core business to create sustainable upliftment

Leveraging our $13.8 billion

supply chain (approximately 100 x social investment budget each year)

Ensuring that host communities have the best possible chance of securing increasingly skilled jobs on our operations

Focusing in particular on how local municipalities can use tax revenues to provide effective public services

Offering equity and loans on a commercial basis to support local entrepreneurs, both within and outside our supply chain

Providing grants to welfare-enhancing initiatives where more market-based approaches are not possible.Local Procurement

Local Training and RecruitmentGovernmental Capacity DevelopmentEnterprise DevelopmentSocial Investment

** 2011 dataSlide19

Ensuring we understand the local context

Our

Socio-Economic Assessment Toolbox

(SEAT) is at the heart of our management of social performance and developmental issuesSEAT is an award-winning manual that provides extensive guidance on: Profiling and engaging with host communitiesAssessing positive and negative impactsManaging relationships with host communitiesContributing to community developmentSEAT provides extensive guidance on understanding our local context, and how we should respond to thatFreely available at www.angloamerican.com/seat Slide20

LOCAL PROCUREMENT

Demand-side Measures

Policy: Local Procurement Strategy

Resources:

Appropriate people and budgetSC Local Procurement Initiatives (eg Ring Fencing)Set framework, show leadership supportDemonstrate commitment

Operationalise commitments

Communication and Reporting: Targets and KPIsBuild Anglo American capacity and incentiviseSupport for Small and Medium-size Business Start-ups (e.g. Emerge / Zimele)

Supplier Development Programmes (building capacity of existing suppliers)Alternative Livelihoods and Micro-credit ProgrammesSupporting the grass-roots

Creating formal businessesBuild capability, capacity and size of suppliersObjective

Supply-side MeasuresLocalising Suppliers (e.g. near-mine supplier parks)Encouraging more suppliers to locate in mining areasSlide21

Capacity development

As a business we pay very significant sums in taxes

Clear that these revenues are not always well spent, typically due to a lack of capacity

Meanwhile, we often suffer because of poor pubic service provisionWe are now engaging on a structured basis in South Africa and Brazil in initiatives to build the capacity of host municipalities and regionsWorking with partners, we have undertaken structured assessments and designed tailored implementation packagesFocus is on revenue management, accountability mechanisms and basic service deliverySlide22

ENTERPISE development

Through our Zimele and Emerge schemes in South Africa and Chile we are now supporting over 47,000 jobs in small businesses

We provide a mixture of equity, loans and technical assistance to businesses, and help them understand how our supply chain works

Our ongoing procurement needs create a very strong platform from which to support local entrepreneursCurrently expanding our ED initiatives to Botswana, Brazil and PeruCurrent focus areas include:Reducing costs: substituting social investments (i.e. grants) with enterprise development activities (i.e. loans, equity participation and business training)Increasing efficiencies: in existing schemes by outsourcing some of the activities to specialist delivery partners (e.g. Technoserve, CARE) Partnering with development finance institutions to increase the capital availableCreating revenue: for example by generating captive, low-cost sources of carbon creditsCreating more stable host communities and a more robust and competitive supply chainSlide23

Social Investment

$128 million spent on social investment in 2011, about $0.5 billion in the last 5 years

Monitored using a Group-wide database and set of indicators to help ensure value for moneySlide24

Concluding remarks

Resource nationalism has emerged in recent years as one of the major risks facing the mining industry

However, this isn’t a new phenomenon, and in some ways current manifestations are less threatening than in previous decades

Some of the drivers of resource nationalism are due to poor understanding of the economic realities of miningThe mining industry needs to do a better job of understanding and communicating its economic contributionsIt also needs to work with partners, in particular governments and host communities, to enhance current economic contributions, with a strong focus on leveraging the core businessSlide25

Thank youSlide26

ANNEXESSlide27

TIMELINE OF A TYPICAL MINE

Exploration

Closure

Year from acquiring exploration permits (assumes continuous intention to develop)

1 4 7 10+ 30+

Only

approx 1% of exploration targets are ever developed into minesCapital Expenditure for “Tier 1” mine typically between $1 and $10 billionSome of World’s biggest deposits have been mined for over 100 years

Development

StudiesOperationSlide28

Managing social risk

Respect

human rights

Deliver lasting, positive net benefitIdentify and manage social impacts

Efficiently utilise resourcesObey all laws and regulationsEnsure contractors follow our standardsSet targets, review performance

Develop staff competenciesEngage employees and stakeholders

Report and investigate incidentsSlide29

social performance WORK PROGRAMME

Anglo American Values

and Good Citizenship Business Principles

Group

Social Strategy: Partner

of Choice for Host Governments and Communities

Policies and Standards: the Anglo American Social Way

1. Education and Training:

SEAT trainingPost-grad diplomasAdvanced Social Management Programme

ABET2. GuidanceDocuments:

SEATMine Closure Planning Toolbox3. Social

Initiatives: Enterprise DevelopmentSocial Investment

Capacity developmentHIV/AIDSHousing

6. ExternalEngagement: Communities

Governments and multi-lateralsIndustry associationsMulti-lateral initiatives5. Internal

Alignment: Business UnitsFunctional liaison

4. Leverage Core Business

: Local procurementLocal workforce developmentSynergies from infrastructure provisionSlide30

SEAT: STRUCTURE

Engagement throughoutSlide31

Access to jobs and training

Access to land and alternative livelihoods

Access to supply chain opportunities

Balance / distribution of social investmentsRivalries between stakeholder groupsPerceptions of environmental impactsHealth and public servicesTransport issuesCommunication and transparency

recurring issues that seat addressesGenerally very pragmatic issues

A strong emphasis on the level and distribution of benefits