Andrew Lane, Deloitte Consulting (Pty) Ltd - What is the role of mining companies in supplying affordable housing, clinics and schools for mining communities?

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©2010 Deloitte Touche Tohmatsu Limited. All rights reserved.

What is the role of mining companies in supplying

affordable housing, clinics and schools for mining

communities?

Andrew Lane 16 July 2013



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Let’s examine the context for this question


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3. Select ’OK’ Tough times for mining shareholders

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160

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Coal Price vs. Coal Producers (2010 – 2013)

Coal Price Anglo American (Coal) BHP Billiton

Vale Ncondezi Coal Rio Tinto

Xstrata

Sources: JSE Limited; Bloomberg.com

Deloitte 4

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Diversified Mining shares vs. Commodity Price Index (2010- 2013)

BHP Billiton Rio Tinto

Anglo American CRB Commodity Spot Index

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Gold Stocks vs. Spot Gold Price (2010 – 2013)

Barrick Gold Newmont Mining

Goldcorp Gold Bullion spot price

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Iron ore producers vs. iron ore price (2010 – 2013)

Rio Tinto BHP Billiton FMG Vale Iron Ore Price




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3. Select ’OK’ Mining market capitalisation showing a decline

Market capitalisation decreased by 9.9% year on year (May 2012- May 2013)

Deloitte 5

832.5

924.5 -9.9%

2013 2012

Market Capitalisation of Top 29 Listed Stocks (USD)

Market Cap (USD M) Sources: Datastream




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Deloitte 6

Seaborne Iron Ore Balance (mt)

Seaborne Met Coal Market Balance (mt)

Global Thermal Coal Market Balance (mt)

Refined Copper Market Balance (mt)

Primary Aluminium Market Balance (mt)

Refined Nickel Market Balance (kt)

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Global commodity markets are moving into surplus

Market Balances for Industrial Commodities

Sources: Datastream




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• Head grades declining all over the globe ,Copper by (30%), Nickel by (40%), Gold and Zinc by 10%.

• Miners have to ‘run harder just to stand still’ (Xstrata)

• Copper ore-grades in Chile expected to fall from 0.9% in 2008 to 0.57% by the end of the decade. “More than $35 billion has

been invested in mines since 2004, but with no corresponding increase in production” (Diego Hernandez, CEO Antofagasta)

• Since the start of 2000, over 75% of new base metal discoveries are blind at depths > 300m

• Deep deposits are difficult to fins which significantly increases cost of extraction

• Also raises complex safety and risk issues – high risk of rock falls, flooding, gas discharges, underground earthquakes and

ventilation problems

• According to US Geological Reserve, almost 80% of base metal reserves in less developed countries or growth markets

• Miners need to move out of comfort zone to maintain reserves and production

• Corruption, infrastructure and governance increasingly big issues as miners move into unchartered regions

• Lack of water supply in remote mine regions and in arid environments i.e. Northern Chile

• Power supply availability. A big issue in South Africa and Chile. Bottlenecks in electricity supplies mean miners face some of

the highest power tariffs in the world

• Heavy equipment lead times above average

• Less developed transport infrastructure in developing economies

• Key issue for global miners who need to reach agreement with all stakeholders in a region

• Social License issues have even suspended development of permitted projects i.e. Minas Conga (Peru) and El Morro (Chile)

• Tighter environmental standards will raise capital expenditures, forcing companies to manage new and existing projects more

carefully than they have in past years

• Regarded as one of the biggest threats to global mining sector in 21st century

• Increased taxes, royalties, permitting hurdles, export restrictions, expropriation, legislated local ownership, nationalisation

• Playing out in developed economies (i.e. Australia MRRT) and developing economies. Latin American jurisdictions such as

Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Honduras, Panama, Peru and Venezuela have all tried to increase the

government's share of mining revenues via tax reforms`

• Lack of fiscal stability puts development of capital projects at risk in these countries

• Shortage of skilled labour. By 2020 Canada will need 100,000 new mining workers (Canadian Mining Human Resources

Council), Australian resources projects may have a shortfall of 36,000 trades workers by 2015 (Australian National

Resources Sector Employment Taskforce)

• Lack of engineers that have the skill sets to build larger, more complex projects Growing backlogs of EPCM contractors

Sources: Datastream

Long-term structural supply issues remain in place

Deloitte

Declining Ore

Grades

Deeper Mines

Heightened

Sovereign Risk

Critical

Infrastructure

Shortage

Social License

to Operate

Resource

Nationalism

Human Capital




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3. Select ’OK’

Canadian Government vetoed the

C$5.2bn takeover of Progress

Energy Resources by Petronas,

because it "was not satisfied that

the proposed investment is likely to

be of net benefit to Canada".

Mongolian government is

trying to renegotiate the

2009 investment

agreement on the Oyu

Tolgoi mine

Kenya has given mining

companies operating in the

country three years to cede a

minimum 35% equity to local

investors

In mid-May, Indonesia decided to

impose a 20% export levy on virtually

all unprocessed ores under a new

mining law. The country has also

announced plans to implement a total

export ban on nickel and other ores,

effective January 2014. Under new

rules, foreign companies must sell

down their stakes in mines in the

country, so that by the tenth year of

production the assets are at least 51%

owned by Indonesian entities.

Uruguay plans to implement

measures to compel larger mining

projects in the country to share their

profits with the federal government

and comply with tougher

environmental standards

Liberian government

is reviewing all

concessions granted

foreign multinational

mining and forestry

companies

China's strategically co-ordinated approach

to securing key commodity inputs via state

sponsored lending and export credits

Australian PM Julia Gillard speaking in

May - "I don't own the minerals,

governments only sell you the right to

mine the resource. A resource we hold in

trust for a sovereign people. They own it

and they deserve their share."

DRC Govt. amended mining code

will more than double royalty

payments, introduce capital gains

tax and raise tax charges on

imports of mining equipment and

machinery. Increased state

participation in mine projects from

5% to 35% Bolivian government declares

the nationalisation of Glencore's

Colquiri zinc-tin mine and

revoked the mining rights of

Vancouver-based South

American Silver Corp

Bauxite and iron ore rich

Guinea will buy additional

20% stakes in mining projects

Extreme risk category in

Resource Nationalism Index

for 2013.

Argentina shocked investors with the

expropriation of YPF from former

Spanish owners Repsol . In northern

Argentina, thousands of residents

protest against Canada's Osisko

Mining gold mine project

Peru – new tax on windfall

mining profits.

Zambia have pushed for 25%

to 35% state participation in

mining projects

Zimbabwe has released a draft amendment to its

indigenisation policy, confirming that the government will not

provide compensation for the 51% share it will hold in foreign-

owned mining companies

Mexico's Congress voted in favour of

a proposed 5% mining royalty

scheme, paving the way for a full

vote in the Senate as Mexico tries to

broaden its weak tax take.

Resource Nationalism is here to stay; Mozambique is no

exception

Deloitte

Ghana hiked corporate tax

rate to 35% from 25% and cut

capital allowances to 20%

from 80% for five years.

South Africa’s cabinet has approved

hiving off the state mining company as a

standalone entity, a move in line with

proposals for greater state participation

in the mining sector in the country.




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3. Select ’OK’ Mozambique’s Growth is Accelerating

Deloitte 9

Mozambique

6.9

Developing

Economies

5.7

World

3.3

Real GDP CAGR, 2007 - 2011 (%) CAGR in FDI Inflows, 2000 - 2011 (%)

8.0

18.0

68.4

Africa Developing

Economies

Mozambique

Sources: World Data Bank, 2012; UNCTAD (2011), Handbook of Statistics; IFC and Worldbank (2012), “Doing Business”; Fitch Ratings

Mozambique’s GDP growth rate is double

World GDP growth…

… FDI into Mozambique is growing faster

than the rest of the continent (2000–2011)


Key to Rankings 0-39 40-80 81-120 121-160 161-185

SSA Ease of Doing Business Ranking, 2013

However it is still relatively risky…

Burundi

Zimbabwe

Kenya

Ethiopia

Eritrea North Sudan

Niger

Mauritania

Mali

Nigeria

Chad

Central African

Republic

Uganda

Liberia

Sierra Leone

Burkina Gambia

Sao Tome & Principe

Equatorial Guinea

Djibouti

Senegal

Guinea Bissau

Namibia

South Africa

Tanzania

Democratic

Republic of the

Congo

Angola

Madagascar Botswana

Zambia

Gabon

Swaziland

Lesotho

Malawi

Rwanda

Benin Ghana

Ivory

Coast

Guinea

Cameroon

Congo

Republic

Comoros

Mozambique

Togo

Country Overall Political

Risk

DR Congo 74

Zimbabwe 72

Angola 56

Tanzania 53

Zambia 51

Mozambique 50

South Africa 41

Botswana 33

Political Risk of Select Countries, 2012

Sources: Source: World Data Bank, 2012; UNCTAD (2011), Handbook of Statistics; IFC and Worldbank (2012), “Doing Business”

Higher ranking indicates greater difficulty in

doing business (scale 1 – 185)

Higher risk rating indicates higher

political risk (scale 1 – 100)




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3. Select ’OK’ Ease of doing business SSA Ease of Doing Business Ranking by Category

Protecting

Investors

Paying

Taxes

Construction

Permits

Enforcing

Contracts

Trade

Across

Borders

Getting

Credit

Registering

Property

Getting

Electricity

Starting a

Business

Overall

Rating

South Africa 39 10 32 39 82 115 1 79 150 53

Botswana 59 49 39 132 68 147 53 51 90 99

Zambia 94 82 97 151 89 156 12 96 151 74

Mozam-

bique

146 49 105 135 132 134 174 155 174 146

Tanzania 134 16 21 44 1 12 22 27 13 15

DRC 181 35 36 10 36 40 13 17 26 30

Angola 172 9 29 24 46 36 22 24 17 41

Zimbabwe 172 20 22 42 18 38 22 11 35 27

Deloitte 11

Sources: Source: World Data Bank, 2012; UNCTAD (2011), Handbook of Statistics; IFC and Worldbank (2012), “Doing Business”




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3. Select ’OK’ As a mining destination, Mozambique ranks favourably

compared to other SADC countries…

Deloitte 12

0

10

20

30

40

50

60

70

0 20 40 60 80

Botswana

South Africa

DRC

Mozambique

Zambia

Tanzania

Zimbabwe

Angola

1. South Africa

2. Botswana

3 DRC

6.Tanzania 7. Zimbabwe

8. Angola

4. Mozambique

5. Zambia

Source: BMI Mozambique Mining Report Q2 2012

Co

un

try R

ew

ard

Country Risk

Most

Favourable

Least

Favourable

Most

Favourable

Least

Favourable

Risk and Reward Ranking, by Country




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3. Select ’OK’ Mozambique still faces some significant challenges

• Despite sustained growth for two decades, half of the population lives

below the national poverty line

• Two thirds of the population do not have access to running water inside

their homes

• The resources boom has resulted in an influx of foreigners into the

country

• Regional economic differences are resulting in rapid urbanisation

• Inflation poses some social stability threat

• Half of the national budget is funded by donor partners which has an

impact on the balance of political power

• There is a significant infrastructure backlog

Deloitte 13

Source: Institute for Security Studies, Mozambique Situation Report




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3. Select ’OK’ Mining Companies are increasingly involved in provision

of bulk infrastructure

Deloitte 14

Russia

SA Australia

Brazil

Guinea Zambia

Mainly State State with some

private operators

PPP between state

and & private

companies

Mostly Private

funding with State

getting ownership

rights

Mozambique


What does this have to do affordable

housing, clinics and schools for mining

communities?




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3. Select ’OK’

Mining

Constituents

Business

Organised

labour Labour

Government Community

Desire

Maximise profit

Retain license to operate

Challenge

Changing government expectations

Government requirements for royalties, taxes, profit

share, and social spend can erode profitability

Can’t always meet community expectations

Don’t always understand community needs

Don’t fully understand labour dynamics

Outcome

Risk and uncertainty

Desire

Share in the mining wealth

Social growth and expansion

Quality of life

Challenge

Government has not delivered

Mining industry’s ability / willingness to

share wealth is limited

Outcome

Social unrest and frustration

Desire

Decent standard of living

Challenge

Poor education/understanding

Difficult working conditions

Perception of continued exploitation

Perception that unions have failed

workers

Outcome

Wildcat strike action

Desire

Membership

Drive government policy

Challenge

Losing/changing support

Role in government and society

Job losses

Outcome

Fight for relevance

Desire

Maximise revenue to the state

Provide infrastructure and social services

Economic competitiveness

Economic transformation

Challenge

Multiple arms of government not aligned

Policy often unclear / unstable / inconsistent

Role of organised labour in governing alliance

Outcome

Have not always delivered to communities

Deloitte

A mining company’s role in society is a function of the conflicting

interests of stakeholders


So, what’s the answer?




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3. Select ’OK’

Corporate

Social

Responsibility

Creating

Shared Value

Value: Doing Good

Citizenship, philanthropy,

sustainability

Discretionary or in response to

external pressure

Separate from profit

maximisation

Agenda is determined by

corporate footprint and CSR

budget

Impact limited by corporate

footprint and CSR budget

Value: Economic and societal

benefits relative to cost

Joint company and community

value creation

Integral to competing

Integral to profit maximisation

Agenda is company specific

and internally generated

Realigns the entire company

budget

Source: Porter, M. and Kramer, M., “Creating Shared Value”, published in the Harvard Business Review (January – February, 2011)

Beyond Corporate Social Responsibility — Creating

Shared Value

Deloitte




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3. Select ’OK’

Engage Effectively with

Stakeholders

Deploy Inclusive Solutions

Measure Socio-Economic Impact

1

2

3

Source: Monitor Analysis, 2012

Three Tools to Creating Shared Value

Deloitte

Identify where shared value can be

unlocked

Understand real needs

Defuse strained relationships

Create sustainable socio-economic

impact

Make the right investment decisions

Frame the debate between stakeholders

Build a shared vision of the future




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3. Select ’OK’

Few credible

tools exist for

measuring /

tracking socio-

economic

return in a

holistic manner

Well

established

tools exist for

measuring

financial

return . . .

Return to

Shareholders

Return to

Country

Return to

Citizen

Examples of Impact

Profit Margin

NPV

IRR

ROI

Financial Security

Physical Security

Social Networks

Professional Satisfaction

Maximize company

profit

Retain license to

operate

Share in the mining

wealth

Social growth and

expansion

Main Desires Stakeholder

Company

shareholders

Industrialisation and

Transformation

Job Creation and

Transformation

Political Stability

National Reputation

Maximize government

revenue

Provide infrastructure

and social services

Local,

Provincial and

National

Governments

Community

members

Employees


Start by getting the facts on the table

Deloitte




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3. Select ’OK’

Global Mining

House

Government

National

Local

Provincial

Employees

Unions

Private

Shareholders

Department of

Environmental

Affairs

Department of

Mineral

Resources

Department of

Labour

Mine

Industry

Associations

Owners

Job seekers

Chamber of

Mines

Private

Shareholders

National Union

of Mineworkers

Department of

Human

Settlements

District and

Local

Municipalities

Provincial

Government

Employees /

Dependents

Current

Employees Other Unions

Board of

Directors

Investors

Various Members and

Makeup

General

Public

Youth Voters Media

Rio Tinto

Traditional

Leaders

Local

Businessmen

Community

ANC

Ruling Faction

Other Factions

Unions

Department of

Labour

Department of

Mineral

Resources

Government

National

Provincial

Institutional

Shareholders Community

Department of

Environmental

Affairs

Local

Businessmen Ruling party

Ruling Faction

Other Factions

Employees

Financial

Institutions

AMCU

Civil Society

Job creation, beneficiation and safety

Revenue for the state

Environmental

compliance Policy

positions and

political allies

Services and

infrastructure Social upliftment, economic

transformation

Re-election

Political

favour

Justice and

peace

Membership,

bargaining power

Profit and license

to operate

Standard of living

Business

opportunities

Return on

investment Power

Profit and license

to operate

Job security, living

wage, decent work

Employment

opportunities

Portfolio


The stakeholder environment is not trivial – take the time

to understand it properly

Deloitte




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3. Select ’OK’

Source: IFC and Harvard Kennedy School, “Scaling up inclusive business: Advancing the knowledge and action agenda”, 2010

Inclusive Solutions

Deloitte

“An inclusive business is one which seeks to contribute towards poverty alleviation by including lower-

income communities within its value chain while not losing sight of the ultimate goal of the business,

which is to generate profits.”

– World Business Council for Sustainable Development

“Inclusive business models include the poor on the demand side as clients and customers, and on the

supply side as employees, producers and business owners at various points in the value chain. They

build bridges between business and the poor for mutual benefit.”

– United Nations Development Programme


So, in summary




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3. Select ’OK’ Mining companies do have a role in society. This requires

difficult trade offs

Get the facts on the table – what real impact has been or needs to be

created for whom and by whom

Take the time to fully understand the stakeholder landscape

Think inclusively

Deloitte



Abrie Olivier

Deloitte Africa Mining

Industry Lead

[email protected]

John Woods

Deloitte Central & East

Africa Mining Lead

[email protected]

Andrew Lane

Monitor Deloitte

Director

[email protected]

Joao Machado

Deloitte Mozambique

Consulting Lead

[email protected]

Louis Kruger

Deloitte South Africa

Mining Lead

[email protected]

Abrie Olivier

Deloitte Africa Mining

Industry Lead

[email protected]

John Woods

Deloitte Central & East

Africa Mining Lead

[email protected]

Andrew Lane

Monitor Deloitte

Director

[email protected]

Joao Machado

Deloitte Mozambique

Consulting Lead

[email protected]

Louis Kruger

Deloitte South Africa

Mining Lead

[email protected]

Andrew Lane, Deloitte Consulting (Pty) Ltd - What is the role of mining companies in supplying affordable housing, clinics and schools for mining communities?

Business

mining market capitalisation

mining revenues

mining shareholders

mining communities

spot gold price

global mining sector

decline market capitalisation

coal producers