Creating value for many (and money) through mining

What value does your current business model create and for whom?

I ask because it is becoming increasingly obvious that the success of a mining company – any company in the mining sector – cannot be measured by its financial returns alone.

The question is: how can we pivot and go from being an industry that has focused on creating value for one particular group of stakeholders (investors) almost exclusively for many years, to one that provides value for many?

Because doing so will address what is widely acknowledged as the biggest risk the mining business faces going forward: social license to operate.

What is shared value?

The notion of ‘shared value’, originally came from a 2011 Harvard Business Review article, authored by Michael Porter and Mark Kramer.

In it, the authors argued that companies can move beyond corporate social responsibility (CSR) and gain competitive advantage by including social and environmental considerations in their core business strategies.

In a bid to understand the concept better and its potential application within the mining space, I turned to Dr Jocelyn Fraser, post-doctoral fellow at the University of British Columbia’s (UBC) School of Public Policy and Global Affairs and the Norman B. Keevil Institute of Mining Engineering.

Fraser’s current work focuses on social risk and social responsibility in the global mining sector. She recently co-authored an excellent paper, published in the Extractive Industries in Society (EXIS) journal, on why the mining industry needs new business models, and presented on business model innovation through shared value as part of the CIM 2020 online Technical Program Series.

“I remember reading the Porter and Kramer paper when I was working for a mining company, and I thought, ‘oh, my gosh, this is such an interesting idea’,” she told me. “However, it also reminded me that although the term itself is new, the idea of finding these points of intersection is not.

“We could go back as early as [British chocolate producer] Cadbury in England in the 1800s. The company worked to provide education and housing for its workers; that’s an example of creating shared value.

“In 2000, I worked for De Beers, and we had a situation in our mines in Botswana where there was a high HIV/AIDS infection rate. The company decided to implement a disease management programme, the first in Sub-Saharan Africa.

“That’s definitely an example of shared value. The company acted out of care and compassion for its workforce, but they also had a very strong business imperative.

“So, I think although Porter and Kramer have popularised the term, the idea of shared value is not new to society or to the mining sector. But we haven’t seen a huge amount of pick up on it in the mining sector thus far.”

Holding back

Which is strange, isn’t it? I noted.

Given the level of importance mining companies currently allocate to sustainability and social license to operate…Why aren’t more firms investigating potential new business models and, more importantly, applying them?

“It’s a question that I ask a lot, both in my research and applied work,” said Fraser. “There’s a couple of reasons, both inside of mining companies and in the communities of interest.

“One of the challenges is that philanthropic investment in CSR programmes is what communities are familiar with. It’s the tried and true method.

“If we’re asking communities to move away from that and do something more collaborative then, first of all, the parties involved need to understand what that’s going to look like. What are they going to get out of it and what are they going to have to put into it?

“In the mining sector, we also have issues related to trust.

“I’ve heard from community representatives who said: ‘Just give us the cheque. We don’t want to be dependent upon you. Who knows if you’re even going to be here in five years?’”

Indeed, while I was writing this article, the Responsible Mining Index published its 2020 report and trust deficit with local communities was the number one risk identified by mining companies for the second year in a row.

Clearly this is an issue that cannot be ignored.

“When we look at the big macroeconomic issues that are the basis of the UN Sustainable Development Goals, there are interesting points of intersection where we know we have common ground with communities,” said Fraser. “And if we can help to bring solutions forward, then maybe that’s the way to bridge that trust divide”

Current mining business models

I asked Fraser what typical business models look like in the mining industry today? Are they mainly set up to benefit shareholders and nobody else?

Fraser gave a wry laugh. “Yes, it’s such a capital-intensive industry. We’re not just talking about millions of dollars; we’re often talking about billions of dollars. And so, return on that investment, cost-benefit analyses and internal rate of returns… All those traditional ways of modelling business success are deeply ingrained in the mining sector.

“The EXIS paper I wrote with my colleagues explores if there’s a way to change that business model so that the mining company is not sandwiched in between government as the mineral rights holder and permit issuer, and communities which host mining operations but don’t necessarily benefit from them.

“There’s an assumption that companies will support communities through voluntary initiatives. But that’s not a great model, because it doesn’t maximise anyone’s key attributes. If we can take mining out of the middle and have a more cooperative arrangement, that would be very helpful.”

The current paradigm is tried and tested. However, it has remained relatively unchanged for decades, if not a century. Given some of the drivers businesses now face, perhaps the time has come for change…?

Fraser believes there are two groups of companies that are capable of initiating this type of transformation.

“First, large multinational corporations that have large capital resources,” she explained. “And, if there’s political will within the company, then they will be able to harness resources to drive these kinds of shared value initiatives.

“Small single-asset companies will also be in a good position, because they don’t have to drag a whole bunch of corporate bureaucracy along with them. They’ve got small, nimble teams that can decide how they want to approach the business.

“The companies that will find it more challenging are the mid-size, mid-tier companies that tend to be pinched between trying to manage their capital wisely and meeting shareholder expectations.

“They will find it more challenging, but it’s not impossible.”

What’s in it for us?

Of course, mining companies are businesses, with shareholders. Not social enterprises. They need to balance the creation of economic wealth with social, ethical and environmental value.

Is that possible?

“Yes! That’s why I like the idea of creating shared value,” Fraser said. “I’m not in any way suggesting that we should get rid of CSR. I think philanthropic investment and social responsibility plays an important role.

“The challenges those approaches face, though, is they’re not core to the business. And so, they’re vulnerable in times of economic downturn to have budgets slashed or staff laid off.

“Shared value is an economic strategy. In the ideal world, it generates economic value, both for the company and communities. Because of that, you can build a very robust business case for it, which is difficult to do for philanthropy and CSR. That’s one of the key differentiators.”

Shared value models can also be used to address market failures as well.

In her CIM presentation, Fraser used Freeport-McMoRan’s Cerro Verde operation in Peru and its collaborative work with local communities as an example.

When social groups began advocating for wastewater treatment in the city of Arequipa, Cerro Verde was able to facilitate its mine expansion plans while also contributing to sustainable development.

In 2015, the mine commissioned a US$500 million wastewater treatment plant for the city within its concession. In exchange, Cerro Verde received a portion (1m³/second) of the treated wastewater for use in its mining operations.

The case has proven a great success for all stakeholders.

“Cerro Verde is a fascinating case because it’s majority-owned by a huge company,” Fraser told me.  Just 200km away is Southern Copper’s proposed Tia Maria operation, which is probably the most contentious project in Peru.

“They’ve had four national states of emergencies declared on that project. Half a dozen people have lost their lives. Hundreds of people have been injured in protests. All triggered around competition for water resources.

“There were lots of reasons why Cerro Verde started looking at water but, the key in that case was the idea came from the community. At that time, no mines in Peru were using treated municipal wastewater for their mining operations. Cerro Verde was the first.

“Mining companies are very good at assessing risk. But, if we’re only looking for risk, we sometimes miss associated opportunities.”

Barriers to uptake

Another sticking point that can hold mining companies back from new business models is desire for best practice, or a template.

“Shared value is not going to come with a template; it’s business strategy,” Fraser explained. “So, it’s going to be jurisdictionally dependent. It’s going to be situational. It might be bounded by whatever kind of time you’re operating in. And that makes it more challenging.

“While there are companies that support the idea, it still needs to have a very strong local focus. So, Freeport-McMoRan had great success with water at Cerro Verde. But that’s probably not going to be a case study that they take to their other mines.

“Companies have to work with local communities to identify the issues that are important to them. They have to build a collaborative partnership with the proper people. It’s time consuming and it’s not as straight forward as some form of philanthropic or CSR investment.

“I think the return on the investment from a time perspective is well worth it, but it also requires some slightly different skills. Some CSR and operations people will be fantastic at doing this. We need more cross-sectoral collaboration to help identify the opportunities.”

Cultural change

So, how can we encourage uptake of shared value across mining organisations rather than just at an operational level?

“It’s an interesting link to the discussion of effective community engagement; what does that look like? And are we asking the right questions at the feasibility stage, or even from the point of discovery?” Fraser said.

“Relationships that are built from the time of early engagement are really important. I’m just not sure how many people are looking for those opportunities at pre-feasibility right now.”

The problem could lie in education and training; unless we’re taught to look for opportunities and shared points of interest with communities as standard or, unless there’s a really strong business imperative, there’s little chance people will go looking for them.

I asked Fraser, what could be the consequences if we don’t start to look at new business models, things like shared value? Why do we need to address this now?

“Over the past decade, voluntary codes of conduct, reporting protocols, standards etc. have grown exponentially,” she said. “But, at the same time, we’re seeing incidences of mining community conflict also increasing.

“When you start to look at the number of projects that have been stalled or derailed due to social opposition… I remember in Peru, in 2015, one country, one year, $52 billion was lost in foreign investment because of social protests.

“That presents a real threat to the industry. There’s a strong motivation for doing things differently.

“When we start funnelling that into the SDGs, it seems straightforward to find some points of intersection, some common ground, and then build a really robust business case for shared value.

“In the mining sector, unless we can prove a really robust business case, boards don’t tend to support these kinds of projects. They think they are nice to have, but not a must have. But with shared value, there’s financial gain on both sides and it’s linked to the core business of mining.

“Typically, the ways that we measure success are increases in productivity or in the operating environment. You can put some nice key performance indicators against shared value, in a way that’s very difficult to do with some of the other methods we’ve tried to engage with our stakeholders.”

Long term gain

A key difference between shared value and a CSR programme or philanthropic initiative, is the time and effort required upfront to ensure the project’s success.

Shared value requires time to find the right issue, the right partners, put a plan together and add reporting. It would likely require two to five years to get the model set up and running properly.

The will to make that happen is rare in industry where quick short-term wins are often favoured over longer-term initiatives. This is where investors will be key…

“We’re seeing a lot more interest in social impact investing and responsible investors,” Fraser noted. “In the first CIM online panel session, one of the presenters, showed an analysis of returns from mining over the past decade, and they didn’t look very good.

“Mining is a capital-intensive industry, we need investors. So that should also be a motivation.

“And if investors begin to push for these kinds of more shared value strategies too… I think it would be very, very helpful.”