Why mines need to shop more locally

Carly Leonida: Tell us about the Mining Local Procurement Reporting Mechanism (LPRM) and how it came about?

Jeff Geipel: The Mining Local Procurement Reporting Mechanism (LPRM) is a standardised template developed by Mining Shared Value to help mining companies provide the same information on their local procurement practices and results.

What is measured can be managed so, if we can get companies to talk about it more publicly then we can empower suppliers, we can empower governments with better policy and we can improve internal performance.

It launched officially in 2017, and the first company to report on it was Ivanhoe Mines in 2019.

How has it been received so far by the industry and by investors?

JG: From the beginning, mining companies have been very supportive of the idea. We’ve got four using it now and another two adopting it. There’s a lot of pressure today for mines to demonstrate their supply chain details and processes.

In 2020, we started to see a big push from the environmental, social governance (ESG) angle and also from COVID too.

I think people had more time on their hands last year thanks to travel restrictions, so a lot of things that were on to do lists finally got done.

What benefits can local procurement bring, not just for mining companies but to host communities and governments as well?

JG: Local procurement is the biggest payment made by almost all mine sites. There’s a lot of attention on taxation and prudent use of taxes, but procurement is, in almost all cases, a much bigger spend.

The Natural Resource Governance Institute estimates that US$160 billion is spent on procurement in the mining industry globally each year.

It’s a huge economic lever for development in terms of jobs, tax revenue, opportunities for skills upgrading, formalising economies… those benefit both communities and governments.

For mining companies, it strengthens their social license to operate, it creates allies in the community who might have otherwise been opposed to the mine, and it helps to demonstrate their positive impacts in a way that can hopefully convince governments to not impose problematic regulations.

For the most part, it’s a win-win situation.

The ‘shop local’ philosophy seems like a no-brainer, so why haven’t more mining companies been taking this approach to date?

JG: I think the main barriers are short termism and corporate pressures.

Mining companies know that if they increase local procurement and support local suppliers it will save them money in the long run, in terms of lower product prices and reduced delivery times.

However, it does take 1-2 years to build up those suppliers and, in those two years they may have to pay more and suffer unreliable procurement. That’s really hard to get past.

Companies who have longer life mines do tend to do better at this, because it’s more of a long-term investment, and companies with shorter mine lives don’t see the value as much. There is value there but relatively speaking, the shorter the mine life the less incentive there is for investment in supply and development.

The deeper the company is in a country, the more likely they are to invest in local supply. But there are areas… for example, it’s very common for South Africa-based mining companies to keep buying from South African suppliers even when they operate in Zambia or other countries.

It’s probably cheaper to buy locally but those long-standing practices and relationships can be hard to shift.

I have seen some crazy cases of mining companies in the Congo buying from South Africa in a way which is not at all cost efficient, simply because of long-term procurement relationships.

Another problem is that procurement departments are often not up to speed on social license concerns. They may see the lower prices they’re getting, but they may not recognise that the lack of local procurement is causing community tensions and pushback.

Procurement is monitoring procurement costs and the community relations team is monitoring community conflicts, but often those things won’t get connected.

People don’t realise that if the mine bought more locally, it would have a better social license and that would save it money in the long run.

There can be real measurement problems internally.

It sounds like most procurement departments and processes are geared towards working with large suppliers who already have an established network around them. Why is that?

JG: In the last twenty years, procurement across every sector has moved towards being super centralised and efficient with one supplier providing lots of goods, but with recent events, people have realised it’s gone too far that way. So much so that now they’re overlooking local suppliers.

If you centralise procurement so much that you’re completely bypassing huge swathes of the country, it’s just not sustainable.

That’s why we’re seeing a push for localisation efforts, not just in mining but in food supply and other products too. COVID has shown that there is big value in local resilience.

I think many mining companies just don’t realise there are good local suppliers on their doorstep. Or maybe they haven’t taken the time to look, because procurement teams have their heads down making orders. They don’t necessarily take the time to look for cheaper suppliers nearby or attend tradeshows to find them.

With the LPRM, if we can get all the mining companies in a particular country or jurisdiction reporting their efforts on local procurement, supply due diligence and anti-corruption, then we can have an informed discussion on what to do about those things.

We can have a baseline of where the industry’s at, where a mine site’s at, where a company’s at and make improvements. But if we don’t have that information, then how can we work together to improve practices?

Where do you hope to take the LPRM over the next few years?

JG: We would like the LPRM to become sort of like the Extraction Industries Transparency Initiative (EITI) but for the issue of procurement, and in a collaborative way.

We want the information to be available, and then for governments and suppliers in the industry to work together on targets and buying opportunities.

I attended (virtually) a roundtable in Zambia recently, and one of the participants remarked that there are supplier development initiatives taking place, but no communication. No-one knows what the other companies are doing, so work is getting duplicated.

We’ve seen many countries in Africa implement local procurement requirements in the last decade, but very little public measurement has taken place.

There’s really no way of holding the government or companies accountable for their practices. The more we can get the information out there the more we can refine our practices.

Health and safety is a great parallel. That’s openly reported, and mine sites have improved drastically despite the fact there aren’t many legal sanctions.

Safety measures and culture are omnipresent, and there are feedback loops that show how everyone’s doing. It incentivises behavioural change for sure and that’s kind of what we’re trying to do with the LPRM.

How can a local procurement strategy help to guard supply chains against future disruption?

JG: The more local procurement you have, the more resilient your supply chain will be to pandemics, exchange rate shocks… to any challenge really.

If you’re operating in South Africa and the Rand falls, all of a sudden imports from the US will become significantly more expensive. Having local suppliers on hand is a great way to guard against that.

The pandemic has really exposed delivery times and how long it’s taking to get certain things to mine sites.

I talked to one mining company recently who said that the price for basic PPE and hand sanitiser went through the roof in 2020, so they spoke to local suppliers and found someone who could make face masks. And they adjusted their lab processes to make sanitiser.

Obviously we live in a globalised world with some efficient trade, but we need to have a little bit more on the ground in host countries to be resilient rather than relying entirely on imports.

Why should people outside of the mining industry care about this too?

JG: In mining, it’s much harder to get consumers to care. No-one who buys gold even knows which mine it came from.

But I do think that with local procurement, the more likely angle is investors who want to know they’re investing in responsible companies and that they won’t have problems.

The German Federal Ministry for Economic Cooperation and Development (BMZ) through GIZ funded the LPRM.

Germany’s got a huge focus on access to raw materials because many mining operations there have closed, so that’s why they’ve focused on improving mining governance in other countries.

They recognise that it’s in their interest to have reliable access to metals that are mined responsibly, so even though consumers might not be looking at this yet, investors are.

Hopefully, we can get to that point where consumers, investors and, ultimately, end users of metals will ask these questions and push for improvements too.