Emerging Frontiers: Focus on Africa & Asia

Risk for reward

With many of the world’s easier mineral deposits already developed in places like Canada, Australia and the US, there is a major push factor towards so-called riskier jurisdictions for the next big find. In the oil and gas industry, that push is driven by companies seeking resources outside of the control of NOC’s [National Oil Companies], which account for some three-quarters of the world’s oil and gas production.

Whatever the drivers might be, there is no doubt that venturing into under-exploited, under-evaluated and under-explored regions requires planning and knowledge.

IRJ talks to James Smither, head of global risk advisory firm Maplecroft’s mining and engineering practice, to get an idea of what companies are, or should be, worried about and what risk mitigation best practices look like. 

It is incredibly hard to generalise about vast continents like Africa and Asia but this is just what I am asking James Smither to do. Natural resources in frontier markets are on the radar and places like Kazakhstan, Mongolia or entire regions such as East and West Africa are attracting plenty of interest, from majors to juniors to investment firms.

“It may not always feel like it, but there has been a drop in the number of conflicts, especially in sub-Saharan Africa, in the last 10 or 15 years. Places that were basically inaccessible to mining companies at the start of the 1990s, like the Democratic Republic of Congo or Sierra Leone, and maybe going back further, countries like Mozambique or Angola, are now open for business. Those are places that, with a bit of risk appetite, companies can think about going and that has made geographic diversification easier in what used to be closed markets,” Smither says.

He adds that though Asia is just as potentially lucrative as Africa, it comes with the caveat that it has existing ‘vested interests’ with better access to the prime development properties, making it something of a tougher nut to crack for foreign companies.

“In places like Tanzania or Guinea, there aren’t large local companies like you might find in Kazakhstan or Indonesia, which have already established positions, close relationships with government and can get the jump on the best reserves. Africa is one of the last great frontiers in terms of open space,” says Smither.

Though he notes that any generalisation about either of these two massive continents has a “giant asterisk” beside it, there are some common themes that can be teased out in terms of the risks that mining companies face in the frontier markets that are making headlines.

Uncertainty and capacity

Some of those risks are quite familiar to IRJ’s readers – for example, the uncertainty which accompanies a lack of developed institutions like a functioning mining ministry that can deal with managing procedures. Governments may indeed have a mining minister, but does that individual have the experience, administrative capacity or technocratic ability to evaluate projects? Manage negotiation processes around running a tender process or issuing environmental permits? Enforce a sensible tax regime?

“In places like Mongolia as well as many African markets there is less of an established commercial framework of laws, resulting in a lack of tried and tested contractual practices and the associated prospect of further policy flux,” he notes.

However, in African frontier markets, miners also run into other deficiencies, notably, a lack of infrastructure development and a serious skills shortage. Having just come back from a trip to Sierra Leone, Smither describes an environment where the only people with access to electricity in some townships near major mining projects are those with generators.

In addition to the need to build basic infrastructure such as paved roads and ports, the mining professionals required to develop a project from feasibility through to operations – geologists, engineers, construction supervisors – are to a large degree absent.

“A mining operation will have to bring people in from outside and that can create difficulties. People may not want to go to potentially dangerous, difficult, remote and malarial locations. And along with that is sporadic political instability since some countries are emerging democracies with flawed electoral systems.

It sounds like a forbidding list to operate in Africa but these are the facts,” he adds.

Mining projects often rely on local state security forces for protection, but in some cases, particularly in countries like the Democratic Republic of Congo (DRC), those police or army units do not have stellar reputations and heavy-handed treatmeant of community protests can lead to human rights abuses.

But stable and fledgling democracies and dictatorships coexist in Asia as well. In India, some of the most prospective mining regions overlap with some of the most troubled territories facing Maoist insurgencies. And in other countries, such as the Philippines and Indonesia, mining projects have encountered stiff resistance from communities including indigenous populations, resulting in clashes between security personnel and the local population.

Sizing up frontiers

Despite this, mining interests are sizing up all of these regions and at more than one investment seminar, companies operating in these very countries reiterate the opportunity presented by high grades of ore across various commodities combined with low labour costs against a back drop of attractive prices.

“The main deterrent for the largest companies is the size of the resource; they are primarily looking at the geology and in looking for those mega-deposits, there are definitely associated concerns from an ‘above-ground’ risk perspective,” Smither says.

In mid-June, Guinea launched operations at its first iron ore mine, a joint venture between Africa-focused miner Bellzone, the China International Fund (CIF) and the government of Guinea, with estimated reserves of 40 million tonnes (Mt) of ore.

Meanwhile, joint ventures by Rio Tinto and Chinalco, and Vale and BSG Resources, are spending more than $5 billion on the Simandou and Zogota iron ore projects in the same country.

According to Reuters, Rio has said it may start exporting iron ore from the Simandou project before its 2015 target-date using trucks to transport ore to the port and has committed more than $1 billion for studies on a 650km railway to link the mine in the south-east to the Atlantic coast of the West African nation.

“All the risks on that forbidding list – recent political instability, lack of infrastructure, security, institutional capacity – they all apply in Guinea. But because the resource is so huge all of that is secondary. The sheer scale of the Simandou deposit means Rio will have to commit a correspondingly large cadre of technical specialists and resources to exploit it fully,” Smither says.

But the companies with the highest risk appetites are junior mining companies. Their goal is to find the resource and sell it on. This can in some cases result in short-term thinking, he adds. DRC’s mining industry, for example, has in recent years been characterised by smaller companies developing individual copper, gold or cobalt deposits. Whether or not that translates into reputational risk may depend on where, or if, a company is listed.

Fighting corruption

Companies listed in the UK and US are subject to legislation like the Bribery, Dodd-Frank or Foreign Corrupt Practices Acts. And there is evidence that regulators are cracking down.

In February this year, US regulator, the Securities and Exchange Commission (SEC) charged three Noble Corporation oil services executives with bribing customs officials in Nigeria to obtain illicit permits for oil rigs in order to retain business under lucrative drilling contracts.

Last year, BHP Billiton banned the use of “facilitation payments” to bring its conduct in line with the UK Bribery Act. The ban came in the wake of an SEC investigation into BHP’s dealings with the Cambodian government to secure a bauxite project.

“Listed companies need to communicate with shareholders if they are going into one of these very high risk markets, to demonstrate that they are doing so with eyes wide open and precautions  in place. This is generally less of a concern for private companies, or companies with headquarters in places like China,” Smither says.

China is certainly receiving its share of criticism in recent years as it extends its influence not just across Asian neighbours, but also in Africa and Latin America.

The resource hungry emerging global super power is under attack for its operational strategies, which some critics say do not take into account the communities it operates in. These accusations come from places like Balochistan province in Pakistan and the Zambian Copperbelt and more surprisingly, even from sources on Australian-based projects.

“Chinese companies are subject to different pressures, many of them are closed ownership structures and not subject to the same reporting requirements as Western companies. But China’s extractives industries are on a huge international learning curve. Many companies first went into Africa in the 90s and experienced difficulties with labour relations or security that necessitated swift corrective action. In some ways, I think they are on just as much of a curve as Western companies have been for the last hundred years in terms of developing an approach to community relations, environmental management, health and safety at work and they are being asked to make that transition quicker,” Smither says.

But there is a fair amount of cross-cultural joint venturing with China going on around the world – not just because of the capital that Chinese companies bring to the table but engineering and infrastructure development know-how as well. Those partnerships are a growing trend and come with a two-way exchange of ideas around best practices, risk management and environmental sensitivity, Smither notes.

Rights defenders?

But are the large miners really known for best practices in terms of human rights and environmental stewardship? Many NGOs are harsh critics of extractive industry participants and the likes of Canada’s Barrick Gold, Australia’s Rio Tinto and Swiss commodities trading giant Glencore are attacked consistently for poor records on this front.

On the environmental side, a 10-year review from the International Institute for Environment and Development says that the mining and minerals industry has made some major advances towards sustainability. The report, intended for the Rio+20 audience, detailed the way in which the International Council on Mining and Metals – an umbrella organisation of leading companies such as Rio Tinto and Anglo American – has succeeded in implementing recommendations to embed sustainable business practices into their operational frameworks. If anything, governments and the small scale mining sector have lagged behind, the report adds.

The findings do not surprise Smither, whose organisation, Maplecroft, works with some of the largest players. South African gold mining giant Gold Fields, for example, is seeking to become a global leader in sustainable practices and is listed on the only major market in the world that obligates companies to report on an integrated basis – the Johannesburg Stock Exchange. This means the company releases water usage and community investment figures along with financial results. 

“Larger miners have recognised that sustainability is not something you do just because people want you to do it but because it makes business sense. If you have a better approach to environmental risk management then you are less wasteful in consumption of natural resources and ultimately the project costs less.

But aside from the economic incentive, there is a risk management incentive as well, because sustainable practices are known to lead to better relationships with the communities in which mines operate,” Smither says.

In other words, what used to be external initiatives led by NGOs demanding that companies adopt sustainable practices have evolved into a virtuous circle of incentives for companies which encourage transparency. Ultimately, says Smither, it will be self-interest that leads to industry-wide adoption of behaviour which embraces best practices.

Ethical questions

But another kind of evolution is taking place in other voluntary reporting initiatives such as the Extractive Industries Transparency Initiative (EITI) and others, such as the Kimberley process, which were intended to stamp out specific human rights abuses.  Established in 2003, the Kimberley process now encompasses 76 countries and tries to eliminate the practice of diamonds being used as payments by rebel movements to finance wars against legitimate governments.

This year, Liberia’s former president Charles Taylor was sentenced to 50 years by a UN-backed war crimes court for his role in aiding and abetting rebels in Sierra Leone during the 1991-2002 civil war.  As it happens, James Smither was in Freetown when the verdict was read.

“The Kimberley process is a success because it had been set up to stop conflict diamonds and under its specific definitions, there aren’t any conflict diamonds now, meaning there are no countries in a state of war where diamonds are produced…but there are follow-up questions pertaining to the future of this process,” he says.

For example, some observers point out that there is a “Zimbabwe ambiguity” relating to alleged human rights abuses committed by government security forces to facilitate diamond mining in the Marange diamond fields. Smither explains that this technically does not count as conflict diamonds under the Kimberley Process parameters because the perpetrators are not rebels and Zimbabwe is not formally in a state of civil conflict.

Diamonds from the troubled country have even been smuggled to Sierra Leone – some 5,600km or over seven hours of flight time - to be verified as clean for sale and export. “It is the world turned on its head,” says Smither.

But the other remaining question is: where do ethics stop?

“If it is about conflict diamonds then the process is more or less complete for now, but if it is more about ‘ethical diamonds’ and someone who buys a diamond for their fiancée wanting to sleep with a fully clear conscience at night, there is still work to do. This would require a complete rewriting of the founding principles of the Kimberley process and needs to include environmental standards, working conditions, a guarantee that no corruption has taken place. Is that really feasible?” he says.

Gold, tantalum and other metals produced in eastern DRC have recently come under the spotlight too when they were included in listed companies’ reporting requirements as part of the Congo Minerals Rule in the US’ sweeping regulatory reform - the Dodd-Frank Act.

Despite all these legislative initiatives, there is no evidence that the fastest growing consumers for luxury goods, those in Asia, seem to care as much about the ethical production of diamonds and gold, which tends to be viewed as a “Western” attitude.

Yet, it is not just the end consumer targeted by initiatives which seek to redress supply chain relationships. Influential organisations like the International Finance Corporation, the investment arm of the World Bank, are maintaining close partnerships with financial services institutions that are adopting concepts such as the Equator Principles - a credit risk management framework for determining, assessing and managing environmental and social risk in project finance transactions.

The Equator Principles seem to suggest that community engagement needs to happen years earlier in the mining life cycle than previously thought and should incorporate women within those communities to a greater extent in order to secure a kind of “social licence” for operating mines.

Resource nation

That social licence could be one of the key ingredients in warding off a growing trend of resource nationalism. Another could be expectations management - for example, appropriate dialogue with communities should include an explanation that there are often more jobs in the construction phase of a project rather than the operational phase. In situations where locals see trucks hauling wealth out of the ground while they are losing jobs, anger often boils over, leading to confrontations with companies such as roadblocks or other operational interruptions.

Smither points out however that the increasing headlines around resource nationalism may not be a “trend” in the traditional sense, but actually an indicator that the extractive industry is heading further and further into unknown territories.

“Resource nationalism is cyclical with commodity price uptrends, more prevalent in countries where a majority of the population is poor and in situations where an existing government is keen to boost its popularity in some way or a new government wishes to establish legitimacy. It is therefore not surprising that we are seeing an increase in ‘resource nationalist’-style policies at present considering the global situation in the push to frontier markets, particularly at a time of recession. It is a volatile cocktail,” Smither explains. 

Though resource nationalism often has negative connotations, it does not necessarily lead to acrimonious relationships between authorities and industry.

Smither points to Peru as a recent case where a new government and mining companies sat around the table negotiating for a more flexible tax regime, resulting in both sides reaching a mutually beneficial agreement that would not penalise miners during bad times but allow the government to make more in taxes during the good times.

Still, whether it is ebbing or rising, resource nationalism is a reality that mining companies have to contend with and, as they do, the conversation over risk and best practices is only going to become more important.

“It can often be fairly unpleasant having a conversation about risk, because you end up creating long lists of things that can and do go wrong. But risk is the evil twin of opportunity and the reason these mining companies are going into these sorts of jurisdiction is because these markets are becoming more democratic, more open, there is demand for the commodities that are being produced and there is potential in those markets to create wealth not just for shareholders and direct employees but for taxpayers and residents in those countries,” he says.

Moreover, the mining industry is full of some of the most problem-solving oriented people venturing into unknown territories. Explorers are often first to go into a country where in some cases Westerners have never been, underpinned by an attitude that there is an engineering solution or a technical solution to any challenge.

“It is a case of applying the same kind of systematic problem solving approach to subjective areas such as risk or problems with environmental or social angles,” Smither says.