The past few years have seen a global surge in extractive activity and deal making in the mining space powered primarily by a strong Asian appetite for base and precious metals. However, the high demand for minerals and metals has done little to relax the exposure of mining companies to project and deal risk. Instead, quite the opposite has happened. Those buying and investing in existing and potential projects have developed a heightened sensitivity to uncertainties that could lead to material financial pain, or that could delay or preclude production. As a result, deal prospectors are often willing to spend significant due diligence dollars in the pre-acquisition phase of a transaction to avoid or minimize their exposure to such risks. Similarly, those seeking to sell projects or mining interests have come to understand that their ability to reduce their exposure to risk is often directly correlated with their market value.
Each year Ernst & Young publishes a report entitled “Business Risks Facing Mining and Metals” which lists and explains the top ten risks faced by mining companies. In this Report, the following risks are cited as being currently prevalent in the following order: Resource nationalism; Skills shortage; Infrastructure access; Maintaining a “social licence to operate”; Capital project execution; Price and currency volatility; Capital allocation; Cost Management; Interruptions to supply; and Fraud and corruption. Speaking to the significance of these challenges and how they are trending, Ernst &Young states “On the surface, the top ten risks don’t look all that different from last year, but…[they] have become more extreme and more complex over the past 12 months due to the fast changing investment and operational environment.”1
While some of these risks are not necessarily within the control of any particular mining company or even the industry generally to mitigate completely, companies can reduce their exposure in most areas by developing a concerted, strategic focus on building and maintaining relationships of trust with people who can influence outcomes. As the concepts of “social licence to operate” and “corporate social responsibility” gain increasing traction throughout the industry, a relationship-focused approach to risk avoidance is not a new idea. Surprisingly though, in practice, the importance of building relationships of trust to pre-empt and deflect risk does not appear to be well enough appreciated and is rarely well executed. Recently, several relatively high-profile examples have come to light which highlight how the failure to get key relationships right has cost extractive companies dearly.
In its report, Ernst & Young offers several recommendations for mitigating the identified risks. For example, to protect against the consequences of resource nationalism, companies are encouraged to invest in transparent relationships with host governments; align with the host government’s long-term economic and political incentives; and partner with state owned enterprises that have strong Government-to-Government relationships. To address the risks posed by lack of access to infrastructure to support proposed projects, project proponents are encouraged, among other things, to look for other stakeholders to co-develop solutions with shared benefits, and partner if possible with other potential stakeholders to innovate financial arrangements. To combat the risks posed by the failure of a company to obtain and maintain the “social licence to operate” companies are encouraged to develop trusting and supportive relationships with all stakeholders.2
Building and maintaining strong relationships of trust with local community groups including local residents and businesses, community leaders, indigenous people, regulators, politicians, and interested non-governmental organizations, is critical to success in reducing project opposition, permitting risks and therefore transactional risks. For optimum results, identifying key representatives, developing an effective engagement plan, and coaching the corporate team to implement the plan effectively should begin well before the announcement of any project and, where possible, before project permitting commences. The engagement plan should be values-based and interest-based, rather than designed solely as a commercial exercise aimed at concluding agreements by which the company will receive project support. While concluding such agreements and gaining regulatory support may be the company’s desired outcome from any engagement process, focusing on this commercial goal can often backfire. Regardless of whether or not one is overt about this goal, a company’s focus on this end-game is often easily detected by stakeholders and the market and, despite best efforts, such a focus can lead to relationship failure between the company and stakeholders, in turn detracting from a company’s credibility, adversely impacting reputation, and resulting in a failure to obtain the social licence to operate.
A values-based and interest-based approach to engagement requires the allocation of sufficient time to establish solid relationships with key players within the various (and often competing) groups. The company should allocate time to strengthen those relationships through repeated and frequent communications with key players. Whether engagement is planned with local residents, politicians, regulators, businesses, special interest groups, or a combination of these, the communications should principally focus on the interests of the group being engaged, and on gaining an understanding of the interests of the particular people involved, as opposed to a road show by the company about its intended activities in the region or area. While business isn’t often personal, the approach to engagement for relationship building absolutely must take a tone that is personal to the party with whom one is dialoguing, and the personal approach must be genuinely so in order to build, grow and maintain trust between the company’s people and those who are being engaged.
Successful engagement begins with a process of inquiry, listening and learning about the culture, politics, and current challenges faced by the particular group. The perspectives offered must then be carefully considered so that a meaningful, directly responsive approach can be worked into the company’s project planning and the company’s presentation to that group about its intentions. Information gained through this listening and learning phase should inform the determination of the presentation format, the venue, the tone of delivery, and follow up steps. While this approach might seem an onerous and more time consuming avenue for risk mitigation than other conventional approaches to addressing business risk, the relationship-focused strategy, if developed with ingenuity and integrity, is one that the company can author, personalize, tailor, align and infuse with its brand, and use to distinguish itself in the market place, not just for the purposes of the intended project, but for future projects it might choose to develop elsewhere in the world. This is an approach that can both decrease project and deal risk, and at the same time increase market value by enhancing credibility and brand recognition.
In considering risk mitigation recommendations involving government relations and the alignment of interests with governments and government agencies, companies should become familiar with and remain vigilant about complying with applicable anti-corruption and anti-bribery laws. They should seek specific advice respecting these and related legal issues when developing engagement strategies involving governments and government agencies - including indigenous governments - to ensure that such laws are not being inadvertently contravened in the process.
1 Go to http://www.ey.com/GL/en/Industries/Mining---Metals/Business-risks-facing-mining-and-metals-2012---2013 for the complete report.
2 These represent a few of several recommendations and these are paraphrased from the Report – for the full recommendations, see the full text, supra.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.