Mining in the 21 st Century The Quest for Sustainable Profits

1. Mining in the 21st CenturyThe Quest for Sustainable Profits Peter Demura αlphaεconomics

2. Disclaimer αlphaεconomics The views represented in this presentation are those solely of the author and do not reflect the views of past or previous employers, clients or associates

3. Today we will discuss αlphaεconomics • Overview of the global mining industry • Strong demand and prices shaping strategies and risk tolerances • The investment decision • Complexity driven by more than resources • Sustainable development need not be a zero sum game • Remains in realm of profit maximisation • Filling institutional voids • Policy recommendations • Building governance frameworks • Trust and transparency

4. Why sustainable development? αlphaεconomics The development of the resources a pathway to economic and political development Not without its costs – “resources curse” “Although leaving oil [or other resources] in the ground means that interest is forgone, the ground may just be the safest place for the asset, especially if there exists the risk that governments may use the revenue for their own purposes rather than the good of society, as has happened so often already.” Humphreys, M., Sachs, J. D. and Stiglitz (2007), What is the Problem with natural resource Wealth, in Humphreys, M., Sachs, J. D. and Stiglitz (eds.), Escaping the Resource Curse, Columbia University press New York. Not an option and inconsistent with the Brundtland definition of sustainable development Future generations benefit from the conversion of natural wealth to human and physical capital

5. Today we will discuss αlphaεconomics • Overview of the global mining industry • Strong demand and prices shaping strategies and risk tolerances • The investment decision • Complexity driven by more than resources • Sustainable development need not be a zero sum game • Remains in realm of profit maximisation • Filling institutional voids • Policy recommendations • Building governance frameworks • Trust and transparency

6. Acceleration in world mineral and energy production αlphaεconomics

7. Australasia dominates regional production of mineral and energy commodities αlphaεconomics

8. China is a dominant supplier and user of commodities αlphaεconomics

9. Industrialisation is driving demand for commodities Source: IISI, AME Mineral Economics αlphaεconomics

10. Price trends reflect industry structure and supply and demand balance Source: LME, Bloomberg, ABARE, Author αlphaεconomics

11. Global mining industry is flexing its muscles αlphaεconomics • Trend is for consolidation and diversification • Top fifteen companies in 1995 accounted for 30.7% of non-fuel mine production, in 2000 it had fallen to 28.8%, by 2006 it was 38.6% and rising • Driven by economies of scale, cost reduction, access to resources and capital markets • The rise of the diversified miner • The top 6 miners in 2009 had a combined market capitalization of $700 billion, 53% of top 40 • BHP Billiton and Vale accounting $350 billion

12. Top six mining companies BHP Billiton, Vale, Rio Tinto, China Shenhua, Anglo American and Xstrata – dominate minerals production αlphaεconomics

13. Challenges facing the global mining industry αlphaεconomics Continued access to resources China as a competitor and geo-political response Rise of resource nationalism and state capitalism Capital and commodity market volatility Pressure from NGOs and local communities

14. Today we will discuss αlphaεconomics • Overview of the global mining industry • Strong demand and prices shaping strategies and risk tolerances • The investment decision • Complexity driven by more than resources • Sustainable development need not be a zero sum game • Remains in realm of profit maximisation • Filling institutional voids • Policy recommendations • Building governance frameworks • Trust and transparency

15. Mining is an economic activity αlphaεconomics “The main purpose of mining is to satisfy basic human needs and wants and create wealth for all potential stakeholders…..Unless they can fully cover their cost of capital, and earn an acceptable rate of return, mining companies will be unable to attract sufficient funds to sustain their investment and their output. Nor will they be able to satisfy many of the wants and aspirations of the wider community Crowson, P. (2010), Mining Unearthed, Aspermont UK, London • The presence of mineral resources does not imply their development • For decades high grade copper deposits in Sub-Sahara Africa went undeveloped • Salient lesson to governments to ensure right frameworks in place

16. Only when resources become probable or proven reserves can they be developed Indentified Mineral Resources (In Situ) Ore Reserves (Mineable) JORC Framework Inferred Indicated Probable Increasing level of geological data, knowledge and confidence Consideration of economic, mining, metallurgical, marketing, legal, environmental, social, and governmental factors Measured Proven Source: Rudenno, V. (2009), “The Mining Valuation Handbook, 3rd edition, Wrightbooks, Melbourne αlphaεconomics

17. Moving from exploration to production is a costly, complex and prolonged process αlphaεconomics

18. Beyond geology and project economics is political risk “From my own perspective, this [proposed mining tax in Australia] is my number one sovereign risk issue on a global basis,” Mr Albanese, CEO Rio Tinto αlphaεconomics

19. A long way between the top and bottom performers αlphaεconomics

20. Today we will discuss αlphaεconomics • Overview of the global mining industry • Strong demand and prices shaping strategies and risk tolerances • The investment decision • Complexity driven by more than resources • Sustainable development need not be a zero sum game • Remains in realm of profit maximisation • Filling institutional voids • Policy recommendations • Building governance frameworks • Trust and transparency

21. Sustainable development need not be a zero sum game αlphaεconomics “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs” If handled correctly, the transformation of natural capital into productive physical and human capital can propel nations forward, and meet the profit maximising objectives of shareholders handled incorrectly it can lay the foundation for decades of misery for countries and shareholders alike there is an alignment of interests between host nations and companies in ensuring sustainable development

22. Virtuous Cycle of Poverty Reduction Sustainable National Economic & Political Development Sustainable Mining Companies Maximising Shareholder Value αlphaεconomics

23. The business case for sustainable development Deloitte (2007), A mine of information, An analysis of sustainable development reporting in the mining industry, London αlphaεconomics

24. The welfare case for sustainable development αlphaεconomics • Resource Curse is a barrier to sustainable development and successful countries have avoided the extreme forms • Many manifestations • Dutch Disease and overvalued real exchange rate • Protectionist policies • Dependence on volatile and declining commodity prices – deterioration in terms of trade • Over-consumption and failure to account fro resource depletion • Development of rent seeking culture prompting corruption, social unrest and civil war • Mining, supported legislation, can kick start the development and emergence of a diversified economy

25. Mining commitment to sustainable governed by sustainable development frameworks αlphaεconomics The dominant frameworks are the ICMM Sustainable Development Framework and Extractive Industries Transparency Initiative Voluntary, but “compulsory” Focus on reporting more than assurance

26. ICMM Principles of Sustainable Development αlphaεconomics Implement and maintain ethical business practices and sound systems of corporate governance. Integrate sustainable development considerations within the corporate decision-making process. Uphold fundamental human rights and respect cultures, customs and values in dealings with employees and others who are affected by our activities. Implement risk management strategies based on valid data and sound science. Seek continual improvement of our health and safety performance Seek continual improvement of our environmental performance Contribute to conservation of biodiversity and integrated approaches to land use planning Facilitate and encourage responsible product design, use, re-use, recycling and disposal of our products Contribute to the social, economic and institutional development of the communities in which we operate Implement effective and transparent engagement, communication and independently verified reporting arrangements with our stakeholders Source: International Council of Mining and Metals, www.icmm.org

27. Growing interest in the assessment of national performance to inform policy αlphaεconomics • ICMM Resources Endowment Initiative – toolkit for assessing impact of mining on economies • Understanding the influence of mining on governance and institutional conditions • Six stage process • Defining country’s economic structure • Profile of mining activities • Documenting economic and social outcomes • Understanding proximate causes of national outcomes • Assess project level impacts of mining • Assess implications of mining on governance processes

28. Today we will discuss αlphaεconomics • Overview of the global mining industry • Strong demand and prices shaping strategies and risk tolerances • The investment decision • Complexity driven by more than resources • Sustainable development need not be a zero sum game • Remains in realm of profit maximisation • Filling institutional voids • Policy recommendations • Supporting private investment • Building governance frameworks • Trust and transparency

29. Private and public dimensions to facilitate sustainable mining Public Dimension • In isolation policy addressing individual dimensions will be ineffective • Developing effective governance processes and institutions • Macroeconomic frameworks • Trust and transparency Good investments embedded in an environment of weak governance and institutions may fail to spread their benefits to the country as a whole – ICMM REI αlphaεconomics Private Dimension • Stability and certainty • Holistic approach • Need not involve a race to the bottom • Risk and return sharing • Balancing profit with legitimate sovereign requirements

30. Importance of Trust – revise ICMM Effective Governance framework ? A fundamental source of political decay in oil-rich countries, she [Terry Karl] argues, is the absence of productive relations between governments and their citizens; technocratic fixes are likely to have little effect absent a basic level of trust between citizens and rulers. A first step toward establishing this trust, she argues, is the provision of basic information about what monies governments receive and how it is used….. [Empirical research] suggest that the first step towards reversing the oil curse is to remove layers of secrecy that continue to surround so many aspects of the industryHumphreys, M., Sachs, J. D. and Stiglitz (2007), Future Directions for the Mangement of Natural Resources, in Humphreys, M., Sachs, J. D. and Stiglitz (eds.), Escaping the Resource Curse, Columbia University press New York. αlphaεconomics

31. Lack of political freedom and civil liberties will make developing trust and transparency difficult αlphaεconomics

32. Growing interest in partnerships to fill the governance void at the local level is partly compensated by the emergence of new forms of global governance above and beyond the state. International organisations, civil society groups, and private business in cooperation with state agencies, or without their support, have started to voluntarily contribute expertise and resources to fill gaps in global regulation and to resolve global public goods problems. At the same time, NGOs that were once focussed on pressing governments have begun to target business firms to make them more responsive to social and environmental concerns. Scherer, A. and Palazzo, G. (2010), The New Political Role for Business In a Globalised World: A Review of a New Perspective on CSR and its Implications for the Firm, Governance and Democracy, Journal of Management Studies (Forthcoming) To address these issues, the ICMM has recommended a series of partnerships between host governments, companies, donor agencies, NGOs civil society and communities to address poverty reduction, revenue management, regional development planning, local sourcing, social investment and compensation and dispute resolution αlphaεconomics

33. Good outcomes are possible αlphaεconomics

34. We have come to the end αlphaεconomics • Industrialisation will ensure the demand for commodities • Traditional mining areas are important but so are frontiers - but risks increased • Industry consolidation and diversification will continue • Mining offers potential for economic development and poverty reduction • Pitfalls are well understood but will governments respond to ensure effective governance ? • Alternative models will fill the institutional gap.