Resource nationalism and mining – issues and potential responses

1. Resource nationalism and mining – issues and potential responses Jon Samuel, Head of Social Performance, 19 February 2013

2. Anglo American’s Footprint Key Corporate and rep offices E Exploration Offices Platinum Diamonds Copper Nickel E • Iron Ore and Manganese • Metallurgical Coal • Thermal Coal 2

3. Resource nationalism – some definitions • “Resource nationalism…encompasses efforts by resource-rich nations to shift political and economic control of their energy and mining sectors from foreign and private interests to domestic and state-controlled companies” • “The threat of tax increases, renegotiation of terms, larger participation of state-owned companies and ultimately nationalisation.” • “Resource nationalism, the terms used to describe situations where governments assert increased control over the natural resources located in their territories” • “Resource nationalism is a term used to describe a tendency of people and governments to assert control over natural resources located on their territory.” • “Situation where producer countries want to maximise their (future) revenues from present production by altering terms of investment”

4. Resource nationalism – drivers • Economic drivers: • High perceived profits in the mining industry • Lack of perceived benefits to host countries / communities: “fair share” • Changing balance of power between resource owners and developers: general industry shift from capital to opportunity constraints as demand has grown • Socio-cultural / technological drivers: • Communications revolution • Growing intolerance of poverty, and greater expectations on business to play a constructive role in its alleviation other than through “business-as-usual” measures • Mining generally perceived to be a part of the problem on many global issues (climate change, water availability, biodiversity, food security, human rights etc) • Negative legacies • Political drivers: • Emerging economies striving to have their voice heard, and to assert their national interests as their economies and foreign interactions grow • Rise of democracy and local empowerment • As an industry we communicate poorly: • We don’t articulate the benefits we bring in a credible manner • The risk / reward trade-off is not understood, so profits are deemed excessive

5. How the world sees the mining industry

6. Resource nationalism – in practice • Taxes and royalties From our perspective… Changing the rules of the game while playing • Local content / value-add requirements (labour, procurement, beneficiation) • State participation in mining projects • Indigenisation (private) • Expropriation

7. Resource nationalism – manifestations in selected countries

8. Resource nationalism – manifestations in selected countries

9. Resource nationalism and oil and gas Private share of global oil resources • National Oil Companies account for ~55% of production and ~88% of reserves globally (in the 1970s it was the other way around)

10. Did high oil prices lead to nationalisation? OPEC led oil market ? Source: OPM analysis for Anglo American

11. Ownership patterns in oil and gas 1960 • In 1960: • World oil reserves were 291 bnbbls; • of which: 85% were privately held; and • two-thirds were in OPEC countries, and also privately held • In 1980: • Reserves were 668 bnbbls; • of which: two-thirds were in OPEC, and state-owned. 1980 Source: OPM analysis for Anglo American

12. Could the same thing happen to mining? ? Privatization Nationalisation Pressure on rents and state-owned equity Source: OPM analysis for Anglo American

13. Could the same thing happen in mining? • Our view is that large-scale nationalisation in the mining sector is unlikely: • Prices rises do not appear to have been the trigger for nationalisation in oil and gas (in fact the converse appears to be true) • There was a spate of nationalisations in mining, but these tended not to be successful and led to subsequent privatisations or closures • The economic rents from mining are generally much lower than in oil and gas, • Mining operations are technically challenging to run, and require very high levels of ongoing capital expenditure to sustain them • Very limited ability to control markets, given wide distribution of most minerals across the world • The increasing inter-connectedness of the global economy makes the cost to implementing countries of unilateral nationalisations much higher • Governments have realised that they don’t need to nationalise: the tax system and other policy tools provide other means • We have a better understanding of what we need to do to respond to the threats posed by resource nationalism

14. How should mining respond? • Be clearer about the existing economic impacts of the mining sector, at both local level and at more macro levels, including addressing the resource curse debate • Ensure that mining is seen as a responsible industry: • Sound business ethics • High standards of safety, health and environmental management • Fair treatment of workers • Good neighbours • Perhaps most importantly, deliver more effective responses to the demand for a greater share of benefits by enhancing the industry’s contributions to local and national socio-economic development

15. Resource curse: potential causes Rent Seeking Terms of Trade Resource Curse Impacts of Mining Volatile Markets Dutch Disease

16. Resource curse: RESPONSES Revenue transparency and governance reform can help to reduce rent seeking The price of manufactured goods is also falling Productivity improvements can increase benefits to local economies Rent Seeking Terms of Trade Responsible management of impacts and proactive development initiatives can create positive economic contributions Resource Curse Impacts of Mining Volatile Markets Dutch Disease Reallocating factors of production to resource sector may be efficient Only a problem if adjustment after resource extraction is not planned for and / or not possible Volatility can and has been managed by instruments such as hedging and stabilisation funds

17. What routes are there for delivering developmental benefits from mining? INFRASTRUCTURE BENEFICIATION JOBS / WAGES CAPACITY BUILDING/ TRAINING SOCIAL INVESTMENT OPERATION SME DEVELOPMENT PROCUREMENT TAXATION

18. Anglo American’s approach to supporting local socio-economic development Our approach to community development is based on understanding local contexts and leveraging our core business to create sustainable upliftment * Local Procurement Local Training and Recruitment Governmental Capacity Development Enterprise Development Social Investment * 2011 data

19. Ensuring we understand the local context Our Socio-Economic Assessment Toolbox (SEAT) is at the heart of our management of social performance and developmental issues SEAT is an award-winning manual that provides extensive guidance on: • Profiling and engaging with host communities • Assessing positive and negative impacts • Managing relationships with host communities • Contributing to community development SEAT provides extensive guidance on understanding our local context, and how we should respond to that Freely available at www.angloamerican.com/seat

20. LOCAL PROCUREMENT Objective Encouraging more suppliers to locate in mining areas Localising Suppliers (e.g. near-mine supplier parks) Build capability, capacity and size of suppliers Supplier Development Programmes (building capacity of existing suppliers) Supply-side Measures Creating formal businesses Support for Small and Medium-size Business Start-ups (e.g. Emerge / Zimele) Supporting the grass-roots Alternative Livelihoods and Micro-credit Programmes Set framework, show leadership support Policy: Local Procurement Strategy Build Anglo American capacity and incentivise Resources: Appropriate people and budget Demand-side Measures Operationalise commitments SC Local Procurement Initiatives (eg Ring Fencing) Demonstrate commitment Communication and Reporting: Targets and KPIs

21. Capacity development As a business we pay very significant sums in taxes Clear that these revenues are not always well spent, typically due to a lack of capacity Meanwhile, we often suffer because of poor pubic service provision We are now engaging on a structured basis in South Africa and Brazil in initiatives to build the capacity of host municipalities and regions Working with partners, we have undertaken structured assessments and designed tailored implementation packages Focus is on revenue management, accountability mechanisms and basic service delivery

22. ENTERPISE development Through our Zimele and Emerge schemes in South Africa and Chile we are now supporting over 47,000 jobs in small businesses We provide a mixture of equity, loans and technical assistance to businesses, and help them understand how our supply chain works • Our ongoing procurement needs create a very strong platform from which to support local entrepreneurs Currently expanding our ED initiatives to Botswana, Brazil and Peru Current focus areas include: • Reducing costs: substituting social investments (i.e. grants) with enterprise development activities (i.e. loans, equity participation and business training) • Increasing efficiencies: in existing schemes by outsourcing some of the activities to specialist delivery partners (e.g. Technoserve, CARE) • Partnering with development finance institutions to increase the capital available • Creating revenue: for example by generating captive, low-cost sources of carbon credits • Creating more stable host communities and a more robust and competitive supply chain

23. Social Investment $128 million spent on social investment in 2011, about $0.5 billion in the last 5 years Monitored using a Group-wide database and set of indicators to help ensure value for money

24. Concluding remarks Resource nationalism has emerged in recent years as one of the major risks facing the mining industry However, this isn’t a new phenomenon, and in some ways current manifestations are less threatening than in previous decades Some of the drivers of resource nationalism are due to poor understanding of the economic realities of mining The mining industry needs to do a better job of understanding and communicating its economic contributions It also needs to work with partners, in particular governments and host communities, to enhance current economic contributions, with a strong focus on leveraging the core business

25. Thank you

26. ANNEXES

27. TIMELINE OF A TYPICAL MINE Exploration Closure Studies Development Operation 1 47 10+ 30+ Year from acquiring exploration permits (assumes continuous intention to develop) • Only approx 1% of exploration targets are ever developed into mines • Capital Expenditure for “Tier 1” mine typically between $1 and $10 billion • Some of World’s biggest deposits have been mined for over 100 years

28. Managing social risk Respect human rights Identify and manage social impacts Engage employees and stakeholders Deliver lasting, positive net benefit Efficiently utilise resources Obey all laws and regulations Ensure contractors follow our standards Set targets, review performance Develop staff competencies Report and investigate incidents

29. social performance WORK PROGRAMME Anglo American Values and Good Citizenship Business Principles Policies and Standards: the Anglo American Social Way Group Social Strategy: Partner of Choice for Host Governments and Communities 1. Education and Training: • SEAT training • Post-grad diplomas • Advanced Social Management Programme • ABET 2. Guidance Documents: • SEAT • Mine Closure Planning Toolbox 3. Social Initiatives: • Enterprise Development • Social Investment • Capacity development • HIV/AIDS • Housing 5. Internal Alignment: • Business Units • Functional liaison 6. External Engagement: • Communities • Governments and multi-laterals • Industry associations • Multi-lateral initiatives 4. Leverage Core Business: • Local procurement • Local workforce development • Synergies from infrastructure provision

30. Engagement throughout SEAT: STRUCTURE

31. A strong emphasis on the level and distribution of benefits Generally very pragmatic issues recurring issues that seat addresses Access to jobs and training Access to land and alternative livelihoods Access to supply chain opportunities Balance / distribution of social investments Rivalries between stakeholder groups Perceptions of environmental impacts Health and public services Transport issues Communication and transparency