Mining Company Misbehavior Among the Largest Investment Risks

Mining is risky business. Some major international mining companies have billions of dollars of investment at stake in their project portfolios. Last week, Ernst & Young (E&Y) released their annual Business Risks Facing Mining and Metals report.

Topping this year’s list are concepts laden with financial jargon like cash optimization and capital access. Related listed challenges involve techniques for penny pinching or turning some money in to more money.

Yet, E&Y’s report also reveals some of the greatest risks mining companies and their investors face having nothing to do with markets, commodity prices, or the boom and bust cycle. In fact, in any economy, these major risks are completely avoidable.

#4 SLTO- Social License to Operate

The fourth greatest risk to mining investors stems from company misbehavior. Ignoring community voices and their environmental and public health concerns comes at a cost. Mining projects that generate protests, civil unrest, or riots are bad for business. This is the social license to operate (SLTO). According to last year’s E&Y report:

Illegal mining activities can also threaten a company’s SLTO, with poor conditions, dangerous practices and environmentally hazardous activities, continuing to threaten the health and safety of employees and local economies

Which is why this year E&Y said:

Ongoing engagement, collaboration and effective communication with all of these stakeholders is crucial.

Mining operators should take E&Y’s advice. Projects that receive the free, prior, and informed consent (FPIC) of the neighboring communities have a substantial competitive advantage over operators who hire armed mercenaries to suppress, intimidate, and harm the opposition.

# 5 Transparency

Sunshine disinfects and creates efficient markets. Better information for investment decisions inspires market confidence. Transparency signals to investors that the principles of good governance and the rule of law will help protect their money. E&Y highlights the contribution of the Extractive Industries Transparency Initiative (EITI), a multi-stakeholder process that publishes and reconciles payments and receipts between miners and governments. On EITI, E&Y urges mining companies to:

Identify the level and granularity of disclosure and reporting necessary and then establish processes to gather and assemble the data regarding government payments for proper reporting

In the United States, disclosure according to the EITI rules has suffered from a lack of full participation among some industry participants.

What’s Not on the List? Environmental Regulation

Environmental regulation failed to make the list this year of top ten mining company risks. In fact, it also failed to make last year’s top twenty E&Y risk list. The reason is that, like transparency and SLTO, common sense environmental protections help the bottom line, posing benefits rather than risks.

All investing requires risk taking. E&Y’s report tells us that companies can eliminate some of mining sector’s greatest challenges simply by committing to transparency and respecting community voices. In boom or bust times, the mining industry will create more wealth for their shareholders if they just do the right thing.