By: Nick HOLLAND, CEO, Gold Fields
There can be no doubt that mining, executed responsibly, is a significant force for sustainable growth. Beyond the multiplier effects on employment, livelihoods and the national economy, it should not be underestimated that whole communities are directly and often exclusively dependent on the sustainability and growth of the mining sector.
But to succeed in growing the mining economy, long-term relationships of trust and mutual respect must be established between its key stakeholders.
A mining operation should provide socio-economic benefits to all stakeholders — including employees and local communities (in the form of jobs, local procurement and community projects), national and regional governments (in the form of royalties, taxes and investment) and investors of capital (in the form of dividends, interest and risk adjusted returns on their investment). If one group withdraws their support for the operation, this will negatively impact all stakeholders.
Host governments offer the mineral resources that they hold in trust for their people; mining companies bring capital and know how, which discover and create value from such resources.
As a potential mine is identified and developed, the number of stakeholders grows — the shareholders and banks who must choose where to invest their money; the communities who own or occupy the surface rights, employees and their trade unions; and contractors and suppliers. Each contributes to the realisation of the project and each looks to achieve a `fair’ return.
For much of the last decade, the debate about mining’s contribution to development has been stunted by the dead hand of the `resource curse’ theory, which held that many poorer countries would be better off leaving their minerals in the ground.
This is partially because many developing countries with a natural resource endowment are faced with a legacy of poverty and inequality to which the mining industry has, without doubt, contributed.
To address these challenges, it is essential to maximise the socio¬economic benefits from the extraction of natural resources, but to do so without shrinking the mining economy.
There are numerous examples around the world where mines have been a catalyst for wider socio-development.
Gold mining typically accounts for a high proportion of foreign direct investment for developing countries and for a substantial chunk of foreign exchange earnings. A recent report found that gold mining contributed some $78 billion in gross economic value added and 530,000 direct jobs in the 15 leading gold producer countries.Moreover, mining tends to generate large numbers of indirect jobs and to have significant multipliereffects in part because many mining jobs pay well and are highly skilled. This is particularly the case in developing countries.
In Ghana one mining position supports an estimated 28 other jobs and livelihoods in the country and in Peru about 19.
In South Africa mining supports about 1.4 million direct, indirect and induced jobs, and each of these jobs supports on average around nine dependents.
Mining companies have also achieved high levels of employment of country nationals in its operations rather than relying on expatriates. As this report also demonstrates, a large share of most mines’ expenditures remain with the country where they are located.
But there can be no doubt that we are currently facing a major trust gap between mining companies and their capital providers on the one hand and trade unions, governments and communities on the other. What can mining companies do better at explaining, and helping other stakeholders to validate, their overall social and economic contribution?
Let’s start with a couple of underlying requirements. First, I take it as read that mining companies must manage their environmental impacts with the greatest care. We have a duty of stewardship to manage resources such as water and to ensure that we do not adversely impact upon the livelihoods of others and to remediate land once mining has finished.
Secondly, I think transparency and consultation are increasingly foundation stones for our relationships. We have significant impacts on national and local economies and on social structures and it is incumbent on us to manage those impacts responsibly and accountably.
Much of the debate about the contribution that miners make to host countries focuses on their royalty and tax payments. This is complicated by the fact that whilst royalties become payable from the start of production, corporate taxes often become due only after the accumulated costs — perhaps disbursed over the previous 15 years — in exploration and mine development have been recouped. Furthermore, this does not take account of the many indirect taxes that mining companies pay.
Governments’ heavy focus on tax incomes from the mining sector has led many of them to raise these taxes and royalties to levels at which they are acting as an active deterrent to new investment. The argument that funds will inevitably flow to explore and develop attractive ore bodies is only true to the extent that these investments can guarantee a sound return.
Uncompetitive tax rates are a factor which could lead to these ore bodies remaining unexploited.
Tax payments are only one means by which a country can turn the depletion of its resource base into benefits.
Investment in areas such as education, skills development, health and infrastructure, often have equally important and far-reaching impacts.
Furthermore, as this report makes clear, the biggest single element in benefit distribution for communities and government comes from procurement by mines. The mining supply chain is well established in traditional mining countries like Australia, the US and South Africa. But, as mining companies have become more proactive in their approach to supporting suppliers, local sourcing is becoming increasingly central to miners’ economic contribution.
This is particularly true in developing countries. In Peru, for example, a 2012 study2 of the four biggest gold mines, found that 88°,% of their procurement spend was within the country and that this is generating clusters of mine-related suppliers who are also starting to service the export market.
In Ghana, the African Development Bank’s African Economic Outlook 20133 noted the emergence of Ghanaian component manufacturers and input providers servicing the mining industry in areas like chemicals, civil engineering, business services, logistics, maintenance, catering, haulage. and security.
In addition, mining companies can make a significant contribution to physical infrastructure surrounding the mine.
Gold mines often need access roads, water pipelines and electricity grids. Increasingly these are built with an eye to creating regional or community benefits rather than being solely focused on the mine.
Finally, gold miners can make a big contribution, working with civil society, to improving governance and supporting capacity building, especially in areas like environmental management and public service delivery. All too often a mine finds it tough to improve the quality of life of surrounding communities because of the lack of local government partners capable of using revenues well. It is essential therefore that we work with local governments in jointly developing and implementing projects that utilise the revenues generated by mining.
However, all of this is academic if the mining sector fails to attract the capital that is required to realise this growth and so to liberate the developmental and wealth creating potential of the mining economy.
Unfortunately, the providers of capital to the mining industry are frustrated, having, at present, little to show for the capital they have invested over the years. Many of these investors have recently deserted the industry, depriving it of new capital and leaving potentially viable ore bodies undeveloped. Growth in the mining industry is stagnant. If we want the capital providers to resume investment, we need to take a fresh approach.
Some of the basic requirements are:
Collaborative partnerships between government and miners, who are better able to operate and develop ore bodies and who are good social partners;
Competitive tax and royalty systems that provide investors with acceptable risk-weighted returns and through which governments can participate in the upside;
Implementing the Shared Value concept, through which mining companies can ensure that the full costs and benefits of mining (social, environmental and economic) are taken into account when evaluating the viability of projects; and
A stable legislative and regulatory environment to reduce risk.
Mining is a long-term business and a gold mine typically generates returns for a wide variety of stakeholders. Our objective should be to secure competitive returns for our investors but also to contribute to the sustainable development of the countries where we operate and thereby to be welcome and long-term development partners.
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