Mining companies falter on failure to comprehend sustainability

TORONTO (miningweekly.com) – Companies need to think beyond environmental or socioeconomic engagement when considering sustainability, Schulich School of Business programme director and Inmet chair Richard Ross told an audience at a recent meeting of the Canadian Institute of Mining’s Economic and Management Society in Toronto.

Sustainability needed to infuse strategic thinking and efforts to create value. Companies also needed to strike the right balance between the various internal and external stakeholders.

“We have discussions about environmental impact or the social aspects of a business and its sustainability. And then the conversation kind of stops,” Ross said. “Aren’t we doing a disservice to the topic by just focusing on environmental and social aspects?”

STUCK IN THE SILO
Mining companies often compartmentalised their business arrangements and various departments. That risked creating a ‘silo’ effect for sustainability, with environmental and socioeconomic concerns dominating the conversation.

It also risked management teams failing to consider the broader picture and making sustainability decisions without considering the effects this might have on value, or the requirements and expectations of other stakeholders.

Still, it was an improvement on the era when social engagement was considered a form of charity work and environmental protection was viewed, sometimes grudgingly, as an expense item.

Companies needed to embed mechanisms that allowed them to consider overlap and which tied in with technical matters, health and safety, personnel, engineering, finances, supply chains and any other aspect of mining or exploration.

Ross reminded the audience that expenditure destroyed value over the short-term, albeit with the medium- and long-term goals of generating greater returns and growth. “Unless we look at all aspects of our business and the things that make it sustainable, then it’s hard to make the right capital allocation decisions and to make the right choices.”

An important part of the problem related to management making decisions based on the prevailing market conditions and not with the overall resource cycle in mind.

Businesses needed to view sustainability through the cycle’s prism, and needed to consider what phase it was moving towards. “If you don’t do this then I’d suggest you’re not making effective business decisions,” said Ross. "There are amazing things you can do to take advantage of the cycle and create wealth.”

That was particularly apparent at the height of the resource supercycle, from the mid-2000s to 2011/12. Management during that period became mesmerised by higher-trending prices spurred on by Chinese demand, which itself appeared both insatiable and seemingly perpetual. 

Governments responded by attempting to raise royalties, seeking what they thought was a fairer share of revenues created. Many local communities were left confused, trying to quantify whether the benefits they received were the right value for them.

The resource supercycle came to an end on China’s slowing growth and its shift towards greater consumerism. That then placed the damage of those decisions in sharp relief.

Companies, particularly the juniors, quickly discovered their strategies were unsustainable in the adverse market conditions, leaving them open to write-downs, cash bleed or complete failure.

“We keep forgetting we’re in a cyclical business and will remain in a cyclical business,” Ross said. “But now we have the chance to change the way we think about decisions and how we sustain ourselves throughout these cycles.”

BETTER BUSINESS
Similar management misjudgments also presented themselves during market bottoms, as many teams came to believe the troughs of a downturn were a permanent feature without the chance of improvement.

That meant competitive opportunities created by a market bottom were overlooked, especially in relation to mergers and acquisitions, logistics or contractual services.

Indeed, a downturn was possibly the best time in which to achieve the greatest future value for a company as it prepared for the inevitable upcycle.

However, Ross also voiced a note of caution as there were some pitfalls in pushing too hard for value. “For example, suppliers might go somewhere else if you keep hammering them over the head to get repeated price cuts,” he said.

If a company treated its employees poorly during a downcycle then their departure was likely once the industry’s fortunes improved. That would damage a company’s sustainability as it then had to spend time, effort and money on finding replacements instead of making the most of the upside.

“You can’t have a sustainable business if you don’t have people there to execute strategy,” Ross said. “So you should take all these aspects, and more besides, and decide how much can be allocated to each one.”

DESTROY AND CREATE
That meant management needed to conceptualise value creation and destruction, informed by the position of the cycle, which fed into sustainability decisions. 

Value creation or destruction was sometimes easy to appreciate. “For example, if I was to buy a mining asset at the peak of the cycle, with high-yield debt attached, then I can assure you it’s unlikely to have a good outcome,” Ross said. “That’s value destruction.”

But if a company acquired a heavily discounted but viable asset at the market bottom, then the potential value would be enormous on the cycle’s upside.

At a more complex level, a company needed to assess revenue streams and consider each business component and its required capital allocation. That included appreciation for the various stakeholders tied with it.

“You can’t survive as a mining company unless you create value,” he said. “And you can’t survive unless all your stakeholders get some fair share of that value.”

Stakeholder interests could include anything from environmental and social aspects to engagement with creditors, suppliers and employees. Fair value was essential as aggrieved stakeholders could create difficulties that negatively affected sustainability.

In addition, feedback provided a form of engagement that acted as a useful tool for guiding future decisions on capital allocation and informing longer-term strategy.

“And that then becomes a circle that keeps growing, creating positive feedback at macro or micro levels,” Ross said. “Over the long term, if you make these positive decisions, then you’ll discover you’ve created more balance, more support and more money.”