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Title: Panel Discussion at Johns Hopkins


1
Achieving sustainable development in mining
  • Panel Discussion at Johns Hopkins
  • University School for Advanced
  • International Studies (SAIS)

16 March 2011
CONFIDENTIAL AND PROPRIETARY Any use of this
material without specific permission of McKinsey
Company is strictly prohibited
2
Data sources and disclaimer
McKinsey Company adheres to the strictest
confidentiality rules and policies. All data in
this presentation is drawn from public or
commercial sources no client-proprietary data
has been used. While McKinsey Company
developed forecasts and scenarios in accordance
with its professional standards, McKinsey
Company does not warrant any results obtained or
conclusions drawn from their use. The analyses
and conclusions contained in this document are
based on various assumptions that McKinsey
Company has developed regarding economic growth,
and commodity demand, production and capacities
which may or may not be correct, being based upon
factors and events subject to uncertainty. Future
results or values could be materially different
from any forecast or estimates contained in the
analyses. The analyses are partly based on
commercially-sourced information that has not
been generated by McKinsey Company and has not,
therefore, been entirely subject to our
independent verification. McKinsey believes such
information to be reliable and adequately
comprehensive but does not represent that such
information is in all respects accurate or
complete.
3
Sustainable development in mining
  • Sustainable development pressures are growing in
    the global mining sector
  • Not all mining companies are responding equally
    well to these pressures
  • A spectrum or levers to reinforce sustainable
    development is available

4
Sustainable Development means meeting the needs
of the present without compromising the ability
of future generations to develop
Source en.wiktionary.org/wiki/human rights
www.akzonobel.ma/com/Sustainability/Glossary.htm
www.personal.umich.edu/alandear/glossary/e.html
ww.balancedscorecard.org/LinkClick.
aspx team analysis
5
In the late 1990s large western mining firms were
facing a growing range of societal pressures
New or growing issues in the 1990s
Long-standing or constant issues
Example growing demands from communities for
greater share in tax revenues, e.g., Indonesia,
PNG
Example falling enrolments for mining schools
across OECD (38 fall in graduate mining
engineers in US 1999-2002)
Examples Blood diamonds campaign
Examples EU environmental legislation potential
moves to ban cyanide NGO campaigns
Examples Native title laws in Australia, Canada
growing pressure in Latin America UN convention
on indigenous peoples rights

Examples Amnesty and Human Rights Watch
criticisms of mining firms
Examples 25-30 HIV infection rates in many
African mines growing problem elsewhere
Examples Publish What You Pay Campaign OECD
anti-bribery convention
SOURCE McKinsey analysis
6
Driving these issues were both project-specific
controversies and deep-rooted public suspicions
of mining
Campaigns on specific issues and projects
fall on receptive ears due to general public
antipathy towards mining
A pressing concern for the mining and metals
industry is the need to overcome poor public
perceptions of our industry's performance in
relation to the environment There is nothing
dramatically new about this. Increasing public
antipathy towards the industry has been evident
for at least two decades. Sir Robert Wilson,
executive chairman of Rio Tinto plc, 2001
  • Protest against uranium mining in Kakadu National
    Park, Australia
  • Protest against Freeport McMoran / Rio Tinto mine
    in Indonesia (West Papua)
  • While those involved in the industry well
    appreciate the tremendous progress made in recent
    years in limiting the impact of mining on the
    environment, in developed countries such as
    Australia, Canada and the United States the
    public often does not. Public perceptions of
    mining are critical to the industry's ability to
    grow and prosper, because they directly influence
    the community's preparedness to give the industry
    access to land. Warwick Parer, Australian
    minister for resources and energy, 1996
  • Protest against foreign mining investments in
    Philippines

SOURCE Press, McKinsey analysis
7
Over the last decade, Chinas urbanization
resulted in surging demand for commodities and
bourgeoning profits to the mining industry
,
Mining industry profit pool (EBITDA) Index 100 in
2003
31 p.a.
SOURCE Team Analysis, SiM DCF Model
8
which accelerated exploration especially in
developing regions

Developed regions Developing regions
60 of total recent exploration expenditure is
directed at developing regions Total exploration
spent US millions
Mining companies are operating internationally
7 200
8
United States
Countries of operation
Global mining companies
11
Australia
5 600
8
19
Canada
26
13
3 900
7
19
18
ROW
8
15
4
Asia
16
17
2 300
20
4
16
Africa
7
16
15
17
4
22
19
16
11
4
24
Latin America
17
23
22
24
2003
2004
2005
2006
Minimum estimate Source
Bloomberg MEG
9
... and pushed the boundaries of mining
development to new frontiers,
SOURCE McKinsey analysis
10
where we see old issues re-surfacing and new,
increasingly complex societal issues emerging,
with communities at center stage
Traditional issues
Issues gaining prominence
  • Water pollution/contamination
  • Air pollution
  • Topographical modifications
  • Land rehabilitation
  • Biodiversity
  • Artisanal mining (e.g., cyanide, mercury)
  • Mine legacy
  • Climate change

Environmental
  • Health
  • Safety
  • Aboriginal/indigenous rights
  • Corruption
  • Local economic development
  • Community development healthcare, education
  • Access to water responsible use of water
  • Human rights
  • Governance
  • Attracting talent

Social/economic
SOURCE Interviews McKinsey analysis
11
Sustainable development in mining
  • Sustainable development pressures are growing in
    the global mining sector
  • Not all mining companies are responding equally
    well to these pressures
  • A spectrum or levers to reinforce sustainable
    development is available

12
The mining sector is however not homogeneous but
comprises a wide range of players with different
commitment to sustainability
Description
Commitment to sustainability
Large, listed multi-national mining companies.
Operating across a one or more commodities in
several regions globally
Normally quite committed to sustainability, but
sometimes make mistakes and then fall short of
societal expectations
Small exploration companies whose main aim is to
find deposits, but not necessarily develop or
operate mines
Short-term focused with limited resources, thus
not always operating at the highest standard
State owned mining companies that are mandated to
operate within the interests of the state
Often perceived to lack capacity, capabilities or
accountability to address sustainability issues
Mining companies from developing nations looking
to feed their countries hunger for resources
Sometimes lack the sensitivity for sustainability
issues, perceived to operate below global
best-practice
SOURCE McKinsey analysis
13
The activity of BRIC players grew rapidly over
the past 10 yearsUS trillions
771
Growth rate in mining industry is twice that in
the industry average . . .
. . . and BRIC players become increasingly
important in the mining industry
World industry value added from 1997-2007
World mining industry value added from 1997-2007
CAGR
CAGR
1 832
15 095
1 832
375
13 064
1 567
11 918
1 567
284
10 822
1 319
1 319
8 683
9 529
978
243
8 459
8 340
8 316
8 122
8 501
978
623
174
771
658
131
623
611
577
104
109
103
97
469
451
84
85
1997
98
99
2000
01
02
03
06
2007
04
05
1997
98
99
2000
01
02
03
04
05
06
2007
Including mining, machinery,
construction, and utilities Source Global
insight team analysis
14
Leading mining companies often engage public and
politicians to proactively shape the regulatory
debate
  • BHP Billiton has actively influenced climate
    change regulation in Australia by
  • CEO leadership and constructive mindset
  • Strong analytical understanding of regulation and
    company impact
  • Positive and strong stakeholder engagement

SOURCE Press search Sustainability
Transformation Service Line
15
because they recognize the competitive
advantage in accessing resources that can come
from leading in sustainability
Shape
The strategic thing to do
Manage
The clever thing to do
Defend
The right thing to do
Objective
  • Obtain a license to operate
  • Ensure long-term viability of the business
  • Develop a competitive advantage
  • Take a long-term view on risks

Approachto risk and opportunities
  • Protect and enhance reputation
  • Turn risks into opportunities
  • Differentiate the business

Why do it?
  • No choice
  • Grow share
  • Grow margins
  • Attract and retain talent
  • Stay in the pack

SOURCE Interviews McKinsey
16
Sustainable development in mining
  • Sustainable development pressures are growing in
    the global mining sector
  • Not all mining companies are responding equally
    well to these pressures
  • A spectrum or levers to reinforce sustainable
    development is available

17
Sustainable development can be reinforced by
formal and informal levers the mix applied
depends on the nature of the project, its owner,
the local and national context
Companies
Sustainable Development Objectives
Communities
Local
Extended
SOURCE World Economic Forum Mining and Metals
Community, McKinsey
18
Laws and regulations sustainability regulation
is underway
l
Count of emissions or energy targets in each
country/region
Climate Change Mandates and Targets as of 2009
Country
Regional
State
106
91
National
73
7
13
3
10
7
6
4
2
1 Countries from other regions in Asia, Africa,
South America have not been shown in this chart
SOURCE Deutsche Bank Global Climate Change
Policy Tracker Oct 2009
19
Financial institutions may choose to provide
financial support based on how companies perform
on sustainability
A financial industry benchmark for determining,
assessing and managing social environmental
risk in project financing
We will not provide loans to projects where the
borrower will not or is unable to comply with our
respective social and environmental policies and
procedures that implement the Equator Principles
Members (not exhaustive)
Background
  • Financial Institutions ABN AMRO Bank N.V., ANZ,
    Banco Galicia, The Royal Bank of Scotland,
    Societe Generale, Standard Chartered Bank,
    National Australia Bank, JPMorgan Chase, Fortis,
    Citigroup Inc., Barclays plc, HSBC Group, ING
    Group, Lloyds TSB, Royal Bank of Canada, Banco do
    Brazil, Credit Suisse Group, Westpac Banking
    Corporation, Royal Bank of Canada, Bank of America
  • The Equator Principles started in October 2002 by
    a number of banks in conjunction with the World
    Bank Group's IFC
  • The EQ provides a sustainability framework to
    which borrowers have to adhere to in order before
    obtaining funding IFC from financial institutions
    that are members
  • The first set of Equator Principles was launched
    on 4 June 2003 and an updated version was
    released in July 2006

SOURCE Equator Principles website
(http//www.equator-principles.com/) McKinsey
analysis
20
NGOs and communities can use the financial sector
to force their hand on the mining industry in
sustainability debates
Money talks and it is saying loud and clear
that mountaintop removal coal mining is a bad
investment. With the move away from mountaintop
removal coal mining, our countrys top banks are
showing that they know they can do well while
doing good for our environment and our public
health, - Rebecca Tarbotton, executive director
of the Rainforest Action Network, August 2010
We have committed to phasing out our financing
of companies whose predominant method of
extracting coal is through mountain-top removal,
a decision that has received widespread
recognition from the environmental community -
Bank of America, Environmental Progress Report,
2010
SOURCE Bank of America, Natural Resources
Defence Council, Rainforest Action
Network,www.coal-is-dirty.com
21
Media-savvy NGOs increased the level of scrutiny
in the mining sector and raise societal
expectations
No. of documents on company website containing
phrases such as
The stakeholder landscape is changing rapidly
No.of NGOs in consultative status with UNESCO
No. of NGOs registered with UNESCO tripled from
1995-2007
89
No. of blogs, m
Effect of Johannesburg 2002 conference (TBC)
1997
98
99
2000
01
02
03
04
05
06
2007
SOURCE Google Factiva Company websites
22
The mining industry collaborated internally and
with stakeholders to agree voluntary principles
of good mining company conduct
From
To
SOURCE Press, McKinsey analysis
23
There has been a significant piling-up of
voluntary initiatives over the past 15 years
ECOWAS Account Ability 1000
Initiative for Responsible Mining
Assurance Council for Responsible Jewellery
Practices
Towards Sustainable Mining Partnering Against
Crime initiative
Kimberly Process Equator Principles Intergovernmen
tal Forum on Mining, Minerals and Metals and
Sustainable Development
Extractive Industry Transparency Initiative
International Council on Mining and
Metals Diamond Development Initiative Communities
and Small Scale Mining FTSE 4 Good
Cyanide Management Code UN Global
Compact Voluntary Principles on Security and
Human Rights Millennium Development Goals
  • Global Reporting Initiative
  • Dow Jones Sustainability Index

Social Accountability 8000
Global Business Coalition on HIV/AIDS,
Tuberculosis, and Malaria
Transparency International
Whitehorse Initiative World Business Council for
Sustainable Development ISO 14001 Business for
Social Responsibility
Organisation for Economic Co-operation and
Development
Prospectors and Developers Association of Canada
1960
1990
2000
1995
2005
1930
Note No accurate initiation date could be
found for OHSAS 18001 World Ministries Mining
Forum IFC against Aids IFC Performance Standards
24
which differ in functional, geographical,
topical and commodity scope
Main messages
  • Many voluntary initiatives exist that apply to
    the Mining and Metals industry
  • Collectively they cover the entire Sustainable
    Development initiative value chain
  • None are strong across all functional areas
  • Most initiatives have global application
  • However, there are a few well-known initiatives
    that are applied regionally
  • Many companies support their own independent,
    local initiatives
  • The voluntary initiatives cover the following
    topics
  • Human rights
  • Governance
  • Social standards
  • Health and safety
  • Environment
  • Many of the issues cover multiple topics
  • However, very few initiatives cover all the
    topics
  • Most of the initiatives cover all commodities
  • There are a few initiatives that were developed
    around a specific commodity-related issue

SOURCE World Economic Forum Mining and Metals
Community, McKinsey
25
Roadblocks along the initiative-delivery process
sometimes hamper the effectiveness or the wider
spread of VPs
Source Interview team analysis
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