Friday, July 10, 2009

The challenge of sustainable mining

The world’s mining companies are under pressure. Not only are they forced to look further afield – both geographically and technologically – for new products, they are also facing demands to maintain standards of environmental and social best practices as scrutiny of company behaviour becomes more acute.

Those are the conclusions of a report produced by international research firm F&C Management: “Sustainable Mining: Oxymoron or New Reality?” The report assesses the progress achieved to date by leading mining companies and explores how successful the industry has been in shedding its long-standing association with environmental and social degradation.

“We find that many mining companies have made significant progress, but warn that the current fall in commodity prices could tempt some to cut back on their commitment to sustainable business practices,” says F&C Management’s John Farley. “However, cutting in these areas often stores up costly problems for the future, saddling shareholders with burdens that they understand much better than they did in the past and are increasingly reluctant to shoulder. F&C considers the effective management of environmental and social impacts of mining a key component of commercial success.”

The report states that companies need to address such issues as community relations, mine security and environmental pollution from the earliest stages of mine development, because the cost of early neglect is far greater later on.

For instance, as mining companies expand into poor and underdeveloped countries, they are looked to by the local communities to provide basic services, such as healthcare and clean water. “Ignoring these expectations may jeopardize the company’s reputation in the region; however, stepping in and providing services on which the community comes to depend also has its risks, as the company may find itself taking on the role of a quasi-government from which it is difficult to extricate itself.

“Bad relations with the locals can, in the worst cases, lead to shutdowns, loss of licences, or even violence and sabotage, with obvious implications for site and staff security as well as production volumes,” says Karina Litvack, head of governance and sustainable investment at F&C. “In addition, corruption and waste also often mean that resource wealth fails to benefit development, as taxes, royalties and social payments are misappropriated by government officials; this fuels community resentment against companies, and raises the risk of contract renegotiation or even expropriation.”

In addition to these longer-term challenges, mining companies are faced with the immediacy of falling commodities prices in the wake of the credit crunch and resulting global recession, Litvack adds. “As a consequence, they have announced dramatic spending cuts.”

Despite the gains achieved by many of the leading mining firms on ESG risk management, the recent retrenchment may tempt some to cut corners, F&C notes. “This is really a case of ‘pay now or pay a lot more later’,” Litvack says.

The question is, can mining ever be sustainable? “It would be hard to argue that extracting a non-renewable resource is sustainable in the absolute sense of the term but neither can companies afford to dodge sustainability challenges, or they will pay an unacceptable price. In practical terms, miners have little choice but to act as if sustainability is an attainable goal, and do the very best possible job,” says Litvack.

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