Economic performance

The recent spike in commodity prices (which in the case of many commodities has now receded) has led to increased debate internationally over the contribution that companies in the resource sector can and should make to economic and social development in their host countries. Despite the fact that the recent period of high commodity prices did not necessarily translate into increased margins for the extractive sector – as so many of the input costs to the industry are also driven by commodity cycles – the perception of windfall profits did result in increased pressure on governments – from their own constituents, from non-governmental organisations (NGOs) and from lending institutions (such as the World Bank) – to ensure that their electorates are benefiting fully from resource industry revenues. Particularly under scrutiny are mining operations in emerging economies, which are often heavily dependent on income from the resource sector, and where living standards have come under pressure from increases in the price of food and basic commodities, and, more recently, the global economic meltdown.

The latest commodity boom cycle is not the first time that the resource industry has come under the spotlight; the role of the resource sector in development has been a subject of debate since the 1980s when the concept of the ‘resource curse’ or ‘paradox of plenty’ was first put forward. Economists argued that countries with significant resource endowments showed lower rates of economic growth, as dependency on resource sector revenues reduced the incentive to build a diversified economy. The economic benefits of the mining sector were often concentrated in the hands of a small elite and not deployed optimally to further the development agenda of the country concerned.

There are sound reasons for this debate. The global resources industry across a range of commodities has not always contributed to the development and well-being of the countries and communities in which it has operated, although recent years have seen a fundamental shift towards recognising the importance of sustainable business. It is also the case that the industry – comprising small, medium or large players – is typically tarred with a single brush and is itself limited by the realities imposed by a cyclical market.

In reality, there are a number of characteristics which are unique to the resource sector and which ensure that the industry will always be the subject of scrutiny by governments and their electorates:

• A finite opportunity? Mineral Resources are part of the natural endowment of any country, and their extraction presents a finite opportunity for governments to benefit from their wealth. In the narrowest sense, this can be seen as a once-off opportunity to tax. In other words, in setting the level at which the extraction of a Mineral Resource is taxed, governments must take into account the opportunity cost of forgoing taxes on these resources in the future.
  
  A longer-term perspective yields a different point of view. Mineral Resource taxes, if invested in education, health care, the facilitation of secondary or service industries, and the diversification of the economy away from dependence on natural resources, can yield developmental benefits far exceeding the life of any mine.
  
  The Government of Botswana, for example, made significant and sustained investments in education as revenue streams from the diamond industry flooded into that country. Botswana’s growth domestic product (GDP) growth today remains impressive and the country is held up as an example of an economy which is heavily dependent on the mining industry (the resource sector accounts for over 60% of government receipts and between 70% and 80% of export earnings) but has largely escaped the so-called ‘resource curse’.
• Sunk costs. Once a mining company has invested in bringing a deposit to production, the investment is effectively sunk. Unlike investments in the manufacturing or service sectors, it cannot be relocated and can therefore present a target for governments to generate additional revenue through raising taxation, or even nationalisation of a whole or part of the asset concerned.
  
  Mining companies are therefore only likely to invest fully in a country when security of tenure and revenue stability are reasonably assured, and they will usually seek to negotiate long-term stability agreements with host governments in order to achieve this. Under-investment, leading to sub-optimal extraction of the Mineral Resource, will be the most likely outcome when political conditions are uncertain or there is a risk that the provisions of a stability agreement may not be respected. Less certainty is also likely to attract smaller, less risk-averse companies with less capacity and desire to act responsibly.
• Riding the commodity price roller coaster. Unlike companies selling consumer goods and services, resource sector companies are price takers and generally accept the full price risk on the commodities produced. Volatile commodity prices create perceptions of windfall profits but the reality of tougher times, when production costs can exceed received prices, is often ignored. And while revenues undoubtedly increase during a boom commodity cycle, input prices, subject to the same cycles as the raw materials produced, can increase in proportion. Diesel, steel, chemicals are all examples of significant input costs to the mining industry.
• A long-term investment. Large mining companies, in particular, cherish assets which deliver a long mine life. Decades of steady cash flow are needed to ensure payback of the significant investment which is required to develop a mine and bring it through to production.

  In order to make the economics of mining viable, therefore, a reasonable degree of fiscal stability over the life of mine is needed. Thus, a new or incoming government can find itself bound by the terms of a mining agreement concluded under a previous regime. Again, a temptation to amend the terms of such an agreement exists, particularly where these are perceived to be unfavourable to the government concerned. Often, however, perceptions are driven by the current situation only and previous years of investment without return are not taken into account in the calculation of a ‘fair take’ by government.

Earning a ‘social licence to mine’

In developing strategies to address these tensions, AngloGold Ashanti looks to its core values as a company. It is committed to ensuring that communities are better off as a result of its presence.

Resource extraction is by definition intrusive and governments need to weigh the benefits carefully against all associated costs. Earning the so-called ‘social licence to mine’ must involve the industry, and individual companies and operations ensuring that, on balance, negative impacts are minimised or remedied. For example:

• careful provision needs to be made for environmental rehabilitation;
• relocation of people should be carried out as a last resort and in consultation with communities; and,
• where it leads to dislocation of unofficial small-scale mining, the benefits of larger-scale commercial operations must bring overall benefits to the society, through the payment of taxes and such measures as social investment in communities – usually in clinics, roads and other infrastructure, education and skills development, the hiring of local citizens and the sourcing of locally produced goods where possible.

Establishing and maintaining dialogue

Dialogue with community representatives and with government at local and national level is initiated at an early stage in any exploration or mining project. Community engagement forums give local residents a platform to air concerns and the company an opportunity to communicate realistically on the economic benefits of a project. A natural tension exists between community expectations and the level of sustainable benefits which can be delivered by resource companies, but this can be mitigated through a healthy and transparent process of dialogue.

For this dialogue to be productive, however, some fundamentals relating to the resource extraction industry need to be taken into account:

• Recognition of a company’s need to create value for shareholders. Without shareholder funding, resource companies cannot generate sufficient revenue for the significant investments required in the resource extraction sector. Investor interest in the resource sector will therefore slow unless governments recognise and meet the need of a company to generate shareholder returns.
• Addressing issues which undermine investment, such as weak governance structures and the risk of fiscal instability. Tackling such issues is key to attracting mining investment and ensuring that the developmental benefits of a resource endowment can be maximised.
• Transparency in relationships with companies in the mining sector and in the application of mining revenue is essential, not only in attracting large-scale companies to a mining jurisdiction, but also in ensuring that benefits are distributed to a broader population base and do not simply remain in the hands of political elites. To this end, AngloGold Ashanti has joined the Extractive Industries Transparency Initiative (EITI) and urges both its peers and its host governments to sign up to the initiative in order to promote the practice of revenue transparency within the sector.

ICMM engagement

The International Council on Mining and Metals (ICMM), an organisation comprising the leading international mining and metals companies as well as regional and national commodity associations, has developed a ‘Resource Endowment Toolkit’ which can assist companies and governments to understand how large-scale mining activity, particularly in low and middle income countries, can enhance the socio-economic development of host countries.

AngloGold Ashanti has been a supporter of this project, which has included regional, multi-stakeholder workshops in two of the countries in which AngloGold Ashanti operates – Ghana and Tanzania. The impacts of mining both at national level and around selected mining projects were assessed at the workshops.

Research conducted in the first phase of the project assessed the developmental impact of mining in 33 resource-rich countries (defined as countries in which mining made up more than 20% of exports in the period) from 1965 to 2003. The performance of these resource-rich economies, measured against a range of socio-economic indicators, was found to outperform regional and income comparator countries, whether these were endowed with minerals or not.

In Ghana, the more detailed research conducted concluded that a resurgence of mining investment since the mid-1980s has made an important contribution to turning round that economy and reducing poverty at local and national level.

The research also conceded that there were still challenges to meet in filtering the benefits of mining to local communities, and this issue needs to be addressed by government in conjunction with mining companies and their host communities in the future. A follow-up workshop is planned in Ghana to assess progress and take the project forward.

For a mining company such as AngloGold Ashanti, therefore, operating in environments and communities where significant socio-economic and developmental challenges still remain requires an approach that goes beyond the ability to operate on a technical level to adopting a collaborative and sustainable approach to interacting with local communities and local and national government. While acknowledging that there is still work to be done in this area, it is also important to recognise that, for AngloGold Ashanti, the need for such a broad-based vision is not in question, and that making a positive contribution to the communities in which it operates remains firmly at the heart of the company’s vision and values.