The Mining Industry’s Isolation Myth

October 19, 2012 Editor 0

Over the last few months, two tragedies unfolded in the natural resource sector: five mining community members were killed in Guinea, and at least 45 people were killed in conflict over mining strikes in South Africa. Twelve thousand more miners in South Africa lost their jobs in response to their wildcat strike at Anglo Platinum.

I’ve had the fortune to work with miners, mining community members, and senior mining executives around the world for 12 years. In my view, these events speak to a larger trend underway in natural resources that will affect every company in the sector.

Let me acknowledge up front that these tragic events are specific to each mine and each community. In South Africa, the miners are striking for higher wages and a better quality of life in the context of changing relationships of government, unions, and mining companies. In Guinea, community members were advocating for a greater share of the hiring and procurement dollars spent by the Brazilian mining company Vale.

In both cases, however, the use of deadly force by public security forces represents failure. Wages and local content are routine sources of tension in the mining sector, and they used to be routine sources of violence as well. In the last 12 years, new principles have been developed regarding the use of public and private security forces, and most major mining and oil companies have adopted policies to mitigate the risk of deadly force. I have seen these policies in practice at mining sites. They are imperfect, but they generally work in avoiding loss of life.

So what is underway that would override those safeguards? Some might say that these were unfortunate but isolated incidents. I do not agree. From gold mines in the high elevations of Peru to the massive copper finds in the South Gobi, the natural resource sector is finding a greater portion of its value in remote regions of the world. The intersection brings the world’s largest companies, biggest machines, and most complex projects into the lives of people who are rich in many ways, but not in the experience or finances to manage that kind of engagement.

The response mechanism I’ve observed in most companies is isolation: Create a channel of isolation through which the company can extract, process, and transport the commodity. Isolation is a compelling paradigm. It’s physically safe, commercially sound, and seemingly well-suited to the risks of putting $5-10 billion of heavy machinery in a place where most people are earning less than one dollar a day. You can have a broad and progressive perspective on stakeholders (most senior executives I know have such a perspective) and still embrace isolation as the default paradigm for planning, building, and operating a mine or oil and gas operation.

Here’s the problem as I’ve observed it: In frontier markets, isolation is a fiction.

Natural assets can’t be separated from the communities that live around and above them. Even the best resettlement programs and social investments fail to deliver sustained healthy relationships for the mining companies. That doesn’t mean that assets can’t be developed successfully and sustainably. It does mean that development has to be not only of the mine, but of the communities, region, and nation around it—or it won’t work.

Similarly, politics above ground can’t be separated from successful work below ground. While there is reason to be hopeful that the confrontation may be reaching resolution, in South Africa it is one that is likely to repeat worldwide. As companies push into more remote regions they will work with governments and unions with shallower reserves of human and political capital. Operating in isolation from worker aspirations will defer the problem but, ultimately, exacerbate it (and with asset life spans in the decades, “ultimately” is a time frame that matters).

There are many talented people working on these challenges. One overarching paradigm that informs my work is this: In frontier markets, interdependence works better than isolation. Everyone who lives on the frontier knows this, and firms operating there can adopt it as well.

Interdependence means building an operation that is integral to and draws heavily on the surrounding political economy. Interdependence is a useful lens through which to plan the full project lifecycle, from exploration and production agreements, through technology transfers, local content and operations, to shut down and post-closure planning. It does not mean charity, CSR, or community relations—these are each important, but in the end can be drivers of dependency and distance as much as they are of interdependence and integration. Companies that tie their fortunes to those of the surrounding region manage the risks of frontier assets better than those who do not.

I’m sometimes asked which companies do this well. Among the global natural resource majors, what I’ve seen is that whoever’s done it last tends to do it best. I worked in Indonesia with an oil and gas major on two projects. The first project was in Aceh, where I think it’s fair to say a strategy of separation yielded a host of risks and harm to company and community alike. The second was in Central Java, where the same company was developing a new asset years after Aceh. In this instance, the commercial arrangements and project development were not only consultative but highly integrated with the local economy. Their resulting approach was the most interdependent natural resource project I had seen to date.

That cycle repeats in most of the global natural resource firms I’ve observed—it’s not that one company does it better than others, it’s that each project does it better than the last. And in that, I find hope.

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Categories: HBR, Insights

Tags: isolation, mining, natural resource sector, south africa