RESOURCE NATIONALISM AND MINING – ISSUES AND POTENTIAL RESPONSESJon Samuel, Head of Social Performance, 19 February 2013

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ANGLO AMERICAN’S FOOTPRINT

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PlatinumDiamondsCopperNickelIron Ore and ManganeseMetallurgical CoalThermal Coal

Corporate and rep officesKey

E Exploration Offices

E

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RESOURCE NATIONALISM – SOME DEFINITIONS

• “Resource nationalism…encompasses efforts by resource-rich nations to shift political and economic control of their energy and mining sectors from foreign and private interests to domestic and state-controlled companies”

• “The threat of tax increases, renegotiation of terms, larger participation of state-owned companies and ultimately nationalisation.”

• “Resource nationalism, the terms used to describe situations where governments assert increased control over the natural resources located in their territories”

• “Resource nationalism is a term used to describe a tendency of people and governments to assert control over natural resources located on their territory.”

• “Situation where producer countries want to maximise their (future) revenues from present production by altering terms of investment”

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• Economic drivers:- High perceived profits in the mining industry- Lack of perceived benefits to host countries / communities: “fair share”- Changing balance of power between resource owners and developers: general

industry shift from capital to opportunity constraints as demand has grown

• Socio-cultural / technological drivers:- Communications revolution- Growing intolerance of poverty, and greater expectations on business to play a

constructive role in its alleviation other than through “business-as-usual” measures- Mining generally perceived to be a part of the problem on many global issues (climate

change, water availability, biodiversity, food security, human rights etc)- Negative legacies

• Political drivers:- Emerging economies striving to have their voice heard, and to assert their national

interests as their economies and foreign interactions grow- Rise of democracy and local empowerment

• As an industry we communicate poorly: - We don’t articulate the benefits we bring in a credible manner- The risk / reward trade-off is not understood, so profits are deemed excessive

RESOURCE NATIONALISM – DRIVERS

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HOW THE WORLD SEES THE MINING INDUSTRY

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RESOURCE NATIONALISM – IN PRACTICE

Taxes and royalties

Local content / value-add requirements (labour, procurement, beneficiation)

State participation in mining projects

Expropriation

Indigenisation (private)

From our perspective…Changing the rules of the game while playing

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RESOURCE NATIONALISM – MANIFESTATIONS IN SELECTED COUNTRIES

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Country Tax / royalty changes

Local content required

State participation

Indigenisation

Australia MRRT (2010)Royalty increase (carbon tax)

Botswana Desires for greater beneficiations

Debswana 50/50

Brazil Currently under review (incl internal debate between federal and state level)

Pressure for local supply contracts (especially in oil and gas)

Vale government shareholding, state ownership of Petrobras

Chile Voluntary royalty increase in 2010

Codelco

Colombia Under discussion/review

Mozambique Talk of increase Will be an important part of license to operate

Degree of free carry (5-20%)

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RESOURCE NATIONALISM – MANIFESTATIONS IN SELECTED COUNTRIES

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Country Tax/royalty Local content required

State ownership Indigenisation

Peru Negotiated voluntary windfall taxes

Several local benefit schemes in place (often negotiated locally)

South Africa SIMS report suggests increasing both

Range of requirements under mining charter (likely to increase)

Nationalisation debate and state mining company

Broad-based Black Economic Empowerment (26%)

Venezuela Strong focus on community and union benefits

Nationalisations and expropriations. Mixed companies required in oil and gas

Zimbabwe Yes 51% requirement (threat of expropriation)

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RESOURCE NATIONALISM AND OIL AND GAS

Private share of global oil resources

National Oil Companies account for ~55% of production and ~88% of reserves globally (in the 1970s it was the other way around)

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DID HIGH OIL PRICES LEAD TO NATIONALISATION?

OPEC led oil market

?

Source: OPM analysis for Anglo American

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Non-OPEC35%

Saudi Arabia25%

Kuwait10%

Iran9%

UAE5%

Iraq4%

Other OPEC12%

OWNERSHIP PATTERNS IN OIL AND GAS

Non-OPEC32%

Kuwait22%

Saudi Arabia18%

Iran12%

Iraq9%

Venezuela6%

In 1960:• World oil reserves

were 291 bn bbls;• of which: 85% were

privately held; and• two-thirds were in

OPEC countries, and also privately held

In 1980:• Reserves were 668

bn bbls;• of which: two-thirds

were in OPEC, and state-owned.

1960

1980

Source: OPM analysis for Anglo American

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COULD THE SAME THING HAPPEN TO MINING?

Nationalisation Privatization Pressure on rents and state-owned equity

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Source: OPM analysis for Anglo American

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• Our view is that large-scale nationalisation in the mining sector is unlikely:– Prices rises do not appear to have been the trigger for nationalisation in oil

and gas (in fact the converse appears to be true)– There was a spate of nationalisations in mining, but these tended not to be

successful and led to subsequent privatisations or closures– The economic rents from mining are generally much lower than in oil and gas, – Mining operations are technically challenging to run, and require very high

levels of ongoing capital expenditure to sustain them– Very limited ability to control markets, given wide distribution of most minerals

across the world– The increasing inter-connectedness of the global economy makes the cost to

implementing countries of unilateral nationalisations much higher– Governments have realised that they don’t need to nationalise: the tax system

and other policy tools provide other means– We have a better understanding of what we need to do to respond to the

threats posed by resource nationalism

COULD THE SAME THING HAPPEN IN MINING?

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• Be clearer about the existing economic impacts of the mining sector, at both local level and at more macro levels, including addressing the resource curse debate

• Ensure that mining is seen as a responsible industry:– Sound business ethics– High standards of safety, health and environmental management– Fair treatment of workers– Good neighbours

• Perhaps most importantly, deliver more effective responses to the demand for a greater share of benefits by enhancing the industry’s contributions to local and national socio-economic development

HOW SHOULD MINING RESPOND?

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RESOURCE CURSE: POTENTIAL CAUSES

Resource Curse

Terms of Trade

Dutch Disease

Rent Seeking

Impacts of Mining

Volatile Markets

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Volatility can and has been managed by instruments such as hedging and stabilisation funds

RESOURCE CURSE: RESPONSES

Terms of Trade

Dutch Disease

Impacts of Mining

Volatile Markets

The price of manufactured goods is also falling

Productivity improvements can increase benefits to local economies

Reallocating factors of production to resource sector may be efficient

Only a problem if adjustment after resource extraction is not planned for and / or not possible

Responsible management of impacts and proactive development initiatives can create positive economic contributions

Revenue transparency and governance reform can help to reduce rent seeking

Rent Seeking

Resource Curse

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WHAT ROUTES ARE THERE FOR DELIVERING DEVELOPMENTAL BENEFITS FROM MINING?

OPERATION

INFRASTRUCTUREINFRASTRUCTURE

BENEFICIATIONBENEFICIATION JOBS / WAGESJOBS / WAGES

CAPACITYBUILDING/TRAINING

CAPACITYBUILDING/TRAINING

PROCUREMENTPROCUREMENT

TAXATIONTAXATION

SOCIAL INVESTMENT

SOCIAL INVESTMENT

SME DEVELOPMENT

SME DEVELOPMENT

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ANGLO AMERICAN’S APPROACH TO SUPPORTING LOCAL SOCIO-ECONOMIC DEVELOPMENT

Our approach to community development is based on understanding local contexts and leveraging our core business to create sustainable upliftment

• Leveraging our $13.8 billion supply chain (approximately 100 x social investment budget each year)

• Ensuring that host communities have the best possible chance of securing increasingly skilled jobs on our operations

• Focusing in particular on how local municipalities can use tax revenues to provide effective public services

• Offering equity and loans on a commercial basis to support local entrepreneurs, both within and outside our supply chain

• Providing grants to welfare-enhancing initiatives where more market-based approaches are not possible.

Local Procurement

Local Training and

Recruitment

Governmental Capacity

Development

Enterprise Development

Social Investment

*

* 2011 data

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ENSURING WE UNDERSTAND THE LOCAL CONTEXT

• Our Socio-Economic Assessment Toolbox (SEAT) is at the heart of our management of social performance and developmental issues

• SEAT is an award-winning manual that provides extensive guidance on: – Profiling and engaging with host

communities– Assessing positive and negative impacts– Managing relationships with host

communities– Contributing to community development

• SEAT provides extensive guidance on understanding our local context, and how we should respond to that

• Freely available at www.angloamerican.com/seat

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LOCAL PROCUREMENTD

eman

d-s

ide

Mea

sure

s

Policy: Local Procurement Strategy

Resources: Appropriate people and budget

SC Local Procurement Initiatives (eg Ring Fencing)

Set framework, show leadership support

Demonstrate commitment

Operationalise commitments

Communication and Reporting: Targets and KPIs

Build Anglo American capacity and incentivise

Support for Small and Medium-size Business Start-ups (e.g. Emerge / Zimele)

Supplier Development Programmes (building capacity of existing suppliers)

Alternative Livelihoods and Micro-credit ProgrammesSupporting the grass-roots

Creating formal businesses

Build capability, capacity and size of suppliers

Objective

Su

pp

ly-s

ide

Mea

sure

s

Localising Suppliers (e.g. near-mine supplier parks)

Encouraging more suppliers to locate in mining areas

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CAPACITY DEVELOPMENT

• As a business we pay very significant sums in taxes

• Clear that these revenues are not always well spent, typically due to a lack of capacity

• Meanwhile, we often suffer because of poor pubic service provision

• We are now engaging on a structured basis in South Africa and Brazil in initiatives to build the capacity of host municipalities and regions

• Working with partners, we have undertaken structured assessments and designed tailored implementation packages

• Focus is on revenue management, accountability mechanisms and basic service delivery

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ENTERPISE DEVELOPMENT

• Through our Zimele and Emerge schemes in South Africa and Chile we are now supporting over 47,000 jobs in small businesses

• We provide a mixture of equity, loans and technical assistance to businesses, and help them understand how our supply chain works– Our ongoing procurement needs create a very strong platform from which to support

local entrepreneurs

• Currently expanding our ED initiatives to Botswana, Brazil and Peru

• Current focus areas include:– Reducing costs: substituting social investments (i.e. grants) with enterprise

development activities (i.e. loans, equity participation and business training)– Increasing efficiencies: in existing schemes by outsourcing some of the activities to

specialist delivery partners (e.g. Technoserve, CARE) – Partnering with development finance institutions to increase the capital available– Creating revenue: for example by generating captive, low-cost sources of carbon

credits– Creating more stable host communities and a more robust and competitive supply

chain

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SOCIAL INVESTMENT

• $128 million spent on social investment in 2011, about $0.5 billion in the last 5 years

• Monitored using a Group-wide database and set of indicators to help ensure value for money

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CONCLUDING REMARKS

• Resource nationalism has emerged in recent years as one of the major risks facing the mining industry

• However, this isn’t a new phenomenon, and in some ways current manifestations are less threatening than in previous decades

• Some of the drivers of resource nationalism are due to poor understanding of the economic realities of mining

• The mining industry needs to do a better job of understanding and communicating its economic contributions

• It also needs to work with partners, in particular governments and host communities, to enhance current economic contributions, with a strong focus on leveraging the core business

THANK YOU

ANNEXES

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TIMELINE OF A TYPICAL MINE

Exploration Closure

Year from acquiring exploration permits (assumes continuous intention to develop) 1 4 7 10+ 30+

• Only approx 1% of exploration targets are ever developed into mines• Capital Expenditure for “Tier 1” mine typically between $1 and $10 billion• Some of World’s biggest deposits have been mined for over 100 years

DevelopmentStudies Operation

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MANAGING SOCIAL RISK

Respect human rights

Deliver lasting, positive net benefit

Identify and manage social impacts

Efficiently utilise resources

Obey all laws and regulations

Ensure contractors follow our standards

Set targets, review performance

Develop staff competencies

Engage employees and stakeholders

Report and investigate incidents

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SOCIAL PERFORMANCE WORK PROGRAMME

Anglo American Values and Good Citizenship Business Principles

Group Social Strategy: Partner of Choice for Host Governments and Communities

Policies and Standards: the Anglo American Social Way

1. Education and Training:

• SEAT training• Post-grad

diplomas• Advanced Social

Management Programme

• ABET

2. GuidanceDocuments:

• SEAT• Mine Closure

Planning Toolbox

3. SocialInitiatives:

• Enterprise Development

• Social Investment

• Capacity development

• HIV/AIDS• Housing

6. ExternalEngagement:

• Communities• Governments

and multi-laterals

• Industry associations

• Multi-lateral initiatives

5. InternalAlignment:

• Business Units• Functional

liaison

4. Leverage Core Business:

• Local procurement

• Local workforce development

• Synergies from infrastructure provision

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SEAT: STRUCTURE

Engagement throughoutStep 1 – Profile your operation, including existing

community development

initiatives

Step 2 – Profile and

engage with stakeholders

Step 3 – Assess and prioritise

impacts and issues

Step 4 – Improve social

performance management

Step 5 – Deliver

enhanced socio-

economic benefits

Step 6 – Develop a

social management

planStep 7 –

Prepare a SEAT report

and feed back to

stakeholders

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• Access to jobs and training

• Access to land and alternative livelihoods

• Access to supply chain opportunities

• Balance / distribution of social investments

• Rivalries between stakeholder groups

• Perceptions of environmental impacts

• Health and public services

• Transport issues

• Communication and transparency

RECURRING ISSUES THAT SEAT ADDRESSES

Generally very pragmatic issues

A strong emphasis on the

level and distribution of

benefits