Introduction
Launched in late 2007, the “From Money to Metals” documentation project was intended to be preliminary essay at gathering together disparate data on institutions (both commercial and private) which aim to profit from mineral extraction and processing.
Thanks to invaluable support from the Heinrich Böll Foundation of Germany, it has now been possible to update the database and analysis of mining-related investment, and to continue improving these over coming months.
Readers will be well aware that, during the period between September 2008 and the first eight months of last year (2009), the so-called “credit crisis” resulted in a virtually-unprecedented meltdown for many banks and associated fiscal players. While the earliest victims of this were poorer mortgage borrowers (sacrificed in the “sub prime” market) few people have remained immune to the failure of banks to fulfil their basic commitments to customers; and the near-criminal extent to which some financiers have salted or frittered away our individual and collective wealth.
Whether, as a result of this gargantuan financial disarray, the mining and minerals industry has been fatally impacted is highly debatable. Up until the end of 2009, mining companies suffered a worse reduction in their stock value than any other industrial sector represented on the London Stock Exchange (LSE) - the single most important source of mining capital [Russ Mould, editor, Shares Magazine, in presentation to LSE seminar, London, 17 February 2009]. Almost every mining company listed on other stock exchanges has also experienced a fall in its market capitalisation, while mineral commodities were trading at lower prices or volumes than at any time for 10 or even -20 years.
The only exceptions have been gold and silver – the former sustaining its historical role as a “store of value” and “safe haven” in hard times or during dramatic fluctuations in dollar exchange rates. [See: Lawrence Williams:” Is gold the only salvation from this financial Armageddon? Mine web, 16 February 2009; also: Barry Sergeant: “Warm bullion, hot stocks”, Mineweb 21 January 2009]. Barry Sergeant, of Mineweb, commented on February 25th 2009 that: “While the rest of the investment world continues to anticipate the next disaster or scandal, trembling in fear, gold stocks are having a fine time of it, underpinned by the world's best performing commodity.”
But this is not because the banks were committing substantial new capital to the sector. (Indeed, they are still having enough trouble trying to raise funds to bulwark their own collapsing balance sheets and pay off the vast debts they have accumulated.) Instead, it appears that gold miners are profiting from what is termed “bought deals” – and to a lesser extent the trading of stock via ETFs, or Exchange Traded Funds (Footnote 4). Bought deals occur when a small number of brokers buy an entire stock issue from a company, then on-sell the shares (or bonds, convertible into shares) to their own clients in what may then become a series of smaller transactions. By February 2009, such transactions had been valued at nearly US$ 4 billion since late 2008, including ones with Eldorado Gold, Great Basin Gold, Victoria Gold, Allied Gold and Gold Wheaton, as well as some silver producers [Barry Sergeant, Mineweb, 25 February 2009]. Nonetheless, although the gold market price shot to new heights during the rest of that year, as this update was being written the share prices of individual global gold mining companies had slipped (in one case, by nearly 50%) below their level a year earlier [Barry Sergeant, Mineweb, 24 February 2010]).
While gold prospectors (in both senses of the term) have certainly been riding fairly high, this is not the case for producers of base metals, ferrous metals, diamonds, and other minerals – not to mention their workforces. Toronto’s Stock Exchange recently reported that US$15. billion had been raised for mining equity in the nine months to November 2009 (three times the amount raised in the whole of 2008) [MJ, 6 November 2009]. But this doesn’t necessarily represent a bell-wether (an indication that the trend will continue improving) for the future). In fact, the market capitalisation (stock market value) of almost all mining companies is lower now than it was at the end of 2008.
Scores, if not hundreds, of thousands of jobs have been lost in the past eighteen months, not only at the pit face but also in construction and automobiles - two industries intrinsically dependent on processed minerals. This attrition was summed up by the global mineworkers federation, ICEM, at the dawn of the new decade: "From Russia to Chile, at Europe’s largest zinc deposits in Ireland’s County Meath, where 670 were retrenched by Tara Mines, to the hundreds of thousands of migrant miners across the world who are out of work with no place to go, it is workers who are paying the unjust price of capital’s failure." [ICEM, Brussels, 12 January 2010]
Numerous expansions of existing mines have been postponed, while some smaller companies have effectively been liquidated. The financial health of many junior miners – those mostly involved in exploration – continues to be grim, if not terminal. According to the Fraser Institute’s 2008-2009 survey of mining executives, at least 30% of these companies might be forced to fold in the near future. One respondent went so far as to declare that: “[J]uniors may never return to the market. The industry should prepare itself for a ‘paradigm shift' in how exploration is funded." [See: Fraser Institute Annual Survey of Mining Companies 2008-2009, Vancouver, February 2009]. (At the same time, it is important to recognise that Canada’s government is unique among its peers in the extent to which it underpins exploration expenditures of hundreds of its domestic mining outfits. The principal incentives for exploration are a 100% deduction from taxable income, accompanied by a 10% credit once mining is underway, and a system dubbed “Flow-Through Shares” (FTS). This allows an extractive company to “flow” its exploration expenses “through to their investors for deduction against their personal or corporate taxable income” [see: “Incentives for Mineral Exploration”, a power point presentation by Robert Clark, Natural Resources Canada, undated, 2010]. Given a perceptible recent expansion in use of these Flow-Through Shares, it is reasonable to suggest that much of the apparent improvement in some companies’ fortunes is stimulated by the use of FTS as a quasi-tax haven by individual investors. For further discussion of FT, see below under “Content of this Report”).
Most indicative of the nature of this global turmoil is that several major extractive companies which, not so long ago, appeared financially secure and with billions of dollars to spare, became saddled with massive indebtedness. On 31 December 2008, Rio Tinto, the world’s then-second largest mining company in mid-2008, acknowledged a debt of some US$ 39 billion – largely the result of its November 2007 acquisition of Canada’s Alcan alumininum conglomerate. Rio Tinto had also signed a deal with Chinalco, intended to see China’s state-owned aluminium giant acquiring nearly 20% of the legendary UK company [News services, 9-14 February 2009], by which point Chinalco was already the most significant shareholder in Rio Tinto itself. But the Rio Tinto-Chinalco deal fell through in early 2009, and the company was forced to offload some of its favoured projects, including an iron ore venture in Brazil, a phosphates mine in Argentina, and components of the ill-fated absorption of Alcan in 2007. It then proceeded to a share rights issue which effectively lowered the company’s value to institutional shareholders. In July 2009, four executives of Rio Tinto were arrested by the Chinese authorities and, as of last February, had been charged with buying state commercial secrets, bribery, and accepting corrupt payments from China’s own steel companies [See: Reuters, 11 February 2010; also: http://www.minesandcommunities.org/article.php?a=9362].
In February 2009, UK-Switzerland-based Xstrata (number 5 among global miners the previous year) also announced a £4.1 billion rights issue to cover its own massive shortfalls [Bloomberg 16 February 2009]. And, at around the same time, OZ Minerals, Australia’s third biggest miner and the world’s second largest producer of zinc, fell into the hands of another Chinese state enterprise, the ubiquitous Minmetals [Mineweb, 16 February 2009].
Far from secure metal futures
A month ago, in an attempt to evaluate the previous 15 months’ attrition of the minerals industry, the global accountancy firm Ernst & Young (E&Y) published its 2009 annual examination of transactions and financing for minerals and metals. The report concludes that: “At this point in the cycle, Asian investors [have] emerged as the new buyers, cash-rich and ready to take advantage of the opportunities that abounded as valuations dropped and struggling companies became the target of bargain hunters.” [Ernst & Young, “2009: the year of survival and revival: Mergers, acquisitions and capital raising in the mining and metals sector”, London, February 2010].
Ernst & Young goes on: “The emergence of these new investors, combined with a quick rebound in demand in Asia and prudent spending, allowed the industry to weather the storm of unsustainably low metal prices and emerge into the calm as prices reached more realistic levels.” E&Y is now banking on China and India, in particular, to “promote a strong seller’s market” in the near future, judging that “[t]he events of 2008 have fundamentally changed the way the industry will be financed in future”.
A brief examination of China’s recent mining-related mergers and acquisitions (see below), superficially confirms this prognosis. The regime’s mineral-dependant industries have undoubtedly snapped up bits of – and a few entire - companies, benefitting from depressed prices prevalent during the past 12 months. However, new “ways” of promoting investment, and bringing minerals’ supply and demand into balance, have yet to be convincingly determined. Nor will this occur, until investment banks and other parts of the financial sector successfully pull themselves out of the mire of debt into which they have dragged themselves (and the rest of us).
Relying on China (and to a lesser extent, India) to stimulate new spending requires that these two huge economies achieve conventionally-defined levels of “growth” last recorded three years ago (India’s growth had slipped from a high of 9% to 6.7% by 2009). In the meantime, domestic socio-economic and environmental pressures in both countries, aimed at curbing the amount and extent of new mineral ventures, are mounting. India’s biggest-ever proposed extractive project, one by POSCO for an integrated iron-steel venture in Orissa, has had its dimensions cut back and construction postponed, thanks largely to local and national opposition. Just as this update was being written, a report by India’s Ministry of Environment and Forests excoriated Vedanta Resources for its derelictions of Forest and Tribal Peoples’ rights legislation, at its alumininum venture in the same state [Business Standard, Economic Times et al, 16 March 2010] (see also below).
Scandals relating to massive child lead poisoning and worker fatalities at numerous coal mines in China have resulted in many abrupt closures; even if, so far, the regime has failed to reduce its overall reliance on these minerals. The administrations in both these Asian states recognise the urgency of limiting their increasing contributions to adverse climate change. If words are to translate into action, many more coal mines will have to close in both countries, though this is not likely to happen for another decade.
Let’s critique in a little more detail Ernst & Young’s assessment of the near-future shape of mining finance. (Thus far into the new decade, its report is the only one seriously attempting to map one out, although a recent article in the Mining Journal briefly covers compatible ground [See: A shift in focus”, by James Nwankwo and Hadim Khan, MJ 22 January 2010]).
E&Y tells us that “equity [purchase of shares] will play a greater role in the next wave of growth, with the IPO [Initial Public Offering] market starting to recover in 2010”. But what evidence is there of this so far? (Although Ernst & Young’s own “Mining Eye index” (a weekly tracker of the share values of the top 20 AIM-listed mining companies) gained 173% in 2009, the index overall was still 40% down on the all-time high achieved in March 2008[MJ, 12 March 2010]).
Thus far into the new year, Barrick Gold plans to list its African assets through a London IPO with a target of US$1 billion. A Guinean iron-ore company, Bellzone Mining plc, intends trading shortly on the AIM market, in order to muster around US$100 million for completion of a feasibility study on its Kalia project. Another iron-ore miner, Brazil’s Ferrous Resources Ltd, is also expected to apply for an LSE listing “as soon as May [2010]” [MJ 12 March 2010, ibid]. The world’s leading materials trading company, Glencore, in March 2010 mooted an IPO, following the purchasing-back of assets it had sold earlier to Xstrata [Bloomberg, 2 March 2010] to help the latter out of debt.
However, the largest expected London IPO of 2008-9, by UC-Rusal (qv), now seems to have been jettisoned: in February 2010 the Russian conglomerate listed instead on the lower-profile Hong Kong Stock Exchange. The following month, Vedanta Resources – the largest Indian listing on the London Stock Exchange back in 2003 – announced that it, too, would seek to make an IPO for its Vedanta Alumininum subsidiary; doing do so on the Mumbai (Bombay) Stock Exchange, with only secondary registration of its stock in London.
Although the LSE will likely remain the premier marketplace for raising of mining-related capital, foreign companies intent on listing in the UK will soon have to conform to a new UK Corporate Governance Code. This aims at setting standards for board composition, directors’ remuneration, accountability and auditing, and relations with shareholders. The code is “non-prescriptive”, faces some further revisions, and fails to adequately address breaches of social and environmental good practice. Nonetheless, companies that do not conform with these “comply or explain” procedures may, say corporate lawyers James Nwankwo and Nadim Khan, suffer a “withdrawal of goodwill from the investment community and [its] refusal to invest”[MJ 22 January 2010, ibid].
E&Y goes on to suggest that a “recovery” could “lead to an emphasis on strategic equity investments from an emerging breed of investors, including: sovereign wealth funds (SWFs), state-owned enterprises (SOEs) and private capital.”
Again, early indications of this are sparse. Outside of China and India, Chile’s state-owned Codelco is the world’s most important state-owned mining enterprise. But, in January 2010, the country’s incoming president announced a plan to part-privatise the enterprise, in order to boost private investment [See: http://www.minesandcommunities.org/article.php?a=9838].
India’s NMDC (formerly the National Mineral Development Corporation) has been “rumoured” to be taking its first steps outside the country by investing in Brazil’s Ferrous Resources [Mineweb, 23 February 2010] – itself due for listing on the London Stock Exchange this year (see above). The state-run Steel Authority of India Ltd (SAIL) announced last November that it was “looking at acquiring licenses for coking coal mines abroad to protect itself from fluctuating raw material prices” [Reuters, 17 November 2009].
While these moves may certainly be described as “strategic”; they do not necessarily indicate a “sea change” in goverment policy towards acquisition of stakes in overseas mineral ventures - something that continues to be largely left to the country’s private sector.
Chinese syndromes
It’s true that China’s own SOEs, backed by its state banks, have been investing substantially in foreign projects, and making some important corporate acquisitions - notably in Australia, Peru and Canada. But there is no certainty that this pattern will continue; or, at any rate, trigger future bids of a similar dimension. If the regime’s core strategy is to build up its raw mineral stocks - not only to bulwark domestic requirements but also use as “bargaining chips” in future pricing deals - then there are finite limits. Mining companies have a specific “problem” (to cite a recent commentary in the Financial Times), which relates to the strategy of "restocking". This denotes a tendency by fiscal regimes at the start of an expected new economic cycle, to build up raw materials well beyond any near-future requirements. Since mid- 2009, such restocking was particularly evident in China, “whose stimulus-boosted manufacturing helped carry metals prices around the world.” [William MacNamara, “Mining and metal trends radically affected by speculative investments embedded in prices”, FT 8 February 2010].
However, “China has [now] reined in such spending, there is little evidence that restocking is happening in developed countries in the way it once did”. According to Deutsche Bank analyst, Daniel Brebner: “This could be because manufacturers are holding lower stock levels permanently to avoid being caught out as they were in 2008.” Breber went on to predict that “... the inventory cycle in the western world will be a shadow of its former self." (author’s italics). [FT, 8 February 2010, ibid]. (For further discussion of this phenomenon, see Footnote 4, below)
The Peoples’ Republic acquired full membership of the World Trade Organisation (WTO) in 2001, leading to an unprecedented flurry of overseas trade in finished and semi-finished goods. The result has been an unsustainably-high level of Chinese accumulation of dollar-demominated funds. According to some pundits, this parlous dependency has driven the Beijing autocracy to promote a shift away from the “Mighty Dollar “to IMF Special Drawing Rights, back to the gold standard, or towards promoting a new form of international exchangeable currency, based on trading of commodities. If so, this helps explain why the state has recently been creating massive stocks of raw materials that it clearly doesn’t require for near-future use. It also adds weight to the argument (just mentioned) that we may not see similar excessive accretion of minerals, for a long time to come [See: http://www.minesandcommunities.org/article.php?a=9596]. Of equal, if not deeper, concern is that many of the country’s citizens are spending at levels never seen before, while the vast majority of them have no means or incentive to save, and investment in socially productive sectors at home has begun dangerously parching.
For these reasons, the administration has been assiduously seeking to “de pressure” the Chinese economy. To an extent this has already happened - if involuntarily - thanks to a reduction in demand for Chinese processed and manufactured goods, occasioned by recent fiscal meltdowns in countries importing such goods. Part of the regime’s more conscious and pre-emptive strategy has been to strive for limits to own industrial pollution caused by over-production, and to double the recycling of scrap metals [Interfax China M&M, 30 October 2010]. Whether these gambits will succeed is open to question. (One Chinese correspondent has suggested that the closure of the country’s numerous outdated and dirty metal refineries and smelters, may actually increase overall pollution [Interfax China M&M 25 September 2010]). Yet there seems little doubt that Beijing’s top power-brokers understand the urgency of curtailing the state’s recent profligacy in mining and metals output. (In 2006 the administration of Tibet’s “Autonomous Region” banned all gold mining in the region, and later closed nine cement plants and seven steel mills “to protect the fragile envronment” [China Daily, 4 March 2010]). The urgent question is whether they can do this before it proves too late - thereby averting even greater civil strife thanevinced on the mainland over the past fewyears, while continuing to meet the expectations of a rising middle class for private ownership of property, their own capital concentration, and access to luxury goods.
A commentary by economics Professor Martin Hart-Landsberg (published online in the Links International Journal of Socialist Renewal in February 2010 [http://links.org.au/node/1558]) drives right to the heart of this “dilemma”. According to Hart-Landsberg: “In the first half of 2009, state banks loaned three times more than in the same period in 2008. Approximately half of the loans have gone to finance property and stock speculation, raising incomes at the top while fueling potentially destructive bubbles.”
But, Hart-Landsberg points out : “Much of the other half has gone to finance the expansion of state industries like steel and cement, which are already suffering from massive overcapacity problems. It is difficult to know how long the Chinese government can sustain this effort. Property and stock bubbles are worsening. Overcapacity problems are driving down prices and the profitability of key state enterprises. Both trends threaten the health of China’s already shaky financial system.”
Even more threatening, though, may be “… the deepening mass resistance to existing social conditions. The number of public order disturbances continues to grow, jumping from 94,000 in 2006 to 120,000 in 2008, and to 58,000 in the first quarter of 2009 (on pace for a yearly record of 230,000). The nature of labor actions is also changing. In particular, workers are increasingly taking direct action, engaging in regional and industry wide protests, and broadening their demands. While this development does not yet pose a serious political threat to the Chinese government, it does have the potential to negatively affect foreign investment flows and the country’s export competitiveness, the two most important pillars supporting China’s growth strategy.
Hart-Landsberg concludes with the severe warning that: “The Chinese government’s determination to sustain the country’s export orientation means that it can do little to respond positively to popular discontent. In fact, quite the opposite is true. In the current period of global turbulence the government finds itself pressured to pursue policies that actually intensify social problems.”
This prompts our asking an important question: one that has exercised a number of commentators. Although uncritically welcoming the unprecedented spurt to mineral prices, triggered by Chinese demand a few years ago, these commentators are now parading concerns about the negative effects exerted by Chinese ventures on the socio-economic health of smaller mineral-dependent states (especially in Africa). Take, for example, Hanjing Xu of Canada’s mining company, Eldorado Gold, who told an investment conference in March 2010 that: “[The Chinese] lack an appreciation for community relations, worker health and safety, and environmental protection.” [Mineweb, 9 March 2010]. To what extent, then, have Chinese mining ventures corrupted overseas governments, displaced their internal labour forces, introduced lower operating standards, and hazarded peoples’ livelihoods?
According to Hanjing himself, overseas mining companies “only received 10% of China's foreign investment in 2009” – hardly squaring with a press-generated image of the “Sino-assault” on global resources. Last November, in an astute examination of Chinese business practices in two important African mineral producing countries (DR Congo and Gabon) researchers from Stellenbosch University’s dismissed the idea that there was a monolithic “Chinese Inc” - rigidly following a central Communist Party line. Instead, the researchers said, mining companies from the Peoples Republic have tried conforming to operating rules set overseas, dealing as best they can with different social and political forces. Whether addressing issues of “transparency”, corruption, relationship with workers, or cultural disparities, Chinese firms have proved to be adaptable, and quick to learn from their hosts. They are not necessarily more prone to take or offer bribes. Indeed, they are often at a disadvantage, compared with other foreigners, some of whom have relentlessy exploited the continent for much longer [“Gabon/DRC: Chinese companies in the extractive industries” by J. Jansson, C. Burke, W. Jiang, Stellenbosch, Centre for Chinese Studies, Stellenbosch, 23 November 2009].
No doubt some Chinese companies, by working offshore, have externalised environmental and social costs, in order to avoid bearing them at home. But the extent of their doing so may often be exaggerated. To harken back to Professor Hart-Landsberg’s prognosis the Chinese leadership’s successful resolution of its own internal political contradictions will have more impact, on far more poor people, than the standards that Chinese companies implement (or don’t) beyond their shores. At the same time, if Beijing fails to peacefully resolve the country’s numerous social conflicts, the savage repercussions may become truly global.
The future role of private capital?
On the one hand, Ernst & Young’s February 2010 report concedes that “[t]raditional investors will be looking for safe options in 2010”, while “fewer lower risk projects are now available”. Somewhat contradictorly, on the other hand, it claims that investors will be willing “to consider acquisitions with greater political risk in 2010.” Little evidence of that is yet forthcoming. More likely, long-betting, mining-dedicated, investment funds will shirk taking on increased risks, especially after the scorching they suffered within very recent memory. Indeed, E&Y itself expects funding to remain scarce, “especially for speculative high-risk companies”. Yet, as we have already seen from the disastrous 2009 fall in share prices, virtually no mining company should now be regarded as a safe bet. (BHP Billiton, the world’s most diversified “natural resources” firm, is arguably an exception - largely because of its geographical and product diversification. As well as being invested in a large range of metals, BHP Billiton is also a significant oil producer, and moving towards control of significant desoits of phosphates. Nonetheless, this pre-eminent Australian-UK conglomerate has progressively withdrawn from nickel mining and exploration. While the market price for the metal has improved of late, it seems unlikely that the company will return to nickel. The point here is not that the company might have misread the market signals, but that these “signals” prove bewilderingly difficult for anyone to accurately read at the present time).
According to E&Y’s report: “[T]he changes in available capital will continue to increase the complexity and variety of deal structures, with joint ventures, partial sales and demergers becoming common, along with alternative financing arrangements, such as partial equity sales and asset swaps.
It conjectures that: “Following the decline of the project finance model, we could see a return to individual mines being floated, with the proceeds used for development, and investors sharing in the profits when the mine goes into production. Off-take customers could also emerge as key sources of funding to develop mines, as is already occurring in the junior mining space.”
Thus, asserts E&Y: “Eventually, borrowing will return to historic averages, but from new lenders and more diversified pool of sources. These will include multilateral development agencies, and Middle Eastern and Asian banks.”
This is such a speculative statement that it verges on the fanciful. As already mentioned, Chinese banks are still in the market for further strategic mining investments, but we are not likely to see these being made at the rate, or to the extent, they were in 2007-2009. India’s State Bank (SBI) recently set up a European financing arm in London; however, its only major minerals-related outlay so far has been on a project (Orissa’s Jharsaguda aluminium smelter), being constructed by Vedanta Resources plc.
It may be true, as E&Y says, that private investors “responded to the [recent] crisis with a combination of equity issuance, corporate bonds, assets disposals and inward equity investment from strategic investors”. While this did result in “a record year for follow-on equity issues and corporate bonds”, the accountancy firm’s own data paints a far from sanguine picture of other strategies being successful in raising substantial funds. In fact, the value of IPOs, loans (debt finance) and the amount of money spent on mergers and acquisitions, all fell dramatically in 2009. So too, did funding aimed at specific projects (See below).
Finally, Ernst & Young itself recognises that “[P]erhaps the most profound effect of the global financial crisis on the metals and mining industry is that the world has lost as much as two years of growth in the supply of scarce resources. The deferral of projects pending financing will lead to a construction bubble that will compete with other lagging fiscal stimulus for resources.”
Now, that does seem to be a fair measure of the crisis that the global minerals industry continues to confront.
Unanswered questions
To sum up - and despite Ernst & Young’s stab at the task - it would be a rash analyst indeed who claimed they could predict what shape the minerals industry will be in by the dawn of 2011. Will there be further mergers and acquisitions in order to reduce costs and consolidate existing leases? How sustainable is the recent spurt in demand for some metals, evidenced during the last half year? Does this reflect hard-and-fast government-led scenarios for new product manufacture? Or is it, rather, an exercise in playing “catch-up” - as mining corporations compete to land bargain-basement deals before the costs of acquisition rise (if indeed they do)? To what extent is this new flurry of activity a consequence of near-whimsical commodity speculation and reckless accumulation, divorced from meeting real physical needs? Will the Chinese government fulfil its aim of reducing excess metals-based consumer exports and restrain parts of its “over heated” domestic economy? And (an issue highly apposite to policy deliberations in the Peoples’ Repblic), is it remotely realistic that laid-off mineworkers will be re-employed at any point in the near future?
These are important questions but not necessarily the most critical ones to ask – especially if you are a farmer living in a mineral-rich village, or (say) the conscientous leader of an organisation intent on forging truly secure livelihoods for her or his members.
Most of us warmly welcome the prospect being able to switch from further global output of coal or oil to promoting “alternative” means of generating power. Nonetheless - whether this means using lithum and nickel for batteries, silicates for solar cells, various metals for windmills and turbines, or the growing of biofuels for motor vehicles, many alternative energy scenarios rely upon potentially highly destructive use of land , posing risks to a community’s own renewable resources, and threatening Indigenous Peoples rights, through the expansion of mining. (In the case of biofuels, such as ethanol, the dependency is indirect, via increased extraction of phosphates and potash to fertiise the crops – but may be no less significant for that).
Unfortunately, even quite powerful “green lobbies” have neglected to factor these consequences into their campaigns. Doing so might lead to postponement of some projects, cancellation of others, and more application being made to finding “alternatives to the alternatives” (For example, the financing of neighbourhood hydro power schemes not big dams dams; small windmills made out of recycled materials rather than huge new wind farms; local coal-methane powered generators, as opposed to relying on “carbon capture and storage” as a spurious “clean development mechanism). In any event, campaigners ought to focus much more attention, than they have paid so far, on judiciously assessing full product-chain costs of moving from “dirty” fuels to purportedly sustainable ones.
Precious little social value would be derived from such a strategy unless the communities, hosting the minerals required to implement these energy transformations, gained significantly more from the profits of mining than they do now. (At present many of them get virtually nothing at all). But the reality is that, in response to dramatic falls in commodity prices, the opposite has been happening. At least one mineral-dependent–state has reversed a recent decision to recoup more value from the exploitation of resources under its peoples’ ground. In January 2009, Zambia significantly diluted the more stringent taxation regime introduced the previous year, as its government succumbed to mining companies’ threats to pull out of the country [“Zambia abolishes 25% windfall mining tax”, Reuters, 30 January 2009; “Zambia faces uncertain mining outlook”, Reuters, 8 December 2009].
Botswana is often cited as a model of success in conquering the “resource curse.” But it has been staring at the possible collapse of its 50% -owned diamond industry, as its private partner De Beers announced that it couldn’t predict when global demand would recover. Just three years ago, Argentina was widely canvassed as one of the most mineral prospective countries in Latin America. In 2009 it was named by prominent mining consultancy, Behre Dolbear, as the least attractive on the subcontinent because of "the populist policies of the government, the seizure of pension funds, and the expectation that things will get much worse than they were in 2008." [Dorothy Kosich: “Exercise much caution when investing large sums on mining projects-Behre Dolbear”, Mineweb 16 February 2009].
These examples (and there are others) illustrate that, although a government may have responded to citizens’ demands for an end to destructive mining and a guarantee of improved rural livelihoods, they are still at the mercy of largely foreign-controlled mining companies. This is never truer than in a “bear” market, especially one of the ferocity experienced recently Even though the World Bank had itself counselled the Zambian government not to cave in to industry demands ("This is a perishable resource. Once it's gone the country has no more access to it. It should be benefiting from it more now." [FT 20 January 2009]) the advice has not been heeded. If the world’s most powerful “development agency” makes no headway in this direction, how can anyone else?
And the attrition continues. In February 2009, the Tanzanian government had promised its citizens that it, too, would increase royalties on gold and diamonds [MJ 20 February 2009]. However, with a much more conservative Mining Bill on the table the following year, civil society organisations were still struggling to squeeze a more equitable share of profits out of the mining companies [See: “Tanzanians are more cursed than blessed!” by Mvuyisi April kaDathini, Africa Files, 2 March 2010].
There is an unfortunate paradox at the root of discourses, centred around the division of various “cakes” of mineral wealth. Put simply: if market prices become depressed due to falling demand, then investment in mining also contracts and so do the values of corporate shares tendered on global stock exchanges. The classic “race for resources” - where companies compete with each other for access to new mineral deposits - is thereby substituted by governments vying with each other to sell (both practically and metaphorically) the country’s minerals at a relatively reduced price. Thus, in order to “sustain” economic mineral returns, governments may end up sustaining the industry, leaving many citizens as badly, if not worse off, than before. This is the most wounding aspect of what’s customarily called “The Resource Curse” [see: Roger Moody, “Cursed by Resources” in Rocks & Hard Places: The Globalization of Mining, Zed Books, London 2007, pps 43-68]. If the two parties had similar aims, then an accommodation between them might result in greater income.
In theory, there has never been a more propitious moment - when mineral exploration and extractive companies as well as materials’ traders, are struggling as never before, in many cases simply to survive - to re-examine the relationships between natural resource exploiters and exploited and thus change them permanently.
Could this be the time to ensure that the most dubious of planned mines will never surface, and that the most parlous of current operations are closed once and for all? Already, there has been some welcome stemming of investment in bad ventures. (For example, Rio Tinto has off loaded its water-threatening phosphates mining scheme in Argentina; BHP Billiton, the world’s leading “natural resources” company, has abandoned its Gag Island nickel venture in West Papua – and, as mentioned earlier, may now well withdraw from the nickel market altogether).
Or has this opportunity already slipped away?
Peoples’ strategies for the coming decade
Based on lack of evidence that the minerals industry is anywhere close to a substantial revival of its fortunes, that question is still a very open one. The challenge ahead is to ensure that all new investments are firmly directed towards projects enjoying the full support of local people, as well as contributing directly towards truly sustainable economic and social development.
This requires a three-fold strategy.
First, we all need to better inform ourselves about the methods used to dispense mining-related finance and how current or future related debt may be “securitised”. This means keeping close track, not only of any newly-emerging financial instruments, but also recently-discredited ones (such as the “shorting” of stock, practiced by hedge funds) which may creep in under different guises. Demystification of terms and tactics is an essential part of this endeavour.
Second, we must become considerably better acquainted with who is paying whom for what and in what form (whether as direct equity, bonds, credit derivatives and “swaps”. other forms of derivatives; the use of exchange traded mechanisms, or specific project finance). To be informed is to be forearmed.
Third, with this information under our belts, we should be able to mobilise more effective shareholder actions, and form broader consensuses when directing our concerns at those investment institutions which must be held to social and ecological account,
These tasks are certainly demanding, but nonetheless achievable. Never has the time been riper to challenge previous assumptions about who should control the flows of money into mining and the legitimacy of their raising and dispensing it. Many people who, just two years ago, would have dismissed such issues as too erudite or remote, are now rudely discovering for themselves how widespread and endemic are the manipulations and concealments, characteristic of modern capitalism. It is the power of our own purses and pensions which should determine the nature of global financial architectures, not the other way around.
Hopefully, the present research assists in fulfilling these aims.
Content of this report
The database which follows (Part Two) records names and some details of around 500 banks, private funders, insurance companies, hedge funds and private equity firms, as well as some individuals, which provide, or have recently provided, financial stimulus to numerous mining companies. Not included are state-owned investors, or purportedly publicly-accountable bodies such as government agencies for overseas development or which grant export credits and provide political risk insurance. Regrettably, for the moment, it also excludes most multilateral development banks (MDBs)/multilateral financial institutions (MFIs), although these often underwrite critical investments in questionable extractive ventures. [For example, see the critique of the European Investment Bank by Heather Stewart: “The shadowy bank that has loaned £150 bn of your cash”, The Observer, London, 2 March 2008]
Outside the scope of this paper, too, are the profits generated by commodities’ trading, essentially in derivatives (see Glossary), on mercantile exchanges such as NYMEX (New York Mercantile Exchange), CME (Chicago Mercantile Exchange), Euronext.Liffe (a subsidiary of the NYSE) and, most important in terms of metals trading, the LME (see Glossary).
Nor does this paper cover in close detail the overt or hidden subsidies granted by governments to bolster private companies engaged in exploration or production, among which we may count CDC Group PLC in the UK. The Canadian government stands out for such support of the industry through its so-called “Flow-Through Shares” arrangement, which allows corporate miners to deduct exploration expenses from their income tax. [MJ and PDAC Exploration 2008, February 2008; see also Salman Partners, below].
As share prices bottomed-out in late 2008 and early 2009, at least one Canadian financial services firm, specialising in flow through brokering since the turn of the new century, was swift to boast the value of such investments. The MineralFields Group (qv) argued that “this is probably the best time to make flow-through investments in history, as the bargains are incredible, unprecedented, and we are buying stocks at low or no premium (and increasingly, at a discount), and at 2 year, even 3 year lows!”; adding that the Group offered “the highest possible level of safe tax sheltering“.
Such a manifest “distortion of the tax system” (in 2008 amounting to 60% of all exploration funding raised in Canada) has been criticised from within the industry itself as penalising ordinary citizens. [See: “Flow-through shares put Canadian mining and exploration juniors ahead” Liezel Hill, Mining Weekly 27 February 2008; see also Footnote 1, below].
On 20 February 2008, South Africa’s finance minister announced that he would not introduce a similar “flow through” system in his own country, instead opting for a 50% tax break on investment by junior mining and exploration outfits [MJ 22 February 2008].
When funders won’t come clean
Diligent reading of trade journals, the financial press, company annual reports and announcements, will usually, though not always, reveal which funds have provided what money for specific projects and purposes (2). However, it is in the nature of equity purchases (buying shares in companies) that holdings will change over time – indeed sometimes over a short period and especially in volatile market conditions such as those of the past 18 months. An investor may purchase a stake one month, sell it the next, and then buy it back again. In 2006, RAB Capital (until 2008 probably the most significant hedge fund involved in mining) was pressured by Friends of the Earth Canada to sell its stake in Ascendant Copper (later renamed Copper Mesa Mining), following allegations of that company’s human rights violations in Ecuador. RAB did so – but apparently re-invested shortly afterwards when the pressure was off.
Funders will often refuse to divulge the identity of recipients of a specific equity investment, claiming client confidentiality or breach of a host country’s laws: Germany’s Commerzbank, for instance, cites the country’s “Banking Secrecy Act” [see: Letter from Commerzbank, Frankfurt-am-Main to ACSTA, London, 16 January 2008]. HSBC bank argues that respect for “client confidentiality” renders it “unable to confirm whether specific companies are clients of HSBC or not.” The bank did this in 2005, following publication of a joint Nostromo Research-India Resource Center report on Vedanta Resources plc [“Ravages through India, Vedanta Resources plc Counter Report”, Nostromo Research and India Resource Center, London & San Francisco, September 2005]. HSBC’s then-advisor on corporate social responsibility (CSR, aka SRI or Socially Responsible Investment) had promised earlier to diligently read the report and get his employers responding to its allegations. No such response has yet been forthcoming.
Banks and fund managers use a variety of equity instruments – such as options, warrants and derivatives – which do not in themselves grant voting rights to determine a company’s transactions. By and large, the owners of ordinary (or Class A) shares do have such rights and therefore surely have an obligation to use them according to their own benchmarked “principles”. But, even if they do not possess voting rights, arguably the very fact that they have invested should make shareholders concerned about whatever the company gets up to.
Many investment institutions hold shares on behalf of clients, either through a “managed” fund, or by acting as a “nominee” (effectively as a stockbroker) (3). A quick glance through the database below shows that most major global banks offer this service to investors wishing to put their money where the mines are. Nominee accounts are particular favoured by HSBC and Credit Suisse, but many other banks follow the practice even while they may proclaim an “ethical” policy on behalf of their retail customers. The UK Coop Bank, which refuses to invest in companies with major involvement in coal production, may still offer such “exposure” through its unit trusts [Correspondence between author and Coop Bank ethical team, December-January 2008-2009, on file]. Adding to this lack of transparency, banks may also allow their nominee accounts to be administered by other fund providers - as did RAB Special Situations on behalf of Credit Suisse Client Nominees for its 2007 investment in Cambridge Mineral Resources plc [see Credit Suisse].
The nominee service is provided for external organisations and individuals by setting up a named investment account, with the result that the bank or fund “[does] not have the rights of shareholders and [is] not entitled to make approaches to a company about any of its planned operations.” This was offered as a defence by both UBS and CS-First Boston in late 2007, when tackled by various NGOs demanding the banks disinvest from London-listed GCM Resources, leaseholder of the Phulbari coal project in Bangladesh. A similar response came from HSBC in January 2008 when tackled by ACTSA (Action for Southern Africa) – once again over the UK bank’s investment in Vedanta Resources plc. [John Laidlaw, Senior Manager, Group Corporate Sustainability (sic), HSBC, London, to T Dykes, ACTSA, 8 January 2008].
Barclays Bank plc explains (rather, seeks to explain away) its failure to account for such investments being channelled into dubious companies, by arguing that: “[The bank] through our asset management business holds shares in thousands of companies around the world. The funds are invested according to client instructions and the majority are in index tracker funds (4) that do not distinguish between companies other than their being in a particular index.” Barclays goes on to proffer its own brand of “socially responsible investments” as a means by which clients can “omit certain industries” from their portfolios. [Christine Farnish, Director of Public Policy & Sustainability, Barclays, London, to Tony Dykes, ACSTA, 11 January 2008]
This is fairly common practice, but no less objectionable for that. Even setting aside the anomaly of running two potentially morally contradictory “books” under the same brand name, it is likely to confuse and mislead many who seek an “ethical” portfolio. One of Standard Life’s “Ethical” funds (as of November 2007) listed Xstrata plc among its top ten biggest investments – as did the same UK insurer’s Pension Ethical Fund. [see: http://uk.standardlife.com/content/saving/investing_ethically.html]. Yet Xstrata – has come under consistent attack from trade unionists, environmentalists and Indigenous Peoples Rights organisations in several countries, including Argentina, Australia, Canada, Colombia, the Philippines and South Africa. Moreover, as pointed out at the time by John Hilary of War on Want, there are purportedly ethical “fund of funds” which themselves invest in “stand-alone” funds of doubtful provenance; surely the former should share responsibility for what the former gets up to? [John Hilary, WoW, to author, 24 November 2007]
Thus, we confront some significant problems when it comes to ascertaining who is a shareholder, at any given moment, in a mining (or indeed any other controversial) company. Although the two main conventions on global accounting – US GAAP (General Agreement on Accounting Principles) and IFRS (International Financial Reporting Standards) – have much in common, they differ when it comes to publicly identifying the ownerships of equity in a given corporate enterprise. Moreover, there are national variations in GAAP, while some companies may adopt what they call “non-GAAP” methods of reporting.
We may consider it reasonable that all firms registered on a stock exchange should have to divulge information about their shareholders and changes in equity. However, such data is rarely published in the main body of Canadian company annual reports and accounts; it is contained in supplemental notes that are more difficult and time-consuming to find. Whether the expected convergence between IFRS and GAAP standards will overcome this significant lacuna remains to be seen. [See “Similarities and Differences: A comparison of IFRS and US GAAP”, published by PriceWaterhouseCoopers, October 2007: http://www.pwc.com]
Even if a company’s reports do not publish shareholder information, or the information is outdated, this may still be located from a stock exchange or perusal of industry journals (2) and via specialist investor services (5). Nonetheless, as testified to by the many weeks spent compiling this document, such data ought to be much easier to access, if not made electronically “live”. Transparency of this kind is burningly relevant, especially for registered charities and pension funds whose duty of care for client’s money extends to public employees, their own and other workers, and to society at large.
Limitations to this research – and challenges ahead
Setting out a comprehensive global table of funds linked to mining/mineral companies, would stretch to encyclopaedic length if, as well as logging specific deals, it were also to include all Chinese banks and mining companies (6), all project and debt financing (loans), bond and securities’ issues; and every “arrangement” made for companies to list on a stock exchange (IPO’s or Initial Public Offerings). Nonetheless, this paper does attempt a summary of such tools (see Part One: Main types of mining finance) – and provides many examples of how they are used.
Critical though it is to be familiar with these and other financial “vehicles” (such as those mentioned in the Glossary) many of them defy easy definition and considerably more investigation is needed into how they function. Welcome research in this direction has already been performed by Mining Watch Canada; by Netwerk Vlaanderen and BankTrack for their late 2007 “Bank Secrets” report (7); and by WISE (World Information Service on Energy) in its “Mined U” survey (see Sources, below). However, project and debt finance (though not bond issues) are usually announced only after the event. These faits accomplis therefore do not provide much for campaigners to bite upon – except in urging a funder not to repeat the error in future.
Initially it proved impossible within the limits of this research to include many small, so-called junior, mining enterprises - those mostly registered on Canadian, Australian stock exchanges, the LSE/London Stock Exchange’s AIM (Alternative Investment Market), and the new Johannesburg alternative exchange, AltX. Some such outfits are only at an initial stage of financing; they or their projects might be bought out by a fund or other mining company at any time. Thanks to the support provided by the Heinrich Boell Foundation these developments are nowbeing closely monitored and recorded.
Drawing lines between the money and the miners
Of late it has become increasingly difficult to distinguish between a “hands on” mining firm and an investor putting their money into the sector; primarily because they reckon this is where new profits are to be made (and little else).
In 1995, Canadian mining junior Bre-X contracted with the Indonesian regime for a gold deposit in East Kalimantan (Borneo) which it proceeded – with the assistance of compliant advisors and “gurus” – to vaunt as one of the world’s richest. Within two years, however, the lode was demonstrated to be virtually worthless. This criminal act shook Canada’s venture capital markets to the core, resulting in a few cosmetic changes to stock exchange regulations. (Indeed, the amalgamation of the Toronto Stock Exchange Group TSX and the Montreal Stock Exchange - essentially a derivatives market – might well lead to even less accountability of Canadian venture capital companies). In the wake of the Bre-X fiasco, some junior mining companies vanished from the scene; others switched with alacrity to launching penny stock “dot.com.” companies. A decade later, similar tactics have emerged, as new enterprises pledge their faith in bio fuels; or have ostensibly moved from banking into gold. Just how credible these ventures are, or how long they will last, is anyone’s guess. For example, Yellowcake PLC, registered on LSE’s AIM in September 2005 as the market price of uranium started soaring, in order to “offer investors a vehicle to invest in the market for quoted and unquoted uranium companies.” [Yellowcake PLC, Annual Report and Accounts 30 June 2007]. Within a year, however, Yellowcake was swaying on a wing and a prayer (or a speculative vein capped with a good measure of hype). (In Financial Year 2007, the company earned less than ex-Labour party leader Tony Blair could demand for a single bout of public speaking!) Other juniors claim to have a similar strategy of centring investment on a specific mineral whose fortunes appear to be rising- as does Coal International plc which is both a miner and an investor. (The company was targeted for takeover in mid-2008 by Cambrian Mining PLC (see below) as it planned to transform from an “investment holding company” into “an operating mining group” [MJ 6 June 2008]). In practice it is often difficult to distinguish the modus operandi of “holding” companies from those of “dedicated” miners. Beacon Hill Resources’ description of itself as a “holding company” is transparently self-serving; while Minmet Plc Group, in dubbing itself an “incubator” of minerals exploration and extraction opportunities, seems to leave most of us guessing as to what its intentions are.
These gambits should not be altogether dismissed. Some smaller companies are beneficiaries of fairly well-established miners, or may be profit-takers for larger, better-known financial institutions. Mineral Securities Limited is a creature of former down-under mining supremo Robert de Crespigny and is not to be sniffed at. (De Crespigny founded Australia’s Normandy mining company, was an advisor to the government of South Australia, and is also Chancellor of the University of Adelaide). Its aim is to become a “21st century mining house that owns and controls resource assets at all stages from exploration to production”. As such it is classified in this report as an investor. Anglo Pacific Group PLC enjoys a major investment from Rathbone Brothers PLC (which incidentally prides itself on its ethical policy) and its shareholders benefit from royalties on coal mined by BHP Billiton and Rio Tinto. City Natural Resources High Yield Trust PLC may be a little-known equity investment outfit whose direct shareholdings in a wide range of mining companies constitute little more than a foothold. However, more than half of City Natural Resources is owned by ten major asset managers: among them JP Morgan Fleming, UBS AG, Barings, and Jupiter with a 3.3% stake held by the county of West Yorkshire’s Pension Fund. A third horse of this ilk is Cambrian Mining PLC, in whose stable are to be found AXA SA, HSBC, the Bank of New York (BNY) Nominees and Credit Suisse. Then there are some much bigger companies whose acquisitions are ruthless and concerted enough to rank them as investors as well as miners. Toronto Stock Exchange-listed base metals group, Lundin Mining Corp, took over four European mines in 2006-7 and holds a quarter stake in Freeport McMoran’s vast copper-cobalt project in DR Congo. Lundin shelled-out around US$2.1 billion for its entry to what could be the largest deposit of its kind on earth and secured for itself a 300% rise in profits for the third quarter of 2007 alone [MJ 16 November 2007]. Although this massive project was delayed while the DR Congo government conducted a review of all mining contracts in 2008-2009, it now seems to be close to fruition [Financial Post, 11 March 2010]. Corporate interlocks may also operate in a slightly different direction. For instance, Canada’s Edco Capital Corp and Balinhard Capital Corp are both controlled by directors of Imperial Metals Corp which has four major gold properties in British Colombia and Nevada.
Campaigning for disinvestment
To disinvest or not?
Even where an equity holder in a company has strong doubts about the way in which that company operates, they may argue for “engagement”. Don’t let’s repudiate the company altogether (runs the argument): this will reduce – may even nullify - any influence we have in encouraging a change in practice for the better. The argument is not to be dismissed lightly. At the outset few Funds (including some “ethical” ones) do more than write letters to the chairperson of an offending company. While this may well result in meetings between the parties to discuss “concerns”, such “tete-a-tetes” risk simply being repeated over weeks, if not months. Meanwhile the root causes of the concerns fail to be meaningfully addressed.
True, some investors may stay the course - fighting for improved corporate behaviour and apparently achieving some concessions in return. But will they ever know whether, by selling all their stock in the first place – and thus morally disassociating from the unacceptable – they couldn’t have achieved their objectives earlier in the day? Of their very nature, many discussions between companies and their critics are bound by protocols of confidentiality (like the so-called Chatham House Rule), behind which corporate executives can hide. Precious few funders are as committed as Boston Common Asset Management (qv), which help file transparent shareholder resolutions at company business meetings. (Moreover, it is much easier to do this in the US than under company laws in other countries).
Many funds identified here hold comparatively small stakes in controversial companies. Some - such as Merrill Lynch’s Gold and General Account (now part of BlackRock (qv), or Best Asset Class’ Platinum Fund – take bets on the fortunes of a specific metal; in effect trading the price of metals’ commodities. Most others investments are above a cut-off point below which the proportion of the equity need not be declared. London’s Stock Exchange (LSE) fixes this at 3% (of total stock held in a given company). Both the SEC (US Securities and Exchange Commission) and the Australian Stock Exchange (ASX) set the bar at 5% - and Toronto’s Stock Exchange even higher, at 10%.
How useful is it, then, to lobby or work with minor investors, or big investors holding small stakes when (or so it seems) their shares grant them merely token voting power and therefore influence over a company’s policies and practices? (8). Even if they sold their entire stake in protest, what impact would it have? Surely the shares will be snapped up swiftly by someone else with fewer scruples – or a hedge fund benefiting from a momentary slide in the share price? In any case, there seem to be precious few examples of investors openly declaring that social or environmental abuses played any part in a specific disinvestment decision.
In reality it may be easier for a small investor to repudiate a company than in the case of far larger funds. Even if a big fund’s holding seems fairly insignificant, it will usually comprise part of a diversified investment portfolio in which extractives are given an allotted role as mandated by the fund’s advisors. These major financial institutions are probably not going to withdraw from the sector altogether, unless the earth moves (or tumbles around mining itself.) But junior investors, especially those which rely on derivative instruments and “play the market”, can switch with greater ease - from gold to bio fuels or into IT, for example. This isn’t to say that the likes of JP Morgan, HSBC or Credit Suisse, should not be lobbied if they are underwriting a manifestly disreputable company, or one performing nefarious deeds, whatever the extent of their holding. But, of course, such considerations do not need to enter the Trust manager’s mind when s/he considers the financial attractiveness of the stock on offer. Campaigners’ energies might, therefore, be better spent urging a lighter-weight shareholder to disinvest, especially if this triggers a “demonstration effect” for others. (This is what apparently happened in the case of Vedanta Resources plc in the first three months of this year – see below).
Nor is it true that all investors clasp their cards so close to the chest that we never know what impact our campaigning has had. Numis Securities, an investment fund believed to have purchased a significant part of Vedanta Resources on its London Stock Exchange IPO in 2003, openly admitted just one and a half years later that it no longer recommended purchasing a stake in this highly controversial company, because of issues raised (inter alia) in an NGO report. [“Ravages through India”, see supra].
Going one step better is the Financial Times’ FTSE for Good Index (FTSE4Good) which outlines the reason(s) for ejecting companies from its index, though without publishing details. It did this in 2006 to Canada’s Inco, (since taken over by Vale, formerly CVRD) after finding the second biggest global nickel producer guilty of human rights violations. [See: http://www.minesandcommunities.org/Action/press1090.htm]
Nonetheless, the FTSE4Good has, of late, taken a step backwards. While initially excluding all companies involved in uranium mining, it recently accepted Rio Tinto into its fold, arguing that the company is a relatively good performer in a sector which admittedly performs badly overall. [See: Proinsias O'Mahoney, “Profits and Principles”, The Guardian, 21 February 2008].
It is the huge Norwegian Government Pension Fund (aka Petroleum or Sovereign Wealth fund) that truly sets the current pace. This is the world’s second largest government pension fund (after Japan’s), worth an estimated US$300 billion. The Fund, advised by its unique Council on Ethics (ethical investment) over the past three years has sold all its equity in six mining companies (Freeport, DRD Gold, Vedanta, Rio Tinto, Barrick Gold and Norilsk – the last in November 2009) and published comprehensive grounds for doing so. If, in the wake of such indictments, a company’s share price falls significantly, it’s reasonable to surmise that other investors have followed suit. (A number of Norwegian funds are known to have followed the government’s lead on Vedanta as did a Belgian fund).
While this will hardly presage a stock market “bear run”, with substantial other investment quitting the scene, it is impossible to predict whether a knock-on effect will occur and - if so - how great it will be. For example, closely following Norway’s condemnation of Vedanta in late 2007, India’s Supreme Court declared the UK company to be persona non grata for the mining of a highly significant bauxite deposit in Orissa. The Supreme Court pointed to the Norwegian report as a compelling justification for rejecting Vedanta. (Unfortunately, in a display of grotesque inconsistency, the Court promptly invited a subsidiary of Vedanta to re-submit the application under its own aegis. [See: “'Vedanta' out, SC admits Sterlite plea” Times of India, 16 February 2008])
Shortly afterwards, India’s Ministry of Environment and Forests (MoEF) threw out Vedanta’s proposal to expand bauxite-aluminium operations in the state of Chhattisgarh. Although no direct connection can be drawn between the Supreme Court’s judgment and that of the MoEF, the ministry’s decision contrasted sharply with the obeisance to Vedanta that it had displayed just a few months earlier. [For details see: http://www.minesandcommunities.org/Action/press1807.htm]
Norway’s stake in Vedanta was a mere US$13 million, against the UK company’s then-market capitalisation of over US$ 7 billion. (The Norwegian government does not permit any holding above 5% in a single company). It is therefore not necessarily true that, because an investor possesses an insignificant equity stake, s/he may not be usefully lobbied, either to use their holding to demand improved corporate practice, or sell it should the targeted company fail to respond to just criticism. The Norwegian Council on Ethics always invites companies to make responses, giving them several weeks to present their counter-arguments before making a final judgment on whether to disinvest. (Neither Rio Tinto, nor Barrick Gold, deigned to respond to the Council’s indictments.)
The above discussion is predicated on the assumption that disinvestment is not merely a valid strategy of moral disapproval of inappropriate corporate behaviour; it actually compels desired changes in that behaviour. Or, in the final analysis, that it will bring about the downfall of a transparently “bad actor.”
Simon Chesterman, of the NYU School of Law / National University of Singapore, last year published a paper, discussing the work of Norway's Council on Ethics and seeking to focus "on the ambiguous legal and ethical meanings of ‘complicity’” and the uncertain impact that disinvestment has on behavior." He asks: "[S]hould the ad hoc efforts of investors to shape the human rights behavior of the companies in which they own shares themselves be regulated? That is, by what standard, if any, should the activist shareholder be judged?" According to Chesterman, the Fund's general guidelines "provide that the overall objective remains safeguarding the fund’s financial interests, but that the exercise of ownership rights 'shall mainly be based on the UN’s Global Compact and the OECD Guidelines for Corporate Governance and for Multinational Enterprises.'...[T]he focus of the Council’s work is on avoiding the risk of doing the wrong thing rather than ensuring a desirable course of action is followed. Moreover, the Council’s examination is focused — at least technically — on the potential for Norwegian complicity rather than the actual conduct of the company in question."
In practice, however, the Council's reports and recommendations blur this theoretical differential. How could they do otherwise, given that the rationale for investment in any corporate enterprise is based on what the company does, not on what it claims to be doing? The Council’s research draws on far more varied and heuristic tools than those employed by the Global Compact or the Organisation of Economic Cooperation and Development (OECD). And, as Chesterman himself says: "Though the Council on Ethics is not a court and its recommendations do not have the force of law, it [has] swiftly assumed a legal character. Through careful interpretation of its mandate, evaluation of evidence, and justification of decisions, the recommendations resemble judgments of a rudimentary court of first instance — rudimentary not because of the quality of the reasoning but because of the limited resources available to make independent findings of fact, and the absence of discipline imposed by the possibility of formal appeal. The decisions are ultimately administrative recommendations, yet the nature of the ethical judgments being made and the dispositions of the individuals making them has led to a kind of jurisprudence of ethics.”
Chesterman continues:
"Even though the issue of complicity raises difficult questions, the Committee considers, in principle, that owning shares or bonds in a company that can be expected to commit grossly unethical actions may be regarded as complicity in these actions. The reason for this is that such investments are directly intended to achieve returns from the company, that a permanent connection is thus established between the Petroleum Fund and the company, and that the question of whether or not to invest in a company is a matter of free choice."
However, Chesterman is far from convinced of the logic - or soundness - of these assumptions, "respectfully ask[ing] the Norwegian government and people to fully recognize the seriousness of what Norway is doing with divestment decisions like these. Norway is not just selling stock — it is publicly alleging profoundly bad ethical behavior by real people. These companies are not lifeless corporate shells. They represent millions of hard working employees, thousands of shareholders, managers and Directors, all now accused by Norway of actively participating in and supporting a highly unethical operation. The stain of an official accusation of bad ethics harms reputations and can have serious economic implications, not just to the company and big mutual funds, but to the pocketbooks of workers and small investors."
We may well be somewhat sceptical about Chesterman's assertions: they appear to negate the very act of disinvestment as a valid tool to secure changed behaviour - including improved benefits to workers. (Of course, selling stock in an associated company, or purchasing shares in another enterprise in order to pursue their own business "models", have been essential ingredients of the raison d'etre of corporate bodies themselves - and usually without regard to the vulnerability of employees.)
More challenging, and deserving of response, is Chesterman's conclusion that:
"The appearance of regulation may, in some circumstances, be worse than no regulation at all. The turn to ethics as a means of improving behavior of multinational corporations offers an opportunity but also an opportunity cost: ethics can be a means of generating legal norms, through changing the reference points of the market and providing a language for the articulation of rights; yet they can also be a substitute for generating those norms."
"The Norwegian Council on Ethics demonstrates both tendencies. The tendency to conceive its work in quasi-legal terms, justifying disinvestment decisions by reference to complicity in wrongs, suggests where its work may lead — even as those terms perhaps overstate how much has already been achieved. At the same time, however, the artifice of a trial in which a company’s conduct is examined and judged without serious consequences may create the illusion of accountability and thus reduce the demand for actual change.”
Nonetheless, despite these strictures, Chesterman welcomes the prospect of the Council’s modus operandi setting a global precedent:
"These tensions will, eventually, need to be resolved. How they are resolved will depend on whether the ethical precepts on which the Council bases its recommendations are dismissed as Scandinavian self-righteousness, in which case their publicity and wider significance are suspect, or as the precursor to a wider adoption of normative constraints on corporate entities operating in jurisdictions without the capacity to control their behavior. In the latter case, the Council’s work may serve as this new regime’s foundational jurisprudence." [Simon Chesterman, "The Turn to Ethics: Disinvestment from Multinational Corporations for Human Rights Violations – The Case of Norway’s Sovereign Wealth Fund", Global Administrative Law Series, IILJ Working Paper 2008/2]
Pensioned off
Finally, we should acknowledge that, while a raft of apparently unaccountable and privately-administered hedge funds (as well as Sovereign Wealth/state pension funds) have swept into the commodities’ market place during recent years; they are by no means the only ones with influence. In fact, the most diversified and significant direct profit-taker from the sector is the private commodities’ trader, Glencore, based in Switzerland, which has been operating for some years (and before that, as the notorious Marc Rich company) and is the largest single shareholder in Xstrata Plc.
Governments (both central and local), along with private Pension Funds, also markedly increased their share purchases in the mining and minerals industry during 2007-2008 Nor should it be forgotten that they invest in trusts and other funds which may also have a high dependency on mining-related stocks. Whether this is advisable in the short-to-medium term is a moot point. Already, in mid-2006, one Financial Times correspondent had pointedly warned that: “[T]he fact remains that a frightening amount of pension and savings money is forced to chase companies exposed to the riskiest parts of the global economy. A true bursting of the commodities bubble would probably only follow a serious slowdown in China…but in the meantime the UK is once again tied to the fortunes of mining.” [Dan Roberts, “A British economy built on mining brings danger”, FT 3-4 May 2006].
At the time this caveat was lost on some Pension Fund managers which (for example) increased their investment in the palladium market during 2007 [MJ 16 November 2007]. In the wake of the 2008 commodities’ market disintegration, Pension Funds began taking new stock of such investments [Russ Mould, Shares magazine, 16 February 2009, op cit]. However, to date little work has been done even to identify such holdings (some are noted below); while few pension funds actively lobby beneficiary companies to adopt an ethical stance, even where they are owned by public service employees. This is not to say that pension funds are oblivious to criticisms of corporate enterprises, but they tend to “follow the trend” rather than forge it. One recent example of this is the decision, taken by BP Pension Scheme (qv) in early 2010, to sell some of its shares in Vedanta Resources plc, citing “concerns about the way the company operates.” The Scheme is one of Britain’s biggest pension funds: it could have signalled these concerns unequivocally if it had sold its entire holding in this mining outfit. The decision appears to have been taken only when four other investors in Vedanta (Church of England, Joseph Rowntree, Millfield House and Marlborough Ethical) also decided to disinvest. In contrast, these offloaded all their shares, without retaining a residual stake by which they could exercise some further influence over the miscreant company.
Meanwhile, few other government pension funds have followed Norway’s 4-year long initiative at welding corporate social and environmental responsibility to individual comany performance (see above). New York City Employees Retirement System is one exception. But, just over the border, the Canadian Pension Plan Investment Board (qv) displays few socio-environmental scruples.
Thus there remains a major challenge to those of us who are gradually becoming aware of the massive negative impacts of extractive industry on thousands of communities and numerous workers across the globe. Is it not manifestly unfair that millions of workers in “developed” or “advancing” economies should continue to benefit from the naked exploitation of millions of their even more exploited counterparts elsewhere?
Inviting your collaboration
If you find the following database helpful, please feel free to contribute further data, including corrections and updates, in order to increase its usefulness.
More detailed allegations against the mining and mineral companies referenced below can be found on the Mines and Communities (MAC) website:
http://www.minesandcommunities.org/company
Go to the “MONEY” page of the same site, to view critical information (regularly updated) on some of the funders listed in this paper’s data base:
http://www.minesandcommunities.org/list.php?f=11
You are warmly welcomed to submit evidence of further violations, or indicate where you think this paper might have got it wrong. Kindly email: info@minesandcommunities.org
