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In light of the tailings pond breach at Imperial Metals’ Mount Polley mine and the toxic leak at Grupo Mexico’s Buenavista, it’s certainly a good time for investors to revisit the importance of social license.
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The value of a mine is generally determined by the amount of resources available, the cost of extraction and the price of the commodity being mined. Yet there is now another factor in valuing a mine: whether it has community support, or social license.
A recent tailings pond breach at Imperial Metals’ (TSX:III) Mount Polley mine in British Columbia has gotten plenty of news coverage, as has a toxic leak at Grupo Mexico’s (OTCMKTS:GMBXF) Buenavista copper mine, with that leak turning river waters orange. To be sure, those disasters give weight to community concerns surrounding mining projects and illustrate part of why it is so important for miners to secure approval from multiple stakeholders.
The fourth factor
“Today, I can show you two mines identical on these three variables that differ in their valuation by an order of magnitude,” Witold Henisz, a management professor at Wharton School at University of Pennsylvania, quoted a mine executive as saying in a podcast related to his research on the subject. “Why? Because one has local support and the other doesn’t.”
Social license, or community buy in, is valuable not only in an ethical sense or for publicity — it also has a very real and significant financial impact on a mine’s value in many cases today.
“The value of the relationship with politicians and community members is worth twice as much as the value of the gold that the 26 mines (studied) ostensibly control,” Henisz said of his research, which looks at the role that stakeholder engagement played in the profits for 26 mining projects.
Understanding social license
Also known also as “social license to operate,” or SLO, social license refers to the level of approval that local stakeholders give to mining companies and their projects, according to Mining Facts. The concept stems from corporate social responsibility initiatives and theories. Many mining companies now believe social license is simply a necessary part of doing business, and that the expenses required in order to secure social license are worth the return on investment.
As Mining Facts notes, the term social license to operate was created in the late 1990s by Canadian mining executive Jim Cooney, meaning that both the phrase and the concept of social license are still fairly new.
Furthermore, it is important to note that social license is not formal in any way. It can’t be found in an agreement or document — only in the sentiment of a community surrounding a mining company and its projects. Stakeholders tend to “grant” social license when they believe a mining company shares their values.
As such, social license can change over time as community values and feelings about mining operations shift. New information may become available; for example, a mining company may fail to fulfill its promises, may cause unexpected environmental damage or may see any number of issues, and the status of its existing social license might change. Furthermore, whether or not a local community receives benefits it sees as valuable from a mining project can also impact social license.
The growing importance of social license
There are of course different roads to obtaining social license, but in most cases, the first step is the same: miners must begin by developing good relationships with stakeholders. The World Bank provides recommendations on this topic, stating, for example, that governments, mining companies and local communities should all engage in negotiations together right from the beginning of mining projects.
This year, multinational consulting firm Ernst & Young named social license the fourth-biggest business risk in the mining sector, and the existence of guidelines for social license from the World Bank support that view. That is not a phenomenon restricted to North America or even to the western world, either. Local communities in China are voicing their concerns about many kinds of industrial developments, according to Carolyn Egri, a professor at the Simon Fraser University’s Beedie School of Business. As wealth, education and media access increase in a given area, social license becomes more important to those living there, according to The Vancouver Sun.
Failure to gain social license can mean regulatory delays, community protests and permitting issues, all of which can garner hefty costs. Furthermore, investors and potential investors may decide to pull out of a project if they perceive social license to be at risk.
According to the Sun, one way that some companies pursue social license is by actively building relationships with local workers. A mine in Africa could invest a few million dollars into training its local workforce, Ernst & Young calculated, and receive as much as four or five times that initial investment over the course of the mine’s life span.
In other words, that strategy is not only a good investment, but also a gesture that shows the mining project can benefit the local community in a concrete way.
Supporting that idea, the Prospectors and Developers Association of Canada has warned mining companies that providing material goods is not necessarily the best way to gain social license. Instead, mining companies should talk with stakeholders about what they need, what they want and what amount of risk they are willing to tolerate. In many cases, something like job training may be more in line with the real needs of the community than material goods.
“Social license isn’t something you can agree to give,” Michelle Pockey, a partner with legal firm Fasken Martineau, told the Sun. “It’s something that happens or doesn’t happen. Social license is the end result of steps that companies take to address the expectations that other affected parties have of them. Whether those expectations are reasonable or unreasonable is another matter.”
Companies would be wise to pay attention to social license for all of their projects, and may need to refine their strategy to gain approval in different communities. Failure to do so can lead to huge financial risks for miners, and diligent investors would do well to ensure that the companies they take an interest in are not taking that extra risk.
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