Do mining companies adequately value corporate social responsibility?

This week the Prospectors & Developers Association of Canada is hosting its annual gathering at the Toronto Metro Convention Centre featuring over 1,000 exhibitors, 25,000 guests and prominent political figures such as the federal Minister of Natural Resources Greg Rickford. The industry is generally optimistic after a difficult year. According to a recent study by the EY Global Mining & Metals Center, the mining sector was battered and bruised in 2014, but is expecting a strong performance in 2015. One promising sign of recovery is the recent merger between Tahoe Resources Inc. and Rio Alto Mining Ltd. for approximately $1.35-billion. According to Bloomberg, this will be the largest deal in the gold-mining industry in the past ten months. The merger will appeal to institutional investors such as the Canadian Pension Plan Investment Board, which already holds a $49-million stake in Tahoe. The raw numbers suggest that Rio Alto struck a profitable deal for its shareholders who stand to enjoy a 22% premium on their stock.  However, the non-financial criteria may cause concern for those interested in corporate social responsibility.

Tahoe’s prime asset is the Escobal mine in Guatemala, which has experienced turmoil and conflict prior to even beginning production in January. A 2013 shooting of protesters has led to criminal charges in Guatemala against the company’s one-time local security manager and a civil lawsuit against Tahoe in Canadian court. According to claims made by Tahoe through various public reports, they engaged in local development initiatives to promote the company and attempted to create constructive dialogue with relevant stakeholders. One could argue that the primary concern is not Tahoe’s actions as much as the risks posed by operating in Guatemala, a state that provides minimal regulation of the extractive sector and has an underdeveloped legal system. These conditions make operating in the country problematic for a company that wants to maximum shareholder return and at the same time respect human rights and environmental protection. For instance, another Canadian mining company, HudBay, is subject to lawsuits filed in Canada alleging human rights abuses near a Guatemalan nickel plant that HudBay owned from 2008 to 2011. Eventually the mine was sold at a significant loss to the company, however the Canadian lawsuits are proceeding to trial in Ontario.

The United Nations and the Canadian government have issued calls for companies to take these issues more seriously. For instance, the Government of Canada recently enhanced the Corporate Social Responsibility Strategy for the Canadian international extractive sector that was initially developed in 2009. The government introduced the use of economic diplomacy to encourage mining companies to align with industry best practices such as the United Nations Guiding Principles on Business and Human Rights developed primarily by Harvard Professor John Ruggie.

The question raised in this article is not whether mining companies should avoid investing in countries with weak governance systems, rather are they accurately valuing and accounting for the risks of operating in these countries, especially when the long-term prognosis can be so costly. For instance, HudBay lost approximately $270-million in selling its Guatemalan mine and is still facing a lawsuit that is proceeding to trial. Given these risks, there is a plausible argument that Rio Alto is getting the raw end of this deal with a 22% premium for shareholders. In a merger that occurred earlier this year, Tahoe’s principle shareholder—and one of the worlds largest gold companies—Goldcorp Inc. acquired another Canadian company, Probe Mines Ltd. with a premium for shareholders of almost 50%. A myriad of factors influences price in these mergers, including the risks attributed to major projects. Certainly, both sides addressed the various risks before the Boards of both Tahoe and Rio Alto assented to the deal. However, the history of disputes in Guatemala should be given serious attention by Rio Alto shareholders who will vote on the deal before the proposed merger can be finalized in the coming months.

Author: Jeffrey Bone is a business law lecturer at the University of Alberta, School of Business focusing on international mining law and corporate social responsibility.

Citation for study above: Report of the EY Global Mining & Metals Center:$FILE/EY-ma-and-capital-raising-in-mining-and-metals.pdf