Energy Resource Governance Initiative: Mineral Sector ... ERGI PDF Report_DGB_AN.pdf · Mapping and...

Energy Resource Governance Initiative: Mineral Sector Governance for a Responsible Energy Transformation

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Table of Contents

Executive Summary ................................................................................................................. 4

Minerals for Clean Technologies ............................................................................................ 4

A Rapidly Evolving Mining Sector ........................................................................................... 4

Mapping and Leveraging a Resource Endowment ................................................................. 5

People, Planet, and Profit: Stewardship from Exploration to Reclamation ............................. 6

Introduction .............................................................................................................................. 8

Resource Management ............................................................................................................ 9

Featured Tool: Understanding and Promoting Your Resource Endowment ............................ 9

Project Development ..............................................................................................................14

Featured Tool: Mineral Licensing and Leasing ......................................................................15

Production ...............................................................................................................................20

Featured Tool: Mineral Asset Classification and An Introduction to Royalties ........................20

Stewardship ............................................................................................................................25

Featured Tool: Social License to Operate ..............................................................................25

Conclusion ..............................................................................................................................29

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Acronyms

3BL Triple Bottom Line

BEV Battery Electric Vehicle

CIM Canadian Institute of Mining, Metallurgy, and Petroleum

CRIRSCO Committee for Mineral Reserves International Reporting Standards

CSR Corporate Social Responsibility

DMP Data Management Plan

EOI Expression of Interest

ERGI Energy Resource Governance Initiative

GDP Gross Domestic Product

GSC Geological Survey of Canada

INGEMMET Instituto Geológico Minero y Metalúrgico

IRR Internal Rate of Return

JORC Joint Ore Reserves Committee

MMEWR Ministry of Minerals, Energy, and Water Resources

NPV Net Profit Value

NSR Net Smelter Returns

RFP Request for Proposal

ROI Return on Investment

SAMREC South African Code for the Reporting of Exploration Results, Mineral Resources, and Mineral Reserves

SME Society for Mining, Metallurgy, and Exploration, Inc.

UNFC United Nations Framework Classification

USGS United States Geological Survey

VBC Value Beyond Compliance

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Tables Table 1: Survey Functions and Impacts to Mining .....................................................................10

Table 2: Activities and Impacts of Geological Recordkeeping ...................................................11

Table 3: Survey Priorities and Activities in Mining .....................................................................13

Table 4: Survey Stages of Maturity ...........................................................................................14

Table 5: Impact of Ownership Structure on Key Roles ..............................................................16

Table 6: Requirements for Competitive Tendering ....................................................................18

Table 7: Evaluation Committee, Process, and Bidder Selection ................................................20

Table 8: Mineral Asset Classification Terminology ....................................................................21

Table 9: Royalty and Tax Structure Types ................................................................................23

Table 10: Role of Stakeholders in Social Impact Strategy ........................................................28

Table 11: Shared Value Types for Monitoring Social Impact .....................................................29

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Executive Summary Minerals for the Energy Transformation Clean energy solutions are a major part of the broader energy ecosystem, contributing to an increasingly large amount of new power production projects. In many places across the globe, solar panels and wind are the most cost-effective sources of power. The point at which battery electric vehicles (BEVs) will hit cost parity with conventional internal combustion engine vehicles is rapidly approaching. Supported by advances in lithium ion batteries, utility-scale battery storage is increasingly replacing gas-fired peaking plants. While civil society and think tanks are confronting issues like renewable intermittency and project financing, to date there has been limited attention given to the minerals, metals, and critical supply chains that will provide the foundation for this transitioning world. There is growing recognition, however, that increased deployment of clean technologies comes with an increase in demand for inputs of crucial energy resource minerals such as lithium, cobalt, nickel, and graphite.

The current era of energy transformation is propelled by plummeting costs, driven by large scale production increases and rapidly evolving technology. The new energy landscape is changing so quickly that these trends often outpace policy. Many energy resource minerals are concentrated in countries without the governance structures to fully leverage their resource endowment for their own economic growth and benefit of their people. The rapid onset of energy technologies has strained mineral supply chains, in some cases, enabling artisanal mining in poor working conditions or promoting child labor. However, sound governance and management promotes sustainable mining practices and economic development opportunities.

The governments of Australia, Botswana, Canada, Peru, and the United States are proud to founded the Energy Resource Governance Initiative (ERGI) with the goal of obtaining and disseminating best practices across the international mining sector. Though their mining sectors have evolved in dramatically different ways, the five Founding Members of ERGI all have robust mining economies that reflect global best practices. As a way of disseminating these best practices, the Founding Partner countries have developed the ERGI Toolkit to share and reinforce best practices for sustainable mining development, from the discovery of mineral resources to the closure and reclamation of mines. Underlying these tools are the concepts of community and environmental stewardship, and how to encourage mining entities to seek Value Beyond Compliance. The goal of this Toolkit is to guide the user through capacity building exercises to not only understand best practices, but how these best practices apply to their country’s specific context. Every mining sector and the policy decisions that can best support it are different, and as such the practices documented here are not meant to be prescriptive, but instead offer a view of how different mining leaders have succeeded in the past. This report serves as a companion to the online Toolkit (available at www.ERGI.tools).

Rapidly Evolving Mining Sectors The Founding Members’ mining sectors have evolved in dramatically different ways, as a result of reserve discoveries, governance choices, colonialization, and globalization. For example, while Peru has developed its mineral endowment since pre-colonial times, Botswana only experienced significant mining growth after its independence in 1966, beginning slowly with copper/nickel projects and expanding rapidly after the discovery of rich diamond resources. Australia, Canada,

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and the United States all had small mining industries until major gold rushes during the 1800s, which created the impetus to establish national and subnational mining policies. Finally, the precious metals of today may not look like those of the 1800s. Major discoveries of cobalt, platinum group metals, or manganese, all critical for the energy transformation, are today’s modern gold rushes.

While the discovery of precious metals, base metals, and other commodities were the catalyst for rapid mining expansion in the founding ERGI countries, their modern-day mineral portfolios are distinct. Peru is the world’s second largest copper producer, while Canada produces some 60 minerals and metals, and is ranked number one in global production of potash. As the energy transformation has accelerated in recent years, Australia has emerged as a leader in hard rock lithium mining. While many countries created their mining industries around precious metals, maintaining a sustainable mining industry requires diversification. Botswana has diversified its mining industry to include more copper/nickel projects and has reinvested diamond royalties in non-mining industries, while other partner countries have leveraged their early success to develop other mineral sectors or export technologies.

Mapping and Leveraging a Country’s Resource Endowment As a country begins to recognize its mineral potential, there is a need to catalogue and study the resources within its borders. This is accomplished through a national geological survey, which facilitates the gathering, analysis, and maintenance of data and records. In many countries, a geological survey predates major mining industry. For example, Botswana and Australia both established surveys to map and understand water resources before expanding them to include mineral information. In Peru, the Comisión Central de Ingenieros (Central Commission of Engineers) was created in 1852 and represents the first iteration of Peru’s modern day INGEMMET (Instituto Geológico Minero y Metalúrgico). Though not under the original commission, the first major resource mapping in Peru was of guano and saltpeter, both used in the production of gunpowder or as fertilizers. The United States Geological Survey (USGS) was established in 1879 to map resources and land obtained through major gains as a result of the Louisiana Purchase and territorial changes. However, today, it manages natural hazard programs, topographic mapping, and the Landsat program. The Geological Survey of Canada is the country’s oldest scientific agency and was established with the express purpose of supporting a strong Canadian mineral industry through exploration. So while each partner country’s geological survey evolved and adapted in different ways over the decades, they all have supported their respective mining sectors through information and analytics. Understanding domestic resources provides governments the best foundation to benefit from them.

After identifying mineral resources through a survey, the mechanism used by the State to convey mineral rights through licenses or leases can impact both sustainability and the long-term value of the resource to its population. There are three main modes to offer rights: competitive tender, open mineral access, and direct negotiation. Generally, successful mining economies will employ an open mineral access strategy, competitive tender, or a combination of the two. Botswana is a unique case due to the government’s longstanding relationship with De Beers. This relationship and the formation of Debswana, a 50-50 joint venture between Botswana and De Beers, has shaped Botswana’s policy framework surrounding broader mineral tenders. At the national level, Canada, Australia, and United States generally operate through open mineral access, though this can vary at a subnational level. The origins of these federal policies originate in the 1800s, with

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Canada’s “free entry” program and the United States’ General Mining Law of 1872. Free entry allowed for the staking of federal land for mineral development, while the General Mining Law incentivized prospecting on federal lands by providing the locator of mineral deposits with unpatented mining claims. In Australia, exploration permits and mineral leases are distributed at the subnational level. Peru uses a combination of the two systems, recently awarding a private company the Michiquillay mining project after a competitive tender. A third common conveyance mechanism, direct negotiation, is used sparingly because of a lack of transparency and unsustainable outcomes.

People, Planet, and Profit: Stewardship from Exploration to Reclamation From exploration to mine closure, every aspect of a mining project should be underpinned by the notion of stewardship. Stewardship manifests in different ways throughout a project and, when successful, strives to address mining’s impact on the environment and surrounding communities. Each of the ERGI Founding Partners employs a robust environmental regulatory framework, and participants in the sector often provide Value Beyond Compliance. Canada is an excellent example. As mining companies have innovated new technologies to meet and often surpass environmental requirements, such technology is exported for international mining projects. Canada’s Green Mining Innovation Initiative has also promoted end-of-life management, resulting in abandoned mines being used for waste disposal, and covering mine tailings sites with pulp and paper mill waste to convert them into fields for biofuel crops.

A critical aspect of stewardship is community engagement, including with indigenous peoples. A common and effective way of supporting communities is by directing mining royalties back to the local people who surround the project. Peru has a robust and effective mechanism for this, through what is known as the First Law of Canon (Law 27560), which distributes 50 percent of mining-related corporate income tax and royalties to the subnational governments based on mine production. In some situations, these funds may be transferred to local schools or universities. The Government of Botswana has used mineral revenues for the development of non-mineral projects and infrastructure (roads, schools, and water supplies), and to fund initiatives promoting literacy and inclusion. Botswana also uses mineral revenues to diversify its economy, including through its Accelerated Rural Development Programme and the Arable Lands Development Programme. Under the African Growth and Opportunity Act, a trade program between the United States and Africa, Botswana has invested heavily in textile manufacturing, primarily around the Selebi Phikwe mine site. Botswana also uses the “Principle of Sustainable Budgeting” to quantify and plan its economy outside of the mineral space and to assess and ensure non-mining autonomy. This generated the concept of a Sustainable Budget Index (SBI), defined as the ratio of non-education, non-health recurrent spending to non-mining revenue.

In Australia’s Northern Territory, over 80 percent of mineral value is extracted from Aboriginal-owned land. Negotiations for these projects achieve landowner consent through land councils, and Aboriginal landowners may fully disagree to mining or exploratory activity under the Land Rights Act. In Canada, mining activities occur in close proximity to Indigenous communities and are a major employer of Indigenous Peoples. Meaningful engagement between industry and Indigenous communities is key to building effective and transparent relationships. Mining companies and Indigenous communities are increasingly negotiating progressive agreements,

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such as impact and benefit agreements, that can include provisions on economic and business opportunities, training, and mentorship, environmental and cultural protections, and other areas. Today, there are more than 420 active exploration and post-exploration stage agreements signed between mining and exploration companies and Indigenous communities and governments.

Minerals play an increasingly important role in the world’s energy security. It is the Founding Partners’ hope that through this Toolkit, a foundational roadmap to extracting and processing these minerals responsibly can be developed. ERGI is designed to be an enduring initiative, and this product is intended to catalyze a broader discussion. In addition, ERGI Founding Partners will continue constructively shaping the paradigm around energy mineral mining into the future.

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Introduction The ERGI Toolkit is an online collection of interactive tools across mining governance disciplines that helps the user build capacity in industry-leading practice by highlighting real-world case studies and providing step-by-step guides to the strategies, policies and institutional skills that lead to a transparent, well-governed mining sector. Users can explore decision trade-offs across the mining life cycle, and see how the choices made affect investment, state revenues, infrastructure, the environment, job creation, and local/indigenous communities.

Through this broad lens, the ERGI Toolkit seeks to engage resource-rich States on responsible energy minerals governance and support resilient supply chains in an effort to lay the necessary groundwork to responsibly and sustainably meet the expected demand for energy technologies. The toolkit educates users on effective industry governance by taking them on a journey through the mining life cycle. By building knowledge in effective resource management, project development, production, and stewardship, users will gain an understanding of key decision points when establishing sector governance Users can then champion the adoption of leading practices within their respective States.

In an effort to maximize the accessibility of the subject matter, the Toolkit organizes the tools into four overarching governance disciplines. Three of these disciplines relate to phases of mining industry development in which public and private sector activities overlap; they include Resource Management, Project Development, and Production. The final discipline, Stewardship, involves a set of governance activities that cut across life cycle phases and emphasize a mine operation’s delivery of social benefits to its host State’s citizens. Each utilizes a step-by-step guide and interactive modules designed to create an immersive experience and guide the user through learning objectives that demonstrate the constraints, tradeoffs, and value associated with leading governance practices recognized by the ERGI Founding Partners.

As of the website’s launch on March 1, 2020, the toolkit will feature four tools—one associated with each of the above disciplines. Resource Management will feature a tool titled “Understanding and Promoting Your Resource Endowment,” Project Development will feature a tool titled “Awarding Mineral Licenses and Leases,” Production will feature a tool titled “Mineral Asset Classification and Introduction to Royalties,” and Stewardship will feature a tool titled “Social License to Operate.” These tools represent the Founding Partners’ initial consensus of priorities, and this companion report provides a summary of the content covered in each. Building from this foundation, the ERGI Founding Partners will collaborate with public and private sector counterparts to build out the Toolkit with a demand-driven, inclusive, and compelling range of tools and case studies. The Toolkit will expand to provide real-world examples and leading practices across the full spectrum of mineral governance disciplines, while remaining a living resource that can adapt as new ideas emerge and additional needs are identified.

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Resource Management States maximize their mineral wealth by providing high quality, actionable mineral data to potential investors. The governance activities within this discipline provide the institutional and policy architecture through which a government collects, analyzes, and shares this information. The topics envisioned under this discipline include the basic mission and features of national geological surveys (hereinafter, “Surveys”) and the rules associated with the responsible stewardship, archival, and disposal of mineral data. a featured tool of Resource Management, titled “Understanding and Promoting Your Resource Endowment,” covers a Survey’s core functions and how such organizations can help to define, develop, and defend a State’s natural resource endowment. What follows is a summary of that tool’s content—please access the online tool for a more immersive and in-depth learning experience.

Featured Tool: Understanding and Promoting Your Resource Endowment Historically, States have established Surveys to understand their natural resource potential and to monitor hazards, as was the case in Botswana and Australia. Over time, Surveys naturally adopted functions such as mapping resource endowments and mining reserves, to provide information for and promote mining sector investment. This tool accomplishes the following objectives:

• Identifies the mission, functions, and basic activities of a National Geological Survey;

• Determines what activities help a Survey to support investment in the mining sector;

• Defines critical data elements that enable Surveys to support mining investment and operations; and

• Identifies the key institutional and structural initiatives that enable Survey success.

Defining a National Geological Survey A National Geological Survey is a public institution that researches and produces information related to the geologic, geographic, and hydrologic underpinnings of available subsurface resources, natural hazards, and climate science in order to advance a State’s economic prosperity and disaster preparedness.

Functions of a Successful Survey and Impacts to Mining Surveys perform a wide variety of geological research, among other activities; however, there are six core functions that have a particularly pronounced impact on mining investment decision-making. These help to accelerate investment in all stages of the mining life cycle—from resource management through project development to production. Each function described in Table 1 plays a role in influencing mining industry decisions.

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Table 1: Survey Functions and Impacts to Mining

Measuring and Communicating Your Resource Potential A Survey’s geological mapping and assessment function is fundamental to supporting investment in the mining sector by helping to promote prospecting and exploration activities. The activities underpinning this function result in key information regarding a State’s geological landscape and its natural resource endowment.

• Establishing Baseline Geological Information – Baseline geological information includes results from systematic surface and subsurface geologic mapping and surveying, identifying primary geologic units, and information on regional geologic basins and terrains including those that have mineral and hydrocarbon potential.

• Conducting Natural Resource Assessments – Natural resource assessments involve evaluating the resource and economic potential of pre-, current and post-mining operations and promoting sustainable development. Assessments may also be conducted to meet the data requirements needed for mining policymakers and regulatory bodies to oversee mining operations.

Geological Survey

Functions Description Impact

Geological Mapping and Assessment

Use mapping, research techniques, and hazard and resource assessments to understand the State’s geological potential

Provides a geological baseline with which public institutions and private investors can express interest in conducting mining activities

Publishing Research

Publish authoritative reports and maps, including results from resource and hazards assessments and other earth science research

Educates investors and citizens on the scope and potential of their State’s mineral endowment

Data Management

Maintain national databases of hydrological, geological, and remote sensing datasets

Enables public and private usage of validated data to determine risks and economic feasibility of mining investment

Government Advisory

Support other agencies and ministries within the government through targeted research, coordinated planning, and education campaigns

Establishes interagency cooperation and oversight of geological research, publications, and mining project development and production

Geophysical Exploration

Explore natural resource potential and assist with resource extraction to advance economic development

Implements mineral exploration throughout the mining life cycle to promote continuous investment and resource discovery

Geological Recordkeeping

Record information and store geologic materials acquired from independently operated mines and wells, surveys, and field work

Advances research, extraction techniques, and informs investors of sustainable mineral potential in future mining operations

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• Performing Mineral Resource Assessments – Mineral resource assessments identify specific mineral prospects and are used as tools to help quantify the potential of deposits such as copper and rare-earth elements. The mining industry, land management agencies, and the public may use mineral resource information in order to evaluate the potential of future resource development.

Partnering with Industry to Achieve the Survey Mission In performing its geological recordkeeping function, Surveys often draw on information submitted by mine operators, who sometimes provide this data pursuant to obligations in the mineral rights they acquire. To optimize the use of this information, Surveys and mine operations tend to overlap within the geological recordkeeping function, as described below.

Table 2: Activities and Impacts of Geological Recordkeeping

Activities Mining Industry Impact

Geoinformatics Surveys utilize geoinformatics to record mine output data and create predictive models for future use

Natural Hazard Assessments

Mine operators assess and provide information that can help a Survey measure risks of natural hazards (e.g., earthquakes), then provide forecasts and develop early warning capabilities to prevent loss of life and property at a mine site

Engineering Geology

Used by miners in collaboration with Survey geologists, mineral assessments and analyses can inform mining engineers of source rock composition and stability for future mine construction

Mining Geophysics

Performed by miners or geophysical crews, these activities include seismic tomography and boreholes, airborne magnetics, electro-magnetic studies, radiometric, hyperspectral, and lidar to measure the size and location of deposits

Data Management Data management defines how, and in what format, data is created, collected, stored, and shared1. For a Survey, data management typically involves the collection, storage, and interpretation of subsurface data and production data. Appropriate definition and supervision of these practices can help to reduce costs for the government and for potential investors. To promote good data management, a Survey often creates a data management plan (DMP) that covers, at a minimum, the following areas:

• Data Ownership and Stewardship – The implementation of standardized workflows, including procedures for communicating, licensing, and personnel’s access to, and management of, data throughout its life cycle.

• Data Taxonomy – Defines organization-wide standards including national and international policies, to sort and organize data.

• Data Completeness and Accuracy – Ensures the usefulness of data with the establishment of standardized data quality rules governing data completeness and accuracy, such as reporting requirements.

1 https://www.usgs.gov/products/data-and-tools/data-management/data-management-plans

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• Data Archival and Disposal – Addresses the integrated data environment, which encompasses the physical and/or digital locations for data storage, usage, and disposal.

Survey Structure and Funding A leading practice followed by most major mining economies is to establish a Survey as either an independent agency or ministry within the overall governmental structure, or to vest a Survey’s functions in a bureau or sub-entity within a larger agency or ministry. Examples of larger agencies within which a Survey’s functions may fall include the Ministry of Minerals, Energy, and Water Resources (MMEWR) in Botswana, or the United States Department of the Interior for the U.S. Geological Survey (USGS).

Once established, a Survey plays three vital social functions:

1. It is a Public Resource – In the case of Canada, the Geological Survey of Canada (GSC) sits within the Earth Sciences Sector of Natural Resources and provides feedback to the public and to private investors on mineral data and resource potential.

2. It is a Government Advisor – A Survey advises on economic and environmental issues or needs of the public and/or private entities using geological expertise in areas such as mineral data and information.

3. It Advances Education – Surveys frequently work in conjunction with public university geoscience departments to advance research, and may award grants, scholarships, and fellowships to conduct research or aid Survey activities.

Strategic Planning and Funding As it grows from a nascent to a mature organization, a Survey must prioritize its activities through strategic planning and acquire funding that corresponds to those priorities. A strategic plan allows a Survey to detail near, medium, and long-term goals, and the priority activities aimed at achieving each. It also lays out key indicators for measuring success. To finance these priorities, a Survey typically receives primary funding through government appropriations of tax revenue. This can be supplemented by fees collected and sustained through bespoke services that can include providing maps or assessments for third parties.

Survey Priorities Survey activities—particularly those that support the Geological Mapping and Assessments function that is key to the mining sector—vary in terms of their ability to influence mining investment, and effort needed to implement them. Table 3 describes Survey activities that aid in mining life cycle development. Visit the online Tool to see an interactive visualization of the relative time, cost, and impact associated with each of these Survey activities.

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Table 3: Survey Priorities and Activities in Mining

Priorities Survey Activities Activity Description

Establishing a Geological Baseline

Geological Mapping and Geoinformatics

Establishes a baseline, geological landscape to identify mineral or hydrocarbon potential, and helps to manage mine output data to create predictive models.

Natural Hazard Assessments

Addresses natural hazards associated before/during mine development.

Conducting a Mineral Resource

Assessment

Geochemical and Geochronological

Analysis

Enables insight into a mineral’s maturity and potential in a source rock during the exploration phase.

Remote Sensing and Mining Geophysics

Locates and estimates size of a mineral deposit during early mine production.

Mineral Resource Assessments

Helps to forecast specific mineral deposits in order to promote mining investment.

Conducting Natural Resource

Assessments

Environmental Geology and Assessment

Informs investors of environmental impacts throughout the mining life cycle.

Engineering Geology Utilizes techniques to improve infrastructure, efficiency, and production during/post-mining operations.

Data Management

Data Ownership and Stewardship

Helps with implementation of standardized workflows and licensing throughout the data life cycle.

Data Archival and Disposal

Addresses the integrated data environment, which encompasses the physical and/or digital locations for data storage, usage, and disposal.

Journey to a Mature Organization Having understood the activities of a Survey that are most likely to have near-term impacts on the mining sector, and engaged in a prioritization exercise similar to that reflected in the Tool, policymakers should be able to gauge the current state of their own Survey’s capabilities. The three following profiles characterize Surveys at varying degrees of organizational maturity.

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Table 4: Survey Stages of Maturity

Stage Description Strengths Improvements

Mature

A well-established land Survey, within the government performing varied geological functions. Successfully utilizes data collected from geophysical exploration to attract private investment at a large scale.

• Establishes a data repository and principles for data management

• Wide-range of activities for information collection to promote mining investment

• Receives annual government funding and private investments

• Well-established inter-agency cooperation

• Informs the public about the benefits of sustainability and social equity

• Utilizes new techniques in engineering geology

Transitioning

A small land Survey within the government able to perform specific geological activities with some funding allocated by policy. May develop a mission statement and have specific functions.

• Can perform natural hazard assessments and specific exploration activities

• Can conduct further geological research into mineral resource potential or mining activities

• Enables private funding opportunities for exploration

• Develops geological data management capabilities

• Establishes hazard or warning preparedness programs

• Understands how to develop a tendering process for the mining industry

Early

The Survey may not be established yet. The government structure in place may lack the architecture or policy may not be in place for adequate funding. With little funding, some activities may not occur within the Survey scope.

• Can initiate small-scale land surveys or collect baseline geological information with little funding

• Develops an institutional structure within the broader government

• Develops policy to establish and fund specific Survey activities

• Brainstorm additional funding opportunities

Project Development When international mining companies consider entering new markets, they seek out transparent and well-defined investment environments. The governance activities within this discipline outline the key concepts that underpin such an environment. The topics considered here include the process through which a State awards mineral rights, and the tradeoffs associated with conveying mineral rights via concession or license. A featured tool of Project Development, titled “Awarding Mineral Licenses and Leases,” examines how the decisions the State makes at the start of the mineral development life cycle can impact future relationships, responsibilities, and economic development. What follows is a summary of that tool’s content—please access that the online Tool for a more immersive and in-depth learning experience.

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Featured Tool: Mineral Licensing and Leasing Private investment in the subsurface mineral sector brings with it the benefits of capital investment, the transfer of technical expertise and experience, and the likelihood of increased government revenues. However, how private investment is structured and managed by the State at the start of the mineral development life cycle sets the precedent for future development. This tool helps policymakers with decision-making in this area by accomplishing the following objectives:

• Define mineral rights, ownership, and the key roles of stakeholders in developing a mineral asset;

• Describe the different processes for awarding mineral rights and when each method is most effective;

• Review basic open access and competitive tendering process requirements; and

• Identify the different stages of open access and competitive tendering processes. At the Toolkit’s launch, this Tool will only address the competitive tendering process, but the ERGI Founding Partners plan to expand the module to include open mineral access shortly thereafter, in an effort to give the Tool broader application.

Defining Mineral Rights, Ownership, and Key Roles Mineral rights refer to the rights for the exploration or the exploitation of a potential or known mineral resource. Such rights are usually granted to an investor for a defined period of time. The distinction between surface and subsurface rights is important to note, especially when discussing ownership.

• Surface Rights – Rights to the surface area of a defined piece of land may include the right to farm the land or the right to exploit above ground resources (trees and plants).

• Subsurface Rights – Rights to underground resources below a defined piece of land may include subsurface minerals, oil, gas, water rights and other commodities.

Ownership of surface and subsurface rights varies by jurisdiction. The three most common ownership structures are:

• National Government – Subsurface rights are owned by the State regardless of who owns the surface rights. The State is responsible for granting third parties mineral rights via appropriate legislation or contracts.

• Subnational Government – Subsurface rights are owned by the subnational governments (such as a province or region) regardless of who owns the surface rights. The subnational government is responsible for granting mineral rights via appropriate legislation or contracts.

• Private Landowner – The Landowner owns both subsurface and surface rights. The landowner may choose to grant or sell the subsurface rights while continuing to maintain their ownership of surface assets. This ownership structure exists in the U.S. and some other countries, but is not the most common.

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For each of the three potential ownership structures for subsurface rights, the relative role of stakeholders can vary. Table 5 illustrates how the relative roles of stakeholders change depending on the prevailing ownership structure. The Tool provides a dynamic map that demonstrates the stakeholder dynamics below—access it online for a more engaging learning experience. Table 5: Impact of Ownership Structure on Key Roles Ownership Structures National Government Subnational Government Private Landowner

Stak

ehol

ders

Nat

iona

l Gov

ernm

ent

• Awards contracts and licenses to third parties

• Regulates and administers mine development

• Enforces environmental protections and compliance with safety and health statutes and regulations

• Collects royalties and taxes

• National-level regulation of mine development


• May have competing land/water/infrastructure interests versus the subnational government

• National-level regulation of mine development


Subn

atio

nal G

over

nmen

t • May have competing land/water/infrastructure interests versus the national government

• Represents local communities if there are environmental and/or safety and health violations

• Awards contracts and licenses to third parties

• May regulate and administer mine development

• Collects royalties and taxes • Represents local

communities if there are environmental and/or safety and health violations

• May regulate and administer mine development

• May collect usage fees • Represents local

communities if there are environmental and/or safety and health violations

Bid

der

• Seeks right to explore, develop, and produce the mineral asset

• Complies with all license, contract, and regulatory conditions

• Needs to achieve risk-appropriate rate of return on all investments




• Bargaining strength is stronger with private landholders




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Com

mun

ity

• Expects to receive a benefit from development of the asset

• If an asset is not developed responsibly, the community may suffer disproportionately from issues such as pollution or loss of livelihood

• Expects to receive a benefit from development of the asset


• Awards subsurface rights to third parties

• Directly benefits from development of the asset


Loca

l Bus

ines

s • Can be positively impacted by responsible and sustainable mineral asset development

• May benefit from skills and technology transfer, especially when the supply chain is localized

• Can be positively impacted by responsible and sustainable mineral asset development


• Can be positively impacted by responsible and sustainable mineral asset development


Awarding Mineral Rights There are three primary mechanisms for a State to award mineral rights to a third party. Determining which of these mechanisms will be most effective for a potential or known asset will depend on many factors, including: commodity type/price, the amount of geological information available, and the level of investor interest. Each mechanism is defined below:

• Competitive Tendering – The government offers subsurface rights to a designated area of land on a competitive basis, soliciting bids from various qualified companies. This approach is more effective when there is a reasonably advanced knowledge of an individual mineral deposit or deposits, there is an established geological survey, or one or more investors have already expressed interest.

• Open Mineral Access – Companies file a claim on a first-come, first-served basis and a negotiation of terms with the State follows. License holders have access to the land for a pre-determined period of time. This approach is most effective when there is only a high-level understanding of the mineral potential of a given geography.2

• Direct Negotiations – A government negotiates directly with a company for rights to a known resource in exchange for a share of project revenues or other investment (e.g., infrastructure development). This approach is effective if little is known about the asset and there is limited public information available either due to a lack of transparency or a lack of data.

While states can engage in direct negotiations to award mineral rights, open access licensing and competitive tendering are more transparent processes that maximize value to citizens. Direct negotiations by contrast are susceptible to idiosyncratic demands, opaque processes, and can

2 The Government of Western Australia Department of Mines, Industry Regulation and Safety has a wealth of resources on open mineral access tendering that can be accessed here: http://dmp.wa.gov.au/Minerals/Prospectors-fossickers-1525.aspx

http://dmp.wa.gov.au/Minerals/Prospectors-fossickers-1525.aspx

http://dmp.wa.gov.au/Minerals/Prospectors-fossickers-1525.aspx

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result in unsustainable outcomes. The following section highlights the basic requirements and life cycle of a competitive tender.

Competitive Tendering Competitive tendering can be an effective method to award mineral rights and deliver value to the state when the necessary preconditions exist (e.g., widely available high-quality data, an economically viable mining asset, etc.). This section will review the basic requirements and distinct stages of a successful competitive tender process, according to international leading practices.

Requirements for Competitive Tendering Before a country undergoes a competitive tendering process for a mineral asset, three key requirements should be met (and government-led) according to leading practices: 1) defined framework; 2) transparency; and 3) safeguards. The table below outlines the purpose and characteristics of each requirement.

Table 6: Requirements for Competitive Tendering

e Defined Framework Transparency Safeguards

Purp

ose Achieve clarity and consensus

between key stakeholders on mineral development objectives, processes, and roles and responsibilities

Provide full access to complete and accurate data, minimizing the potential for corruption and building confidence in the tender process to attract investors

Prevent detrimental impacts of mining operations to protect the community and maximize long-term value of the mineral asset

Cha

ract

eris

tics

• Publish a defined legal and institutional framework for the mining industry (laws, regulations, procedures) informed by international leading practice

• Develop a project information memorandum that clearly defines the opportunity and roles of all stakeholders

• Include local content requirements (e.g., use of local labor)

• Allocate commercial and regulatory oversight to independent entities

• Enforce rules and penalties for noncompliance agreed upon before the process begins

• Equal access to data for potential investors

• Annual publication and disclosure of principle terms, conditions, and payments

• Employ health and safety standards to minimize any adverse effects on the environment or local populations

• Use investor prequalification to confirm bidder history of compliance with leading international practices for environmental and social sustainability

Competitive Tender Lifecycle When followed, a Competitive Tender process introduces transparency and trust into the mineral rights administration of a State. This section provides an overview of the six stages of a competitive tender lifecycle.

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Stage 1: Tender Design

When preparing to issue a competitive tender, the State needs to provide information access, develop preliminary documentation, and finalize the tender methodology. Each of these steps help attract bidders, promote transparency and increase the likelihood of a successful tender.

• Information Access – the State should provide open, non-discretionary access to all information and data relevant to the investment opportunity.

• Preliminary Documentation – the State should provide: 1) an information memorandum describing the mineral asset and associated infrastructure; and 2) a transaction principles and policies statement specifying key policies and responsibilities of related government agencies.

Stage 2: Advertisement and Prequalification Once the preliminary documentation, information access protocols, and bid methodology have been finalized and before the Request for Proposals (RFP) stage begins, it is common to include a prequalification step. Bidders submit an Expression of Interest (EOI) and from that pool of applicants, a list of prequalified bidders are identified based on pre-determined (ideally quantitative) criteria to then participate in the RFP stage. Prequalification makes it simpler, easier, and faster to make sure that only qualified and responsible mining developers can proceed to the next stage of the process.

The State should be ready to make a public announcement of its intention to solicit bids and open a relevant data room, depending on the maturity of the opportunity/sector.

Stage 3: Finalize the Request for Proposal In order to finalize the RFP, there are two steps for the government to take:

1. Issuance of a Draft Bid Package (optional) – Via an open and transparent mechanism, prequalified firms provide feedback on the information memorandum, transaction principles, and policies statement.

2. Development of a Final Bid Package – The government incorporates market feedback and finalizes the bid package for distribution to prequalified bidders. Bid documentation should be developed by technical experts, referencing international leading practices.

Stage 4: Issue of the Request for Proposal Once the final bid package has been cleared by relevant government authorities, it is released to prequalified bidders for their review, bid preparation, and submission. Separate technical and financial bids should be submitted by the stated deadline.

Stage 5: Bid Receipt, Evaluation, and Award Once the bids have been received, the evaluation and selection process begins. Independent third-party assistance may be used to support the evaluation process outlined in the table below to ensure transparency and integrity.

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Table 7: Evaluation Committee, Process, and Bidder Selection

Evaluation Committee Evaluation Process Bidder Selection • Create a Committee with

diverse technical backgrounds and procurement expertise

• Limit the size to make consensus easier and reduce likelihood of delays

• Members should treat bidder information and their role as confidential

• The Committee should review and score the technical bids first

• Only technical bids that meet the predefined minimum score should have their financial bids opened; if not, financial bids should be returned unopened

• The Committee completes evaluation report and identifies Preferred and Reserve Bidders

• The State accepts bid evaluation report and announces the Preferred Bidder

• Final negotiation of the contract with the Preferred Bidder must be completed within a specified period

• If unsuccessful, the Reserve Bidder can be called upon

Stage 6: Identify & Incorporate Lessons Learned Throughout the competitive tender process, stakeholders should actively identify and document lessons learned. These lessons learned can them be applied to future tenders, improving outcomes to the government, enhancing transparency for bidders, and improving accountability to local communities and stakeholders.

Production As mining operations progress from prospecting to extraction activities, the State must perform an investment facilitation and oversight function—conducting early stage exploration, collecting mineral data, administering royalty payments, and enforcing safety standards. The governance activities covered within the Production discipline comprise the implementing steps for these core economic, revenue collection, and safety functions. The topics covered under this discipline include classifying mineral assets, royalties and fiscal regimes, and establishing an effective regulatory or oversight function over the industry. A featured online Tool of Production, titled “Mineral Asset Classification and an Introduction to Royalties,” describes the important role the State plays in influencing the economic geology within which a mine must operate, and how State decisions directly impact future economic and social development. What follows is a summary of that tool’s content—please access the online Tool for a more immersive and in-depth learning experience.

Featured Tool: Mineral Asset Classification and An Introduction to Royalties This Tool enables the user to understand the role that the state plays in evaluating, collecting, and publishing mineral asset data (including data that is normally produced by mine operators), and how State activities can help promote and incentivize the private sector’s development of a country’s mineral wealth. In so doing, it accomplishes the following objectives:

• Explain the distinctions between the different mineral classifications and sub-classifications

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• Explain the role of the state in promoting private sector resource exploration and development

• Introduce potential options relevant to national royalty regimes

Mineral Asset Classification: Resources vs. Reserves One of the core functions of a Survey is to assess and publish evaluations of a country’s resource potential. One method Surveys use to perform this function is to aggregate the mineral asset data they acquire from mine operators to provide a comprehensive overview of national, regional, and deposit-level resource estimates. When reporting mineral asset data, mining companies separate their valuable information into two categories: mineral resources and mineral reserves. Consequently, non-valuable information may fall within the mineral occurrence category.

Table 8: Mineral Asset Classification Terminology

Mineral Asset Classification Description

Mineral Occurrence

• Has no formal economic meaning or value • If a mineral occurrence is detected, it generally does increase the prospect of

finding a larger amount of mineral in close proximity

Mineral Resource

• A concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade, or quality and quantity that there are reasonable prospects for eventual economic extraction3

• In increasing order of probability, mineral resources are classified as Inferred, Indicated or Measured

• Measurements commonly used to identify mineral resources include location, quantity, product grade, geological characteristics, and continuity

Mineral Reserve

• The economically mineable part of a Measured and/or Indicated Mineral Resource, often categorized as Probable or Proven Reserves

• It includes modifying factors such as diluting materials and allowances for losses, which may occur when the material is mined or extracted

• Measurements commonly used to identify mineral reserves include production rate, in-situ and run-of-mine grade, royalties, end-product commodity prices and operating/compliance costs

It is a mine’s economic, regulatory, social, and technical “modifying factors” that determine if a mineral resource can be reclassified as a mineral reserve. As modifying factors change, resources can become reserves and vice-versa. The legal and regulatory decisions of states therefore directly impact not only the profitability of a mine, but also the volume of its mineral reserves.

International Codes and Standards Over the past three decades, multiple States have published codes and standards to which mining firms must adhere when reporting resources / reserves within their respective markets. Relevant standards include the Australasian Joint Ore Reserves Committee (the JORC code for Australasia), the NI43-101 & CIM Definition Standards (Canada), the South African Code for the 3 CIM Definition Standards for Mineral Resources & Mineral Reserves 2014

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Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC), and the Society for Mining, Metallurgy, and Exploration, Inc. (SME) guide in the U.S. portion of the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) has endeavored to harmonize these codes into an international standard.

Other bodies have also endeavored to harmonize national mineral asset codes. The United Nations Framework Classification (UNFC) is a highly technically-focused reporting standard, for example, but CRIRSCO remains the most widely recognized, commercially-focused approach to mineral asset reporting and harmonization.

Promoting Investment & Resource Development A Survey publishes regular quantities of high-quality geological information as a means to attract resource developers and mining sector investment. Such data is also required to effectively set mining-fiscal policies. In bringing this data to the market, mining authorities must take into account available data and early-stage exploration activities performed.

Acquisition of Geological and Geophysical Data Under optimal conditions, data should flow both from the Survey to industry and vice-versa. There should be a continuous, legally-mandated flow of exploration and production data from all mining and natural resource operators to the Survey.

Early Stage Exploration Activities In many cases, Surveys perform early-stage exploration activities in an effort to bring resource data to market. Open access to such professionally managed data resources enables private sector operators to identify where best to focus their prospecting investments; it also helps to build confidence in the transparency and capabilities of the host country.

Asset Identification Using Prospecting Activities Surveys sometimes mitigate private sector prospecting risks by engaging in low-cost / high-value exploration activities that can help accelerate follow-on investment. Exploration often begins over a large swath of land, using relatively inexpensive and simple data collection techniques. Complexity and cost increase as potential mineral assets are identified, and the area of exploration becomes increasingly focused.

Introduction to Royalties As States across the world open their markets to private sector exploration and mining investment, policymakers have begun to evaluate how to adopt a fiscal policy regime that strikes the right balance between attracting investment and ensuring the State and its citizens can share in the value of their natural resources. Policymakers typically rely on two levers to create this balance: royalties and taxes.

Royalties and Taxes A royalty is a payment for continuous use of a piece of land or resource and can be applied in addition to taxes. Royalties are often defined in terms of a percentage of the proceeds from the sale of an extracted commodity. Royalty rates can sometimes be pegged to a global commodity price, and therefore can be resource and quality-specific.

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A tax is a compulsory levy on individuals or businesses to finance the cost of governing. Taxes are typically set by national or subnational legislatures and enforced by a ministry of finance. Unlike royalties, which tend to be linked to the sale of a mine’s output, taxes are usually linked to a firm’s reported earnings.

Understand the Different Types of Royalty and Tax Structures Refer to Table 9 for common royalty and tax structures found in the mining industry. Please note that although these structures are commonly used, Net Smelter Returns (NSR) Royalty is the prevailing royalty structure in most mining markets. Table 9: Royalty and Tax Structure Types

Structure Type Description

Mineral Royalty

Fixed Rate Royalty

A fixed rate/unit-based royalty is applied to a physical vs. financial base (e.g. USD/tonne). This structure is simple to administer but inflexible. Mines can become uneconomic when commodity prices go down; when commodity prices increase, the state receives no upside.

Net Smelter Returns (NSR)

Royalty

NSR or ad valorem royalties apply a uniform percentage to the financial value of the commodity sold by the miner. This structure generates variable State revenue, but tends to entail low administrative costs.

Profit-Based Royalty

Profit-based royalty is levied on mine-level reported earnings. This can result in unpredictable State revenue and entails a high administrative cost, given compliance risks. The inherent complexities of the process can also create transparency issues, if not managed carefully.

Royalty Payment

Royalty in Value

Royalty is paid as in cash.

Royalty in Kind

Payment is provided in the form of a finished (or semi-finished) commodity. In-kind royalties require the state to market and sell commodities on its own account, resulting in higher or lower net values vs. Royalty in Value. The risks plus the resulting lack of transparency, are often reasons why states choose Royalty in Value systems vs. Royalty in Kind.

Mineral Tax In Rem Taxes

An in rem, or excise, tax is levied at the point of purchase. In the mining industry this tax is typically assessed on downstream sales, or on the equipment or services required to extract the deposit—it is not levied on an operation’s earnings.

In Personam Taxes

In personam taxes are levied on a mining operation’s net revenues or earnings.

Designing a Royalty Regime As described previously, States tend to establish royalties separately from, and in parallel with, a standard taxation policy. Royalties are used to allow the State and its citizenry—most often the owner of the record for mineral rights—to share in the appropriate value of their natural resources. As with most fiscal policy, though, policymakers must attempt to balance seeking remuneration for their depleting resource and encouraging investment within their borders. When deciding the appropriate rate and structure for a royalty regime, government officials should take into consideration the following factors:

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• The Commodity Cycle – Commodity pricing tends to be global, and therefore influenced by a multitude of global economic factors—the result is price volatility. This volatility in commodity pricing can, in turn, result in volatility in government revenues. Fixed rate royalties are unaffected by commodity prices, but may cause an otherwise viable mine to become loss-making.

• Economic Life of the Mine – Onerous royalty provisions can dissuade potential investors from entering the market, but they also alter operating economics such that a mine may become uneconomic and close before the deposit is fully extracted. As such, while a high or fixed tax royalty rate may generate revenues at the early stage of a mine’s operation, it does so at the expense of future revenues, due to a shorter mine life.

• Administrative Costs – Implementing, and enforcing compliance with, a defined royalty regime can impose significant costs on both the mine operators and the state. The more simple and transparent a royalty regime is, the lower administrative costs will be for all stakeholders.

Note: the online Tool contains a dynamic visualization intended to demonstrate the tradeoffs associated with choices in mining royalty regime based on the foregoing factors.

Administering Royalties via the Royalty Life Cycle State officials must monitor the operation of, and enforce compliance with, their royalty regime through transparent policies and procedures. The key to achieving this goal is to create a robust royalty accounting and management system. A state regulator and/or division of a ministry of finance is usually charged with carrying out royalty monitoring and enforcement activities.

The Royalty Life Cycle captures the key elements of a royalty administration system, and highlights some of the data typically collected/analyzed to implement common royalty regimes, such as fixed rate and NSR. Profit-based royalties tend to be more administratively complex, and are usually linked to a mining operation’s audited financial reports and statements. The stages of the Life Cycle, as outlined below, describe the steps to transparent royalty enforcement.

Stage 1: Production Volume

The royalty life-cycle begins with the regulator acquiring site-specific production and other operational data. Under a fixed rate, volume is relevant given its unit-based structure. In the case of an NSR, this will be required when applying to a market, or reference price to determine payments.

Stage 2: Royalty Rate and Reference Price

The mandated royalty is calculated and scheduled for payment. Both mine operator and the state will need full access to data and appropriate staff/resources to verify the calculations of the other party.

Fixed rate royalties are relatively simple to calculate. The definition of a reference price for NSR royalties, and using that price to calculate the royalty due, normally requires specialist knowledge and experience.

Stage 3: Royalty Payment

States should plan for and adequately fund royalty collection activities. Firms typically submit a royalty return with their payment, documenting sales, costs, any price adjustments, and other

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relevant financial data. The State should have the staff/resources and access to data required to verify the royalty return, as needed.

Stage 4: Verification and Audit

Regulators should conduct periodic royalty audits to verify compliance. Such audits can be carried out by specially-trained state employees or can be contracted out to qualified third parties. Auditors should review and verify:

• Production volumes as reported by the Survey, and operator accounting systems;

• Pricing from the reference price database;

• Payment exemption reports; and

• Confirmed royalty receipts. Stage 5: Allocated Royalty

To promote transparency and reflect social concerns, many governments choose to allocate an appropriate proportion of revenues to subnational governments or regional stakeholders, reflecting the interests of those communities that host mining activity.

Stewardship Mining sector stewardship involves supporting all stakeholders across the full life cycle of a project to maximize the value from mining activities. Governments have an important role to play in promoting and innovating policies that create shared value through social, economic, and environmental outcomes. The governance activities associated with the Stewardship discipline cover public-private collaborative methods and practices to achieve optimal shared value for the mining host nation and communities. The topics covered under this discipline include environmental management, mine rehabilitation and return to productive use, and investments in sustainable infrastructure. A featured Tool of Stewardship, titled “Social License to Operate,” describes how mines should be developed and operated with the ongoing consent of the local community and the State. What follows is a summary of that Tool’s content—please access the online Tool for a more immersive and in-depth learning experience.

Featured Tool: Social License to Operate For mines to be successful in the long run, they need to be developed and operated with the ongoing consent of the local community and the State. This trust, or social license, must be cultivated and maintained over the life cycle of the mine. Toward this end, this Tool sets out to accomplish the following objectives:

• Identify the key elements of a Social License to Operate and provide a framework through which to view informed consent; and

• Highlight how investors typically work to cultivate a social license to operate, including the concept of shared value, and outline the policy levers governments can use to incentivize social license investments.

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The Triple Bottom Line and Value Beyond Compliance A commonly-used framework to promote sustainable mining operations is the Triple Bottom Line, or 3BL. 3BL focuses on three factors—profit, people, and the planet4. While the profit factor is measured by traditional business performance indicators such as the internal rate of return (IRR) for an investment, the people factor accounts for the employment opportunities and other social benefits delivered to the local community and indigenous peoples, and the planet factor accounts for and measures metrics such as climate resilience and environmental responsibility. While not exhaustively addressing the full range of risk and performance factors that underpin a mining operation’s social license to operate—3BL offers a useful model through which to holistically view a mining operation’s value to its hosts. The online Tool provides a visual to understand the various opportunities for a mining operation to deliver value in areas where each of the 3BL factors intersect.

As the 3BL describes, the mining industry is strongly positioned to bring investors, government and society together to create a shared, value agenda. Value Beyond Compliance (VBC) is an analytical framework often used to bring key stakeholders together and accelerate the creation of innovative ideas/solutions in areas of joint interest – for instance, in areas where the 3BL factors intersect. VBC works across five phases:

• Shared Value Collaboration – Government and industry create a dedicated multi-stakeholder collaboration forum that is tasked with accelerating mining’s socio-economic impact.

• Shared Value Strategies – Leverage forum members to build purpose-driven champions within partner organizations. Use strategic analysis to identify value-creating opportunities.

• Shared Value Tactics – Addressing specific issues through stakeholder strategies such as diversity and inclusion, enterprise development, regulatory dividend, etc.

• Shared Value Execution – Transparency can be enhanced by using an independent third party for implementation, as opposed to relying on individual stakeholders.

• Measuring Impact – Metrics established to measure impact and gauge shared value delivered to investors, government, and local citizens.

VBC vs. Corporate Social Responsibility It is important to distinguish that a VBC, or shared value approach, to business operations does not equate to a corporate social responsibility (CSR) initiative. CSR initiatives tend to be targeted actions by private companies with defined, near-term socioeconomic benefits. VBC, in contrast, is a mechanism that leverages a private company’s commercial expertise to create innovative and financially sustainable solutions to shared problems. By resolving such problems, additional sources of long-term value are created that accrue to both the private company and the relevant stakeholders. To further this approach, Michael E. Porter and Mark R. Kramar, authors for the Harvard Business Review, note that “shared value is a strategic choice made by a company to

4 A four-component “quadruple bottom line” is also used, by countries such as Australia and Canada, to promote additional focus on indigenous community engagement issues

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apply their profitable business model in a manner which creates profits and prosperity for its shareholders, as well as the community within which it operates.”5

Stakeholder Engagement While mining companies have taken strides in delivering shared value at the local and national level, they continue to evolve beyond conventional ‘check-the-box’ compliance exercises. To accelerate this evolution, they need to strategically, tactically, and operationally target their stakeholder engagement approach to reflect a deeper understanding of the diverse stakeholder groups and host communities impacted by the development of a mineral deposit. Ignoring this need for deeper engagement may result in negative stakeholder relation outcomes, as local communities and/or indigenous groups may hold skeptical views about the perceived costs/benefits of mining operations.

Companies and governments across the globe are under increasing pressure to grow their contributions and accountability towards sustainable development and social impact. To respond to this trend, the mining industry needs to transition from a reactive to a more proactive approach on such issues, requiring stakeholder engagement at three levels of frequency: strategic (annual), tactical (periodic), and operational (continuous).

Social Impact Strategies The impact of mining operations can be significant; several mineral-rich countries receive natural resource royalties, taxes and other payments that exceed 40 percent of national GDP6. To avoid long-term distortions in the economy, and promote equitable growth across all strata of society, policymakers need to work in concert with industry leaders to create policies that share economic value across all stakeholders and local communities. Table 10 presents leading practice policy levers, and the stakeholders likely to derive the greatest direct value from the policy.

5 Michael E. Porter & Mark R. Kramer, Harvard Business Review, January-February 2011. Available from HBR.org 6 “Total natural resource rents (% of GDP),” World Bank, 2011, https://data.worldbank.org/indicator/NY.GDP.TOTL.RT.ZS

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Table 10: Role of Stakeholders in Social Impact Strategy

Stakeholder Role Description

Citizens Local Content Regulation

Local content policies help drive opportunities for local businesses, but must balance increasing cost of mine operations with increasing local opportunities. Regulations must couple with workforce development efforts that correspond to relevant industries.

Government

Taxes, Royalties, and

Tariffs

Policymakers must balance fiscal and trade policy. Tax, royalty, and tariffs should coordinate to encourage foreign direct investment, while simultaneously creating opportunities for government revenue and entrepreneurship.

Citizens and Investors

Shared Data Infrastructure

Geological surveys can provide baseline data to encourage mining investment. High quality, industry-accessible databases and repositories for geological data can accelerate industry interest in developing mineral assets and simplify sharing of data.

Local Setting

Historically, mines focused on developing local suppliers in low complexity / low value spend categories to meet compliance requirements. To go beyond this, stakeholders should enable localization of more strategic and specialized spend categories that have higher technological complexity.

Citizens and Government

Standard Setting

Smart use of industry standards and/or regulations can have downstream additive value, such as requiring infrastructure be developed for long-term, sustainable use by multiple stakeholders. This improves local social license to operate and enables operators to use non-project specific sources of capital funding.

Citizens, Government, and

Investors

Convening Collaborative Stakeholder

Groups

Standing up formal or informal collaborative ecosystems or forums that bring together stakeholders can have a catalytic impact on shared value strategies. Collaboration accelerates improved stakeholder participation, thereby yielding more effective local economic planning and community development.

Creating a Social Impact Policy Agenda The foregoing policy levers each have targeted aims and drive value for discrete sets of stakeholders, from local communities and businesses, to stewards of central government finances and prospective mining sector investors. Since not all policies can be designed appropriately and implemented at once, it is incumbent on policymakers to prioritize their issues, and develop an agenda that aims to optimize the shared value derived from mining sector operations. Policy design leading practices suggest a five-step iterative process7:

1. Identify the Problem – What problem is the State attempting to solve? Depending on whether the State aims to promote investment or boost local employment, the choices of priority policies could differ.

7 “Total natural resource rents (% of GDP),” World Bank, 2011, https://data.worldbank.org/indicator/NY.GDP.TOTL.RT.ZS

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2. Diagnose the Cause – Collaborate with stakeholders and acquire data through direct engagement, surveys, and other tools to agree on the root cause.

3. Design and Adopt – Using the above general policy areas as a starting point, design legislation or regulation with not only high potential for impact, but high feasibility of adoption.

4. Implement and Test – Once adopted, enforce the new policy using rigorous and continuous monitoring for shared value impact.

5. Refine – Use the results of testing and continuous stakeholder feedback to inform future policy options and to shift course as needed.

Monitoring Social Impact One of the challenges in deploying the policy options as suggested in the foregoing sections is measuring impact and understanding how value is perceived by the many local, national, and international stakeholders with interests in an individual mining project. Table 11 demonstrates how different groups both perceive and respond to shared value, and how this value can be tracked as metrics to allow for monitoring results. This Tool takes these individual metrics and constructs visual representations of how these metrics might be tracked cohesively to paint a larger picture of a mine’s social impact. Access it online to learn more.

Table 11: Shared Value Types for Monitoring Social Impact

Shared Value Type

Stakeholders Involved Main Focuses Example of Impacts

Value to Investors Company

• Maximize company profit • Retain license to operate

• Operating Margin • Net Profit Value (NPV) • Internal Rate of Return (IRR) • Return on Investment (ROI)

Value to Government

Local, Subnational, and National Governments

• Maximize government revenue

• Resilient infrastructure and social services

• Tax and royalty revenue • Balance of trade • Education investments (health

and education) • Infrastructure investments

Value to Citizens

Community Members and

Employees

• Share in the mining wealth

• Sustainable growth

• Employment • Wages • Water Use • Land disturbance

Approaching an Energy Transformation with the Energy Resource Governance Initiative The foregoing featured tools are designed to enhance ERGI’s reach to policymakers seeking to derive maximum value from their State’s resource endowment. By using and providing feedback to the Toolkit as a living educational resource, States around the world will have the ability to meet and manage growing demand for vital mineral resources as energy technology advances.

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To understand recent energy demands, States must realize that the world is experiencing a unique moment in the history of energy resource development. This is being driven by increasingly vocal commitments from multilateral, national, and private sector institutions toward supporting a more sustainable planet. At the center of this driving force is modern technology, made possible through a diverse combination of minerals and metals. As these technologies are deployed more rapidly their supply chains need to accommodate an exponential increase in demand. Although the expectation is for the demand to be met, the question is whether or not it will be met by well-governed mining sectors.

ERGI and this Toolkit aim to ensure that the energy transformation happens responsibly. The Initiative’s goal is to ensure States with mineral endowments are empowered to advocate for their citizens, and human rights are respected throughout the entire clean technology supply chain, and especially in the upstream extraction of these energy resource commodities. Importantly, the initiative is technology agnostic, and does not aim to elevate one product over another; rather, it outlines universal considerations important for any State to consider as it is developing its energy mineral sector. These best practices, including open access to geological data, competitive mechanisms for mineral rights, and community engagement, apply to any and all mineral projects, and are the foundation for a robust and responsible transformation. The ERGI Founding Partners believe that this document and these tools act not just as a resource to States interested in energy mineral extraction, but also as a catalyst to promote the important discussion around energy mineral sector governance.

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