AF: This is the first of a series of virtual round table discussions co-hosted by Young Mining Professionals ("YMP") and Pinsent Masons, a global law firm. I am Akshai Fofaria, a Partner and Mining Leader for Pinsent Masons and my co-chair for this session is Bianca Depres of YMP. I would like to remind all the participants that Chatham House Rules do not apply. I am now going to pass the chair to Bianca who will introduce the session.
BD: This session will focus on how mining companies and investors are evaluating the impact of greater ESG and the decarbonisation agenda. In particular, how mining companies are framing their role in the transition and continuing to attract institutional as well as die hard retail investors. The discussion will also focus on how mining companies and investors are appreciating and evaluating political risk in a multipolar world as well as a post-Covid environment. To discuss these topics today we have an imminent panel of market actors.
AF: The first question I am going to ask is to Ross Beatty and it relates to ESG and initially to the E in ESG. Ross, mining has a reputation for being particularly consumptive as far as energy is concerned, yet it does produce minerals that are essential to the energy transition. What should miners be doing and communicating, to ensure that they are acting in tune with the spirit of the age before they find themselves forced to act by regulation?
RB: In today's world it is not what you say you do, it is actually what you do and you cannot hide, if you have bad environmental practices or bad social practices or difficulties in any ESG area you are found out immediately. It is a very easy role to catch bad actors, so you have to do the right thing and let your actions speak more loudly than your words. Every single public company today and every responsible company in the mining sector has to do the right thing to look after the environment, look after the workers and look after communities that they are working in and provide stakeholders returns. There is only one way of doing things. Public companies are, I think, on the right path and they are genuinely trying to clean up their act and try to work in sync with the right way to do things.
AF: Yes, that is really reassuring Ross. What steps have you and your team been taking from the perspective of carbon targets or other environmental actives? Do you have "no impact" commitments in certain areas. Is this something that you are tackling from a strategic perspective?
RB: No, ESG today is at the forefront of what the operating companies that I am involved with are doing. I can tell only from personal experience with Pan American Silver and Equinox Gold that every single board meeting starts with ESG, every single shareholder meeting starts with ESG. It is almost like a revolution in the last 5 to 10 years just how important this stuff is today and it is important because it should be. It is important because we have an existential threat to human existence and not to mention countless other species from increasing temperature in the air and increasing weather problems, all due to carbon emissions. We have just got to get that fixed. Every single person has to do it. Every single company has to do it. I have seen this big shift in this direction in the last 5 or 10 years as to how important the environment really is and I am very, very happy to see that.
AF: Rick, on the same theme if I can focus more on the S of ESG rather than the E? Is there a risk that the mining industry could potentially suffer the fate of the oil and gas industry as far as investments by the major funds are concerned? This is in the shape of disinvestment and pressure from their clients and customers. As a critical investor in this space, what is your reaction to this and what is happening from your perspective?
RN: We certainly have improved on the S part of ESG. One part of that is increasing participation by citizens of countries where mining companies operate. I do believe that in addition to a deeper dialogue with the institutional investors who represent the money that comes into the mining business that we also need to deepen and expand the dialog with local communities as Ross suggested.
We cannot dictate to host Government the sort of distribution of the benefits of mining, but it is important to our social licence, that we as investors make sure that all elements of societies, but particularly local communities and indigenous communities benefit from what we do. I think the pressure is helpful on balance and I think my friend Ross Beatty has been really on that job for a very long time, at any rate.
AF: Thanks Rick. What you said is incredibly powerful. Does effective corporate citizenship, from an environmental and social perspective, factor into your calculations on the whom to invest in and on whom to avoid investing in? Is that something that you take a very careful look at when you are taking those decisions for Sprott?
RN: The answer to that is yes. It has been since my early years as an investor and as I have been investing with Ross for 35 years, and in the first Equinox he explained very carefully to me that our job was first to do no harm. In each of the ESG components one of the things that you learn in the 40 years of investment is that there are some people who are certainly good people and other people who are less good people and the probability means that the good people will win and the less good people will loose. That is truly as simple as that.
The fact is that we have the opportunity not to be useful but rather beneficial actors in each of the ESG components.
It is important for us to earn our places. It is enormously important on the morale of our employees when the employees of mining companies feel like they are part of an organisation that is honourable and doing the right thing. They believe that they are part of a cause rather than merely believe that they are doing a good job. Now all those are an important part of the due diligence process for Sprott and has been for some time.
AF: Richard you are a former oil and gas leader within one of Africa's largest investment funds and you have kind of felt the full force of environmental opinion amongst the wider investment community in that sector, what lessons do you feel the mining industry has to learn from the oil and gas industry as far as reputation, purpose, and planet are concerned, and are there any discernible rules or principles that you feel now are sufficiently concrete that you can communicate them?
RN: Thank you Akshai. As we have heard, mining has something of a lost decade over, for a while now, it is being brought back into the fold of public opinion as renewable energy demands, minerals and metals, and it is a very different perspective from Oil and Gas. Oil and Gas might actually have something to learn from mining if we turn it around. Mining can show itself as part of the solution, a sense of a lesser evil if you will and it really is part of the solution to the energy transition and I think that is really the key for mining.
AF: That is interesting Richard, because there is a bit of a convergence between commercial imperatives and environmental morality. It is interesting to draw a parallel from one of the super majors who have jettisoned their core business and moved into renewables. It is rather different for the mining industry. Is there really such a thing as responsible behaviour in terms of the type of energy you use to mine? The way in which you interact with your communities?
RN: That is absolutely the reason. That comes back to what both Ross and Rick were saying earlier, about the way that mining is addressing those issues upfront and directly, and it will separate the winners from the losers. Mining has a cleaner slate and probably more runway than Oil and Gas to make this work. Addressing from a carbon perspective, the Scope 1 and Scope 2 emissions, those which are used in the production essentially of the minerals is an area which can be addressed fairly easily. It cannot perhaps be solved overnight, but there is definitely room for work there.
Where there is a really big positive is in the use of minerals and metals, essentially again they are part of the solution to the Scope 3 emissions, which are the emissions that come from fossil fuels when they are used by the consumers. By being part of the solution for replacement in the energy transition, mining is in a much better position.
AF: We are going to turn now from the environmental and social considerations to the G, if you like in ESG. There is an argument that it is a good reason to hold precious metal mining stocks in more stable jurisdictions. The reason is that there is always a temptation for governments in distress to extract rent by imposing punitive taxes or otherwise interfering in property rights, short of expropriation because obviously that is far too controversial. How do you manage those risks? Do you make a clear distinction between emerging type economies and more developed societies? Does that factor into your calculations?
RB: Obviously, you have to take into account conditions everywhere you are, and every country is different in many fundamental ways, but the fact is, there is only one way to mine and it is to mine responsibly, anywhere you are. You have got to, as I said before, you have got to look after the health and safety of your workers, that is core. You have got to look after the environment that you are around, you have got to minimise your footprint, minimise your emissions, minimise your use of water, try to get off carbon emissions to the extent that you can and you have got to look after your communities. And that is just basic how you mine in 2020. It is just basic business.
The problem is that not every country is the same and how they respond to the mining business, how they respond to the mining companies acting with them, governments change on a dime and you can go from a very mining supportive government to a very mining hostile government or a mining greedy or a very voracious government that just wants to increase taxes like crazy and I can give you many examples of those over time, not just in Latin America by the way, it is happening in North America too.
AF: Does it help that you are Canadian; everyone loves Canadians, is that helpful as an investor? Is the nationality of the mining house a significant factor in de-risking your operations in certain markets?
RB: Sure, I have worked internationally, really all over the world and I have to say that I agree with that, being a Canadian company does go a long way. Canadians are known as being quite honest people and trying to do things the right way. There is always a few exceptions to that, we always have a few bad actors, it does not matter where you go but yes, being Canadian definitely opens doors, and we are also known as being good miners, it is a core business in Canada, we know how to do this, we are real professionals and that is understood pretty well everywhere in the world. It definitely helps to have a Canadian domicile.
AF: Rick, on the same theme, as precious metal prices are on the rise with the coming decade at least that is what we are being lead to believe, do you think there is going to be a decoupling of valuations between precious metals as investments in markets where the rule of the law, is at best questionable and markets like Canada or Chile where the rule of law is very entrenched, particularly as economical risk factors in the sense of distress and forex issues and currency collapses, compound in a political risk. Do you think there is going to be a decoupling between those two types of markets?
RR: I think the decoupling already exists. I think the presumption that all of us, myself included had in the 1990s for example was the emerging frontier or market had no such assurance to welcoming foreign capital caused problems. My suspicion is that our idea about government, that we believe are relatively friendly, is probably too strong. I believe that we are an unpopular industry, I believe given that we are a capital incentive industry that once our assets are reclaimed we are totally in a position of not being refunded. We cannot refund them because we are unpopular. While I understand the political risk discounted associated with many frontier markets, including several of which I have invested in behind and with my friend Ross Beaty, I would argue that the political risk discounts that confronts us in developed countries are too low and our expectations for fair treatment is too high.
AF: That is an interesting comment Rick. In terms of the political risks issues that we have experienced, I have worked in the African continent for 18 years now. My sense is whilst there is a discount that is applied in relation to these valuations, it does not seem to take into account the asymmetric risks involved in some of these markets. In the sense that if something goes wrong it can go terribly wrong. Do you think that this is fully appreciated Rick in terms of for long-term investors?
RR: I think to be a mining investors you have to be almost ludicrous or optimistic. My intuition is that if you have a deposit that attracts us from a technical basis, our tendency is to call it mission accomplished regardless of the surroundings. So I understand the nature of the question but what I have found is that they are very good people that know how to mitigate the political risks for example, if you look at what Mark Bristow was able to do in Eastern Congo, in some sense believe to be a bad country and having the bad part of what we believe to be a bad country, such AIDS, Ebola, Malaria and he did a great job.
My suspicion is that if you invest in an entrepreneur and he tends to do the right thing, then this is the best way to mitigate the political risk and by investing in people who have prior experience in that country and culture.
As investors, we need to understand the nature of political risks While you cannot affect political risks you can affect your ability to deal with it.
AF: Wise words Rick, thank you for that. Richard, you have huge experience of political work schemes and investments across Africa. How did the best players adapt to the risks of the resource nationalism from your perspective?
RN: It is a good question. I think resources for nationalism in the broader sense has already happened in oil and gas. I mean the vast majority of the world reserves are already not accessible to private companies. In those cases, they have to go in through joint ventures or service contracts and those do happen in certain parts of the world. In areas where they can operate, the problem is more of a creeping… not really nationalisation but a creeping effect on the return on projects. This is not specifically direct taxes, but it is all sorts of peripheral taxes that nibble away the value of a project.
So, what does the best people do? Well, simply they often revert to more stable predictable jurisdictions, and perhaps predictable is a better word than stable because countries like Norway for example or Alberta or the UK. They change their fiscal regimes, but they change them in a fairly predictable way depending on where the oil price is going. The second thing that happens is you have a very strong tree auger projects and only the very best projects will happen because your return or capital is that much harder to achieve when your cost of capital is increased. Therefore, many projects will fall by the wayside and the third one of course as we have seen in oil and gas, is they simply transition out of the sector.
AF: We are going to now turn out to ESG considerations and consider some but some of the key events of the day and in particular the US elections.
BD: On the US election topic, Ross this is a very decisive US election where the results could be decided in the Supreme Court. This could have an impact on the market. We have seen it in March when the price of precious metal crashed and people ran to cover margin calls. Are we going to see a similar response as in March and what does it mean for precious metals in this volatile environment, and does it matter who wins in the end whether it is like Democrat or Republicans?
RB: My world is mostly precious metal. I think you have to remember that every metal is different. You cannot lump titanium or iron ore into a conversation with gold and silver. I am going to stick to gold and silver, and I have to say, I do not really think it matters too much who wins the election in terms of the effect on gold and silver. You do not buy metal today, I do not think, based on a political party or even world fear indexes. I think you buy it if you think fiat currencies are going to be debased and there has not been a time in my life for them to have been more conditioned synchronously geared to currency debasement than we are seeing today. I do not think it matters who is going to come into power. That is just going to continue. I think it is a good environment for gold and silver. Pure and simple.
BD: Rick, this is all very interesting what Ross was saying and what I take from Ross's intervention is that in the short term it does not matter whether it is a Republican or a Democratic Party in place. There will be a stimulus package and the Fed will continue printing money. What would you say to an investor, who thought precious metal were a safe haven and when we were seeing them being subject to great volatility and uncertainty? Is the sector like too risky now?
RR: I do not believe so. Ross has described the political circumstances we find ourselves in, very, very well. Irrespective of politics, there will be increased quantitative easing which means continued debasement of currencies. There will be complete debt suspending and continued negative interest rates in those circumstances my suspicion is that the political reality around the world means that there is more risk with not being in the sector than there is with being in the sector. It simply means that given the social circumstances around the world we need to invest in precious metals.
BD: Turning to Richard on emerging markets. It has historically been more important for investors to hold hard assets in frontier markets than in the West. Do we see an evolution in that position as a result of behaviour in the West (which appears to operating from an electoral standpoint, much like emerging markets) or are political risks in emerging markets getting even more acute as a result of the current crisis?
RN: No, I think the adages that when developed markets catch a cold then emerging markets get very sick and I think that that is going to be the case. There are many things happening here, but the current printing of money absolutely terrifies me. Money is basically a call on energy and debt is an acceleration of that call.
From an energy perspective, we are essentially using tomorrow's resources today and whilst that is a convenient tool, I think it is fraught with danger and to Ross's point about currency debasement; it is very hard to see any other way out than that. Obviously, what I think about more is oil rather than anything else because that underpins the global economies. We always talk about the break-even cost of oil and how it is developed in different crisis. But there is a third element to a break-even which is the fiscal break-even of a lot of oil producing countries. And that is the number that they need to have for oil price so they can pay their internal budgets. When they can no longer afford to pay anybody including the police and the army, then we start to see chaos happening and when that happens you have societal collapse and very quickly, those countries are no longer producing oil.
BD: Final question with respect to Young Mining Professional. Ross the younger and next generations are more concerned, or at least more vocal, on issues such as equality, inclusion, purpose all of which have been I guess accentuated by Covid. Is the mining industry part of the solution or the problem in this and is there such as thing as I guess like responsible mining now?
RB: It is part of the solution. I think it is happening with ESG. There is diversity and inclusion and it is all happening right now and again executives realising what is important and what makes a better company have driven it and owners of these companies, the shareholders who know that diversity and inclusion make better companies, drive it as well. Its just good business and so I would say it is happening very quickly.
You can just look at the number of women for example on companies boards it is just going up like a straight line.
It does suffer from the reality of the world though I mean you cannot turn on a dime and say 50% of your work process has to be female, you just cannot do it. While the mining industry was typically a male oriented industry, looking at universities 40 years ago. If you look at universities today there is 50% or even in some cases more women in the most traditional areas for males, like mining. Geology for example is around 70% of women now and it is a fantastic field and there is no barriers to entry but it is going to take time for those women who are just coming into university now or just leaving university to make their way through the executive ranks and ultimately take over these companies. Today you have males as CEOs and as c-suite people, but it is changing rapidly, and I am going to say another 10 or 15 years it is going to be a very different world. Much more inclusive, much more diverse and it will be a better world for us.
BD: Rick turning to you, YMP represents a large number of young investors who are investing in their own rights and as an employed capacity, what is the message you would like to give to them in this current investing environment?
RR: Not many frankly, the young investors who I have met are uniformly pretty good. Like many young people a little too narrative oriented and may be hopeful that they can succeed without doing the work but the market will fix that. What is important, I think, is that this generation has so much access to technology. You know, you need to have less real knowledge now because Google has all the knowledge in the world. You just have to know how to get the facts and you have to organise your sort of paradigms and prejudices. Take advantage of the fact that all resources are available to you.
AF: On behalf of YMP and Pinsent Masons, thank you to all of the participants. We have squared circles around climate change, energy, the responsible extraction of resources and the US election. It has been a fantastic conversation and we look forward to hosting the next mining session in a couple of months.