Anglo American: Resource Nationalism

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Resource nationalism and mining issues and potential responsesJon Samuel, Head of Social Performance, 19 February 2013#1Anglo Americans Footprint2

PlatinumDiamondsCopperNickelIron Ore and Manganese

Metallurgical Coal

Thermal Coal

Corporate and rep officesKeyEExploration OfficesE#2Resource nationalism some definitionsResource nationalismencompasses efforts by resource-rich nations to shift political and economic control of their energy and mining sectors from foreign and private interests to domestic and state-controlled companies

The threat of tax increases, renegotiation of terms, larger participation of state-owned companies and ultimately nationalisation.

Resource nationalism, the terms used to describe situations where governments assert increased control over the natural resources located in their territories

Resource nationalism is a term used to describe a tendency of people and governments to assert control over natural resources located on their territory.

Situation where producer countries want to maximise their (future) revenues from present production by altering terms of investment#Economic drivers:High perceived profits in the mining industryLack of perceived benefits to host countries / communities: fair shareChanging balance of power between resource owners and developers: general industry shift from capital to opportunity constraints as demand has grownSocio-cultural / technological drivers:Communications revolutionGrowing intolerance of poverty, and greater expectations on business to play a constructive role in its alleviation other than through business-as-usual measuresMining generally perceived to be a part of the problem on many global issues (climate change, water availability, biodiversity, food security, human rights etc)Negative legaciesPolitical drivers:Emerging economies striving to have their voice heard, and to assert their national interests as their economies and foreign interactions growRise of democracy and local empowermentAs an industry we communicate poorly: We dont articulate the benefits we bring in a credible mannerThe risk / reward trade-off is not understood, so profits are deemed excessiveResource nationalism drivers#How the world sees the mining industry

#Resource nationalism in practiceTaxes and royaltiesLocal content / value-add requirements (labour, procurement, beneficiation)State participation in mining projectsExpropriationIndigenisation (private)From our perspectiveChanging the rules of the game while playing#Resource nationalism manifestations in selected countries7CountryTax / royalty changesLocal content requiredState participationIndigenisationAustraliaMRRT (2010)Royalty increase (carbon tax)BotswanaDesires for greater beneficiationsDebswana 50/50BrazilCurrently under review (incl internal debate between federal and state level)Pressure for local supply contracts (especially in oil and gas)Vale government shareholding, state ownership of PetrobrasChileVoluntary royalty increase in 2010CodelcoColombiaUnder discussion/reviewMozambiqueTalk of increaseWill be an important part of license to operateDegree of free carry (5-20%)#7Resource nationalism manifestations in selected countries8CountryTax/royaltyLocal content requiredState ownershipIndigenisationPeruNegotiated voluntary windfall taxesSeveral local benefit schemes in place (often negotiated locally)South AfricaSIMS report suggests increasing bothRange of requirements under mining charter (likely to increase)Nationalisation debate and state mining companyBroad-based Black Economic Empowerment (26%)VenezuelaStrong focus on community and union benefitsNationalisations and expropriations. Mixed companies required in oil and gasZimbabweYes 51% requirement (threat of expropriation)#8Resource nationalism and oil and gas

Private share of global oil resourcesNational Oil Companies account for ~55% of production and ~88% of reserves globally (in the 1970s it was the other way around)#Did high oil prices lead to nationalisation?

OPEC led oil market?Source: OPM analysis for Anglo American #Ownership patterns in oil and gasIn 1960:World oil reserves were 291 bn bbls;of which: 85% were privately held; andtwo-thirds were in OPEC countries, and also privately held

In 1980:Reserves were 668 bn bbls;of which: two-thirds were in OPEC, and state-owned.19601980Source: OPM analysis for Anglo American #Could the same thing happen to mining?

NationalisationPrivatizationPressure on rents and state-owned equity ?Source: OPM analysis for Anglo American #Our view is that large-scale nationalisation in the mining sector is unlikely:Prices rises do not appear to have been the trigger for nationalisation in oil and gas (in fact the converse appears to be true)There was a spate of nationalisations in mining, but these tended not to be successful and led to subsequent privatisations or closuresThe economic rents from mining are generally much lower than in oil and gas, Mining operations are technically challenging to run, and require very high levels of ongoing capital expenditure to sustain themVery limited ability to control markets, given wide distribution of most minerals across the worldThe increasing inter-connectedness of the global economy makes the cost to implementing countries of unilateral nationalisations much higherGovernments have realised that they dont need to nationalise: the tax system and other policy tools provide other meansWe have a better understanding of what we need to do to respond to the threats posed by resource nationalismCould the same thing happen in mining?#Be clearer about the existing economic impacts of the mining sector, at both local level and at more macro levels, including addressing the resource curse debateEnsure that mining is seen as a responsible industry:Sound business ethicsHigh standards of safety, health and environmental managementFair treatment of workersGood neighboursPerhaps most importantly, deliver more effective responses to the demand for a greater share of benefits by enhancing the industrys contributions to local and national socio-economic developmentHow should mining respond?#Resource curse: potential causesResource CurseTerms of TradeDutch DiseaseRent SeekingImpacts of MiningVolatile Markets#Volatility can and has been managed by instruments such as hedging and stabilisation fundsResource curse: RESPONSESTerms of TradeDutch DiseaseImpacts of MiningVolatile MarketsThe price of manufactured goods is also fallingProductivity improvements can increase benefits to local economiesReallocating factors of production to resource sector may be efficientOnly a problem if adjustment after resource extraction is not planned for and / or not possibleResponsible management of impacts and proactive development initiatives can create positive economic contributionsRevenue transparency and governance reform can help to reduce rent seekingRent SeekingResource Curse#What routes are there for delivering developmental benefits from mining?OPERATIONINFRASTRUCTUREBENEFICIATIONJOBS / WAGESCAPACITYBUILDING/TRAININGPROCUREMENTTAXATIONSOCIAL INVESTMENTSME DEVELOPMENT#Anglo Americans approach to supporting local socio-economic developmentOur approach to community development is based on understanding local contexts and leveraging our core business to create sustainable upliftment

Leveraging our $13.8 billion supply chain (approximately 100 x social investment budget each year)Ensuring that host communities have the best possible chance of securing increasingly skilled jobs on our operationsFocusing in particular on how local municipalities can use tax revenues to provide effective public servicesOffering equity and loans on a commercial basis to support local entrepreneurs, both within and outside our supply chainProviding grants to welfare-enhancing initiatives where more market-based approaches are not possible.Local ProcurementLocal Training and RecruitmentGovernmental Capacity DevelopmentEnterprise DevelopmentSocial Investment** 2011 data#Ensuring we understand the local contextOur Socio-Economic Assessment Toolbox (SEAT) is at the heart of our management of social performance and developmental issuesSEAT is an award-winning manual that provides extensive guidance on: Profiling and engaging with host communitiesAssessing positive and negative impactsManaging relationships with host communitiesContributing to community developmentSEAT provides extensive guidance on understanding our local context, and how we should respond to thatFreely available at www.angloamerican.com/seat

#LOCAL PROCUREMENTDemand-side MeasuresPolicy: Local Procurement StrategyResources: Appropriate people and budgetSC Local Procurement Initiatives (eg Ring Fencing)Set framework, show leadership supportDemonstrate commitmentOperationalise commitmentsCommunication and Reporting: Targets and KPIsBuild Anglo American capacity and incentiviseSupport for Small and Medium-size Business Start-ups (e.g. Emerge / Zimele)Supplier Development Programmes (building capacity of existing suppliers)Alternative Livelihoods and Micro-credit ProgrammesSupporting the grass-rootsCreating formal businessesBuild capability, capacity and size of suppliersObjectiveSupply-side MeasuresLocalising Suppliers (e.g. near-mine supplier parks)Encouraging more suppliers to locate in mining areas#Capacity developmentAs a business we pay very significant sums in taxesClear that these revenues are not always well spent, typically due to a lack of capacityMeanwhile, we often suffer because of poor pubic service provisionWe are now engaging on a structured basis in South Africa and Brazil in initiatives to build the capacity of host municipalities and regionsWorking with partners, we have undertaken structured assessments and designed tailored implementation packagesFocus is on revenue management, accounta