Quarterly Mining Report: Mining Companies Don't Take Into Account the Cost of Community Conflicts

Mining and hydrocarbon companies are failing to take into account the full cost of community conflicts, which are a major risk for resource projects world-wide, according to our new study.


The study, which was published in Proceedings of the National Academy of Sciences in the U.S., looked at 50 projects around the world that have faced community opposition.

Protests by rural residents and indigenous groups, often over such environmental concerns as the use of water, have derailed mining and energy projects in areas including Australia, India and Peru.

The study found the largest costs that companies face because of the conflicts are the losses when abandoning projects after sinking in a sizable part of their investment. The most frequent costs are due to lost productivity from delays.

Researchers from the University of Queensland, Harvard University and Clark University said they identified several cases where a mining project with capital expenditures of $3 billion to $5 billion incurred weekly losses of about $20 million due to delayed production because of community opposition.

"It's counterintuitive, but some of the most vulnerable and marginalized groups, like indigenous peoples and rural communities, have an enormous clout over the economic impact of projects," said Daniel Franks, an author of the study from the University of Queensland's Centre for Social Responsibility in Mining.

The study's publication comes at a time when mining companies are focusing on cutting costs as lower metal prices have hurt revenues.

A commodities boom during the past decade increased the industry's appetite for projects. However, the push to develop projects also resulted in conflicts with communities over environmental concerns, leading to delays and suspensions. In Peru, for example, some mining projects have been met with violent marches, roadblocks, vandalism and other forms of protest.

In 2013, Ernst & Young said in a report on risks to the mining sector that obtaining social approval for a project is one of the top challenges for companies, behind ensuring access to capital, protection of margins and resource nationalism.

Indigenous organizations say their opinions on resource development are often overlooked by the government and private sector, and that can boil over into violent conflicts.

"We are not against all investments, that would be absurd," said Roberto Espinoza, an adviser to Peru's biggest indigenous organization, Aidesep. "We only ask that the law is respected, and the law says communities should be consulted…and have the right to determine their own development."

The authors of the study released Monday said there are numerous other costs from the conflicts that are difficult to quantify, like the value of reserves, which change due to fluctuations in commodity prices. The suspension of a project also hinders opportunities to expand the reserves. Reserves often increase in size as companies advance projects and become more familiar with the ore body.

Researchers said the most overlooked cost by companies in the extractive industries is the time that executives spend dealing with community conflicts, which takes away the opportunity to focus on other business.

In one case, the study said that senior managers spent more than 80% of their time dealing with a community dispute over an asset that was worth about 10% of the firm's income.

"This is a very large cost, the time of executives," Carlos Galvez, the chief financial officer of Peruvian precious metals miner Compania de Minas Buenaventura, BUENAVC1.VL -6.45%  said in an interview.

Buenaventura has a minority stake in Peru's giant Minas Conga copper and gold project. The company and its partners, which includes Newmont Mining Corp., invested $1.6 billion in Minas Conga before it was put on hold in 2012 due to protests over its impact on the water supply.

The conflict resulted in the companies agreeing to spend about another $200 million on the project to build reservoirs to ease concerns about the water.

Newmont said in an emailed statement that support for Minas Conga has been growing as surrounding communities have been affected by economic losses due to the project's delay and the benefits of the reservoirs.

The authors of the study say that resource companies should give experts in sustainable development a greater say in the development of projects to avoid the costs of conflicts.

"You can demonstrate the value of good community relations through these costs," Mr. Franks said in an interview. "Companies that run roughshod over communities are pursuing a very high-risk strategy."