Fear of scandal blocks fund managers from mining: survey with Vale, BlackRock

Miners must prioritize environmental, social and governmental (ESG) improvements to attract investment funds, according to a new survey featuring Vale’s (NYSE: VALE) Mark Cutifani and BlackRock, the world’s largest asset manager.

Increasing the traceability of metals across supply chains, decarbonizing operations and logistics, and developing successful social programs are some of the key areas miners should focus on, according to the report by Vancouver-based advocacy group Metals for Humanity. It surveyed 150 global asset managers with help from a unit of London’s Financial Times newspaper.

“The mining industry remains misunderstood and underfunded,” Cutifani, chairman of the Energy Transition Metals Board at Vale and former CEO of Anglo American (LSE: AAL), said in the report, issued Thursday. “We need to do our work in a way that builds trust with our shareholders and potential investors, our broader business and social stakeholders and our local communities.”

The research found that 29% of institutional investors considered ESG factors integral to their fund selection criteria. Nearly half said they gave them greater importance than they used to. Fund managers said their main concern, cited by 31%, is that mining companies will have a negative impact on local communities and spark allegations of human rights abuses. A quarter said they fear scandals will cut fund earnings and inflict reputational damage by association.

“There has not been enough investment in exploration and development of mines,” Christophe Roux, Europe, Middle East and Africa head of mining, metals and industries finance at Société Générale, France’s third-largest bank, said in the report. “One of the reasons for that is that the social acceptance of mining remains very low.”

Other challenges

Besides ESG challenges, the mining industry faces declining ore quality and slower productivity gains than most sectors. Copper grades have plunged from 6% in 1890 to 0.6% in 2018, while productivity has stagnated at 1% growth over the past quarter-century versus 15% in manufacturing and 25% in business services. Energy transition demands are bound to make the situation more complex, according to the survey.

“Mining companies are significantly undervalued and trading at deep discounts relative to their replacement costs,” Evy Hambro, global head of thematic and sector-based investing and leader of the natural resources team at BlackRock, said in the survey. “If you had to recreate the materials industry globally, you couldn’t do it for the valuation that it trades at right now. It would cost many more times.”

Metals for Humanity focused on the mining industry’s funding needs for the global transition to cleaner power. The International Energy Agency forecasts that demand for vital metals will increase by four to six times by 2040. Consultant McKinsey predicts 20-50% shortfalls in lithium, copper, cobalt, iridium, tin and rare metals for electric motor magnets if countries are to achieve their net-zero targets. New production, smelting and refining needs could cost US$4 trillion by 2030, McKinsey said.

Engage communities

If mining is to become more appealing to fund managers, it must decarbonize and go beyond a do-no-harm policy. It should ensure social initiatives properly engage host communities to see, experience and understand the benefits of mining and its products, according to the report.

There needs to be greater visibility and transparency of operations and processes by employing independent third parties to offer objective validation. Key data should be shared with a wider audience to shift mining’s image as a problem to being a solution. ESG should be standardized to more easily compare companies, Metals for Humanity said.

Part of the mining industry’s problem is not promoting how valuable it is to everyday life, respondents said. It also has tended to view host communities as potential threats rather than partners. That’s fostered the traditional image of miners as poor corporate citizens in the minds of institutional investors.

“The vast majority of asset owners are very removed from mining and understanding its dynamics and therefore have pretty limited exposure to it,” Adam Matthews, chief investment officer of the Church of England pensions board, said in the survey. “When a disaster happens, it reinforces a negative perception of the industry. And that’s part of the challenge.”