The Business Case for Social Due-Diligence
photo: Yanta, Piura, Peru
As I finally got this website up and running, I went through some of my old-field photos and found a picture of a more youthful me in 2006 with a group of major investors at the site of the Rio Blanco Project (not this photo). Rio Blanco was promising copper porphyry deposit on Peru’s border with Ecuador and I had been hired to lead and produce a social and environmental baseline study on the Ecuadorian side.
Everyone in the photo was smiling, and why not? The detailed feasibility study had determined nearly 1.3 billion tonnes of resource at 0.57% copper and 228ppm molybdenum. The investment payback period on the ~$1.5B investment was going to be 4 years of a 20 year mine life. The target date for first production was 2011.
Many residents and leaders of the nearest communities however were not in favour. As of 2003, they argued that the company had not gained the correct permissions to operate on community lands. They also expressed concerns about the impact of mining and mine-waste seeping into the Rio Blanco river basin. Proponents pointed to shadier underlying reasons for the opposition - that the development and increased state presence that a modern mine would bring would not be good for narcotics trafficking in the region.
Regardless of the reasons for it, opposition to the Project was fierce. In 2004 and 2005, a number of protest marches were organized. These sometimes involved hundreds of campesino farmers who would walk for over a day to reach the remote Project site. Clashes between the policy security forces and the protesters resulted in injuries and even fatalities on some occasions. Throughout all these events, the central government remained in favour of the Project. And, in February 2007, China’s number 2 miner, Zijin group, acquired Monterrico Metals (hitherto Project owner) for $186 million.
In September 2007, the community opponents tried a new tactic - they organized a referendum on the Project. The stated outcome was that 95% of votes cast were against it. The Project’s proponents attribute this result to a climate of fear created in the region where anyone openly supporting the project risked violence. Later in 2009 radical elements burnt down buildings owned by the company. This time, the government suspended the Project to ease tensions. A 2015 date was set to resume activity. More recently, on April 27, 2013, the President of Piura (the region where Rio Blanco is located) Juan Atkins Lerggios described the Project as “undevelopable” given the community opposition.
Were the investors in the photo wrong to be smiling? No, they still made out handsomely in the Zijin takeover, and the company added a lot of value by seeing a challenging Project through feasibility. And I, well I made my fees for a successfully completed study, and gained valuable experience as a first-hand observer to a social license gone wrong. The big losers – so far (as there is hope that one day the Project may be developed and their investment recouped) – are the Chinese investors led by the Zijin group. In their quest to acquire a “world-class” deposit one can only assume they did not do their social due diligence, or at least did not heed it.
This is only one of several promising projects I’ve witness fail and investors’ millions turn to loss. Companies spend tens of millions on technical feasibility studies. Should companies and funds not be adding some minor tens of thousands more to conduct a proper social due diligence? How many companies or funds do you know that are taking social risks seriously?