Investing in sustainable mining: lessons from Marikana in South Africa

The Marikana platinum mine in South Africa will forever be a place marked by loss of life, like Bhopal, Macondo or Wenzhou. It joins the list of place names linked to avoidable company or state environmental, social and governance (ESG) tragedies. It is also a reality check for investors in the mining sector in growing markets. This first part of a two-part opinion piece looks at what happened and why it matters to ESG investors.
Marikana is a dusty patch of the Highveld in South Africa’s mineral-rich interior plateau traced with mines, agriculture and rural poverty. The Marikana platinum mine is operated by Lonmin Plc at Nkaneng near Rustenburg, a town that in 2010 hosted the England soccer World Cup team. The platinum sector is highly competitive and South Africa contributes 80% of global supply. The Bushveld Complex in South Africa is the world’s largest deposit of platinum group metals (PGMs). Pressure on platinum miner margins came from a global slump in platinum prices since mid-2011 due to low demand for the metal used in jewelry and catalytic converters in European cars to cut emissions due to the global financial recession. Margin pressure in a labour-heavy industry like deep-level mining saw firms like Lonmin negotiating to reduce their wage costs in 2011. Two platinum mines had already shut down in June 2012. Lonmin Plc is a dual-listed company with a business in mining, refining and marketing of PGMs with a market cap today of about GBP 1.44bn (US$ 2.32bn), with two key customersbeing BASF and Mitsubishi. Mostly because of supply concerns stemming from the strikes in South Africa, the platinum price has risen 13% as supply hit an 11-year low in 2012. But Lonmin shareholders have suffered: the share price is down over 70% (YTD), partly because of the strikes as well as reduced profit prospects. A November rights issue aims to shore up the weak balance sheet. Labour strikes in South Africa in 2012 involving up to 100,000 workers were marked by violence. Strikes disrupted Marikana mining operations for nearly six weeks spreading to other platinum, gold and coal mines that dragged on through November. Notoriously, on 16 August 2012, what the media dubbed the “Marikana Massacare” captured global attention: police shooting with military weapons left 34 dead and 78 injured, all captured on live video. Dead and injured men lay sprawled around the infamous koppie (rocky outcrop) just outside Lonmin’s mine property.
The emotionally-charged Farlam Commission of Inquiry is hearing evidence to understand what happened and will report to the South African President in Q1 2013. Already the police, surviving workers and family members have filed competing criminal and civil charges. Investors and ratings agencies have responded to trouble in South Africa’s platinum and gold mining sectors by becoming bearish on prospects and downgrading their investment exposure. In total, the Marikana conflict has claimed at least 47 lives, including mine security personnel, union
representatives, and two policemen prior to the massacre, which no doubt fuelled the extreme police reaction. It’s important though to understand the national backdrop. Bad relations between competing unions exacerbated the wage dispute between workers and the company, which was itself under pressure from poor trading conditions and investor demands. Social conditions for workers were dire with miners living in basic shacks where they did not qualify for or did not want to live in the mine hostels. Local government (itself embroiled in a corruption scandal and political power struggle) failed to provide basic services like roads and sewers, while national politics have been fractious in an election year and the police have had 3 different commissioners in 3 years. A stand-off of days turned into a crime scene due to a botched police crowd control operation and a fateful misunderstanding in the moments before the triggers were pulled. Months of tension and mistrust exploded in barely three minutes of police gunfire. Could it happen again? Like many such mining companies operating in places like Siberia, Papua New Guinea or Chile, Lonmin is headquartered in a major capital markets centre, London, while all of its operations are based in South Africa, 8,000 miles away. How much did this geographic gap lead to a communication gap, an ESG risks assessment gap, or a gap in leadership in an extreme situation?
Sustainable investment is often an intellectual conversation about environmental, social and governance (ESG) factors playing out over
the long-term. But, as the former CEO of Gold Fields Limited Bobby Godsell said, industrial actions and strikes in South Africa are not academic:real people really die. Marikana was a “wildcat” or unsanctioned strike, not protected even by South Africa’s progressive labour laws. In the run-up to the mass shooting on 16 August, the miners actually refused any union representation. The proximate issue was a breakdown in industrial
relations when miners, led by the skilled rock drill operators (RDO) demanded wage increases to net monthly wages of R12,500 (about GBP885,
US$1,400). RDO do the dangerous job of physically drilling into the rockface deep underground that eventually leads to investment portfolio profits for investors in platinum mines. The platinum sector in South Africa, unlike the gold sector, does not have industry-wide negotiations that apply to all mines and mining companies. Mines themselves have been the scene of both union member recruitment competition, and wage disputes. One such dispute had been settled in 2011 with Lonmin and the National Union of Mineworkers (NUM) negotiating a two-year deal. But workers in the industry – and at Marikana – had become dissatisfied with the settlement, flagging income disparities between different worker types, including below- and above-ground workers. Grievances were stoked by months of competition between two major unions seeking to represent the workers, the incumbent NUM, large and politically aligned to the ruling ANC, and the challenger Association of Mineworkers and Construction Union (Amcu), smaller and more radical. Fellow platinum firm Implats reported labour disputes and violent union rivalry in May 2012. Lonmin’s legal counsel has pointed to the “toxic relationship” between NUM and Amcu as one reason workers remained unhappy despite the
2011 agreement. NUM had accused Amcu of killing two security officers and had claimed that all the unrest was a ploy by Amcu to unseat NUM at Marikana. The strikes have led to similar strikes in the region, ending only in mid-November when Amplats the world’s top producer and a unit of troubled global mining group Anglo American settled the last outstanding strike. In the aftermath of Marikana and with government intervention, Lonmin agreed to pay rises for miners of up to 22%. Marikana is both near and far for institutional investors. It is less than a 100 kilometers drive northwest from the Johannesburg Securities Exchange, the most advanced in Africa, a global top 20 exchange by market capitalization, itself built on over a century of mining-driven economic growth and host to many world-first ESG initiatives such as the JSE SRI Index (the first ever emerging markets ESG index in 2004) and the Integrated Reporting Initiative (first to be built into listing and reporting regulations in 2011). The “Marikana reality” has entered the ESG lexicon. Lonmin was a member of EITI, rated on the JSE SRI Index and FTSE4Good, had produced sustainability and integrated reports, and been engaged in community development type initiatives. A leading ESG rating agency described Lonmin’s “history of strong management of ESG risks”. Lonmin reported through CDP and its 2011 sustainability report earned a GRI A+ rating, and included comments on “community unrest and industrial action experienced highlighted the importance of pro-active stakeholderengagement.” Lonmin is a member of the International Council for Mining and Metals (ICMM) and a signatory to the United Nations Global Compact (UNGC). In an eerie precedent, the 2011 sustainability report highlighted “industrial action at Karee Mine which was peacefully resolved”. Lonmin’s acting CEO Simon Scott in 2012 said Marikana was “an industrial relations issue and turned into something else”. The
“Marikana reality” is that a litany of ESG issues erupted in a tragic season of worker discontent. The list was long: wage disparities between local labourers and global executives, slow economic development in a region with a growing population, company obligations to their workers, mining community stakeholder relations, payday lending and loansharking, regional politics and corruption leading to failure to build roads or sewers, the role of institutional investors in the USA, Europe and Africa, political opportunism during an election year, enforcement of government regulations in rural areas, and the tension between local needs and a globalized industry. The “Marikana reality” is that companies operate in a complex web of relationships. Good corporate CSR and good investor ESG risk management is important. But these were not enough to prevent a fatal
flare-up within a dynamic social-economic and political reality. Investors have further lessons to learn about how to read better the ESG risks within the local realities.
Graham Sinclair is Principal of SinCo the sustainable investment consultant *