My company is 50% minority owned and managed (by me). It’s also 50% female owned and managed (by my lovely wife and COO/CFO/CIO/CTO/everything else).
My top researchers are Indian.
My eight interns are in almost as many countries and some are older than I am, while others are much younger.
The Independent Speculator team is about as diverse as the cast of one of today’s Hollywood movies.
But I didn’t lift a claw to try to make it that way.
I couldn’t give a large rodent’s posterior for environmental, social, and governance (ESG) nonsense in my business. I simply want the best people I can get. That means being age-, color-, and gender-blind. Not as virtue signaling, but in uncompromising search of excellence. Period.
I bring this up because of what I’m about to say:
I’m rethinking the value of ESG initiatives in mining companies.
Up until now, I haven’t bothered posting analysis of the news for clients when one of our companies publishes an ESG report.
In part, that’s because most of our companies were already trying hard to be good corporate citizens. Reporting on their efforts in the new politically correct verbiage of ESG changes nothing.
But it’s also in part because I do think businesses should be focused on the bottom line. Kowtowing to the politically correct mob can range from being a waste of time and money to a complete disaster.
My view on this hasn’t changed.
What’s different is my perception of the degree to which ESG “credentials” will become an essential part of the permitting process going forward.
ESG may be BS, but it’s going to be the most valuable BS in the world—to mining companies.
The COP26 circus and the mixed messages about mining emanating from it really drove this home for me.
Here’s how I see it:
- Whether it should be so or not, the green agenda is going to be a major driver in the resource sector for decades to come.
- There’s a growing realization that “metals are the new oil” and that the green dream won’t be realized without a lot more mining.
- “Not in my back yard” (NIMBY) thinking dominates the minds of climate-change warriors and the politicians who pander to them.
- Supply chain security will force regulators in the developed world to permit more mines, but they are going to require ever more stringent ESG standards—not just the “E” bit.
- The need for energy minerals will be so intense that costs will be passed on to consumers (directly or via subsidies and taxes).
- Mining in developing countries that care less about ESG fluff might work for a while, but international corporations listed in developed countries will likely face increasing backlash—and regulation—for doing so.
- In this environment, companies with the most impeccable ESG credentials will stand a materially better chance of delivering for shareholders.
This may seem obvious. The profit motive has long been behind good corporate citizenship.
What’s new in my mind is that ESG credentials seem to be changing from good public relations to something as non-negotiable as a drill permit or a mining license.
There may be a little more wiggle room for underground mines with small footprints and benign processing methods. But if there’s cyanide involved, or a mountain is going to be turned into a giant crater, lack of “ESG permits” will be showstoppers for many projects.
Well, for starters, companies are going to get louder in their virtue signaling. Mining company websites may turn so green, it’ll take effort to figure out what they do. We may have to wade through pages of verbiage about how multi-gender-appropriate an exploration company’s porta-potties are before we get to drill results.
The increased flow of ESG showmanship will be great cover for obscuring pertinent facts.
Boots on the ground due diligence will be more important than ever.
Companies will be tripping over themselves to appear greener than thou, but much of it will be no more than that: appearances. A site visit—including unchaperoned chats with locals—will tell us a lot more about how permittable a project really is.
Short of boots on the ground, things to look for include:
- Projects on past mine sites have huge permitting advantages over those on pristine ground.
- Projects far from aboriginal villages, pastures, fish spawning rivers, traditional hunting grounds, and so on will have better odds of going ahead.
- Companies that have signed involvement agreements with all local communities should be less likely to be protested.
- I’ll be more interested in companies with projects in jurisdictions that have recently permitted other, similar mines.
- Projects in poor countries that care less for ESG mandates may seem advantageous, but the tradeoff is usually greater physical security risk as well as risk of retroactive tax changes and outright nationalization.
Basically, what it all comes down to is making sure we invest in the best companies doing things right. That was already a good idea, but now I think it’s going to become more important than ever.
I’m willing to pay a bit more for such top-notch players.
My gains might be less than a moonshot success story in Ebola Central, but my risk of major loss should also be much less.
I’m fine with that.
ESG mandates may be a load of dingo’s kidneys, but I do think they will make or break many mining projects going forward. Especially for large, open-pit projects, “being part of the solution” will be a major advantage.
Note that while this applies to silver—a green mineral—I can’t see it ever including gold. Anti-“not part of the solution” mining sentiment seems likely to be an increasing headwind for gold projects going forward. That would only tend to boost the perception of scarcity and the price of gold, but it will make investing in gold companies trickier.
I’ll do my best to keep you appraised of the changing risks as these themes develop.
As for how this affects specific companies, please understand that that’s what clients pay me for. But I am watching this closely when I give my take on resource stocks.
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