Information asymmetries and transparency – the leaking faucet of the mining industry
Most often, the mining industry is viewed as a social activity with the inherent goal of upgrading the societies in which the mining occurs. This is, in fact, wrong. Mining is an economic activity with the goal of creating profits for the shareholder or the investor. Apart from investors, mining is closely associated with a core group of stakeholders that play a major role in the success of the venture, namely the government and the community.
Historically, the industry has had a bias towards catering to the needs of the investor. This is because the industry is characterized by many uncertainties and the investors have to safeguard their investment. Geologically, it is impossible to know the exact ore grade and quantity of the deposit until production commences. Commodity prices are also volatile, creating an additional risk factor, which may negatively affect investment and production decisions – an investor has no assurance of the price they will get for their product and thus no certainty of the expected profits.
The industry is also characterized by high sunk costs and long exploration periods. It is estimated that only about 1 in 1000 exploration projects ever develop into commercially viable mines. Thus, for many exploration projects, most of the money spent is sunk costs – never to be recouped. For the successful projects, it takes many years before any cash flow is generated from production, and the initial capital outlay recovered. However, although mining is a high-risk venture, it also has potential for high returns. It is this magnitude of potential returns that makes the mining industry stand out prominently among other economic activities. Returns to mining companies can be large, for example, Glencore’s revenue in 2021 was N$3530 billion, compared to Namibia’s GDP of N$ 207 billion in the same year.
This brings into play the government and the host communities. The government acts as a representative of the communities to ensure the responsible development of mineral resources. This includes putting in place laws and policies to guide mining activities, and monitoring compliance with those laws. The government is also responsible for collecting revenue from the extraction of these mineral resources. One of the unique characteristics of the mining industry is that mineral resources are non-renewable – once a deposit is extracted and depleted there is no going back. Each deposit therefore represents a single chance of maximizing the potential and benefit that can be derived from its existence, a short term cash flow, if you will.
In many mineral resource-dependent African countries, it is no secret that government oversight agencies tend to be underskilled and/or under-staffed. The government thus relies on the mineral resource companies to tell them how much ore is in the ground, the quality of that ore and how much they are getting paid for it. This creates a huge information asymmetry to the detriment of the governments. In 2020, the UN report “Tackling Illicit Financial Flows for Sustainable Development in Africa” reported that Africa loses at least N$691 billion a year due to illicit financial flows in the mining industry. Most of this loss is due to under invoicing – for example a company would tell the host country the value of the mined resources is N$500 million, when in fact they are worth N$650 million in the destination country.
The imbalance of information crucial for decision making is made worse by the fact that despite being a major global producer of mineral commodities, there isn’t a single metal exchange in Africa, and apart from SAMREC in South Africa, no country in Africa has a national code for reporting mineral and energy resources to stock exchanges and financial institutions. The importance of reporting codes and stock exchanges should not be underestimated. Reporting codes create an environment to hold those reporting mineral resources accountable. They provide guidelines for reporting and displaying information related to mineral properties and lead to the production of standardized reports.
Stock exchanges are obliged to disclose to the public various aspects of mineral projects. This, in part, mitigates the information imbalance between the industry players and the governments. Additionally, regulators in countries that host stock exchanges have means by which they hold listed companies accountable. For example, this year Glencore was found guilty of bribery and engaging in corruption in a number of African countries. Consequently, the UK and US fined Glencore US$333 million and US$ 1 billion, respectively. It is crucial to note that the countries where the corruption took place will not receive any of this money. Not to mention that the corrupt African counterparts are themselves not held accountable. In the case of Namibia, the exploration and mining sector is made up of various companies/investors – local, foreign, foreign government, Namibian government and joint ventures between the various parties. For companies that are listed, it is relatively easy to find both technical and non-technical details on the companies and their projects. For all other companies, information available to the public is at the discretion of the company. This includes even information that should by law be made publicly available such as Environmental Management Plans. It is this information vacuum that leads to distorted regulatory oversight, a misinformed and dissatisfied public and inactive local civil society movements.
To address issues such as corruption, information asymmetry and misinvoicing, the Africa Mineral Development Centre (AMDC) has developed an African Mineral and Energy Resources Classification and Management System (AMREC) which is based on the United Nation Framework Classification for Resources. The development of UNFC-AMREC, together with the Pan-African Resource Reporting Code (PARC), aims not only to ensure a harmonised resource classification and management system across Africa but also to encourage transparency in financial reporting and broader participation of African citizens in the industry. The harmonised, transparent and public availability of resource data and associated deals acts as a corruption deterrent by enabling the public scrutiny of information. Transparency also fosters a trust relationship between the various stakeholders. As opposed to reporting codes that only categorizes economic resources, AMREC has a provision to report uneconomic mineral occurrences. Governments can therefore use AMREC to facilitate mineral resource policy and strategy formulation for sustainable development. The bottom line is this – only when we know what we have, can we determine what it’s worth. Information truly is power.