Dominic Holden and Campbell Rickard
A mining blast is a delicate and deliberate act, with explosives used in a controlled manner to break up rock for extraction. In May 2020, Australian mining giant Rio Tinto horribly miscalculated the rationale of a blast in the Western Pilbara’s Juukan Gorge 1 and 2.
The issue with this blast wasn’t geological, but cultural; the explosion had destroyed Aboriginal rock shelters dating back 46,000 years and held deep cultural and historical significance to the Puutu Kunti Kurraama (PKKP) traditional landowners. Rightfully so, the incident caused widespread public outrage, eventuating in the departure of three key Rio management personnel, including Chief Executive Jean-Sébastian Jaques, a tarnished public reputation and a tattered relationship with traditional landowners.
But what are the financial implications of this blast, and what does the backlash from this event reveal about businesses’ growing need to retain their social license to operate?
Through becoming the first major industry player to divest from fossil fuel production, reducing the incidence of fatal safety incidents and avoiding the overinvestment in new projects despite steadily rising commodity prices, Australian mining giant Rio Tinto has reeled off a series of financial successes under Chief Executive Jean-Sébastian Jaques. Shareholders evidently appreciated this approach to management, with the mining giant’s value soaring to $33 billion in April 2020, up 150% from Jaques’ appointment in March 2016.
However, all of this came tumbling down with the Juukan Gorge blast. The timing was atrocious, with the blast occurring at the beginning of National Reconciliation Week, a national campaign designed to celebrate and build respectful relationships between Aboriginal, Torres Strait Islanders and non-Indigenous people. Rightfully so, the ethicacy of Rio’s actions was discussed across media outlets across the world, not to mention social media.
But while this backlash was swift and brutal, Rio acted completely within the law. Based on a 2013 ministerial consent, Rio Tinto was given permission to damage the caves in pursuit of $135 million worth of iron ore. The cultural significance of the site was enhanced a year later through the discovery of greater artefacts, such as a 4,000-year plait of human hair. However, this added cultural significance was not reflected in any legal sense, and thus Rio did not act criminally, despite the cultural and moral questions raised.
This is the latest series of events in a continuingly fraught relationship between a multibillion-dollar entity who profits from digging up rocks, and the traditional owners of the land that these resources are present upon.
This incident and the resultant backlash caused a series of cascading effects within Rio Tinto. After initially docking executive pay, Rio was forced to take further action due to continued pressure from shareholders including Australian Super, and a leaked internal audio recording of iron ore boss Chris Salisbury apologising for the impact to investors, rather than for the act of destruction itself.
Allegations of a negligent internal culture and a United Kingdom based leadership disconnected to the Australian social and cultural outcomes of their decisions threatened to derail the Rio Tinto train. Eventually, Chief Executive Jean-Sébastian Jaques, along with Salisbury and corporate relations executive Simone Niven stepped down.
Without breaking a single law, Rio now stands with reduced management skills from the departure of three key personnel, a fractured relationship with the PKKP and a damaged internal and external reputation.
This incident represents a new type of risk for mining companies and is representative of a broader shift in public expectations, with the importance of maintaining a social licence to operate now critical to the reputation and continued operations of any major company.
But amongst all the noise, what is the actual impact for investors of Rio’s situation?
The most visible cost to shareholders is the departure of an experienced and capable management team. Buoyed by rising commodity prices since Jacques took over in 2016, Rio’s stock has risen 116% and recorded record dividend payments. Whilst some of this performance is undoubtedly due to good fortune, his key decisions have been praised by investors for adding significant value to the company. Instead of reinvesting the excess cash into high cost projects, Jacques sought to make the most of the economic climate, selling the miners coal assets at the peak of the cycle. Furthermore, in 2019 Rio reported zero workplace deaths for the first time in history, thereby improving the mining giant’s vital relationship with key unions.
Not only will Rio Tinto lose core and proven capable leaders, its willingness to hold on to its embarrassed directors indicates that the board is at a loss to find suitable replacements. Despite the large shareholder, public and government backlash the embattled miner has been reluctant for Jacques, Salisbury and Niven to exit until March 2021. This presents a worrying picture for the future of Rio’s leadership, with no internal candidate obviously able to fill the shoes of the outgoing leaders.
Whilst more difficult to estimate, the cost of the reputational damage to Rio is likely to have a large impact in the longer term. The level of publicity the story has garnered renders the company as likely to be regarded as irresponsible in both the public and corporate eye far into the future. Ironically this is in spite of Jacques efforts to cultivate an image of a socially conscious miner, such as a partnership with technology company Apple to source carbon-free aluminium. Whilst any economic forecast is speculation, this damaged reputation is most likely to manifest in greater difficulty sourcing financing and dealing with other aborigional communities.
Due to it’s incredibly capital intensive nature, mining companies are reliant on investors to provide funding for new projects, reflected in the sectors comparatively large asset weighting for Plant, Property and Equipment on the balance sheet. Today’s debt market is seeing increased reluctance to support businesses not consistent with ideals of environmental, social and corporate governance investing. In Australia, this can most clearly be seen with the Big 4 banks, of which all are committed to not fund any additional carbon intensive energy projects.
Publishing the data relevant to the environment aspect in ESG investing is far easier than the social, perhaps explaining why so many companies have begun to incentivize their managers to reduce CO2 emissions. However, it is reasonable to assume that clear examples of breaches of the social responsibility tenet, such as destroying sacred Aborigional sites, will lead to the same lack of support that industries such as thermal coal are now experiencing. For Rio, the likely end result will be a higher cost of debt, eroding profitability on capital intensive projects.
Rio Tinto currently operates 16 iron ore mines in the Pilbara region, one of the richest regions of Aboriginal culture and heritage in Australia. The ongoing use and expansion of existing mines is often highly dependent on a working relationship with the local indigenous people. Given the PKKP’s frustration and the widespread publicity, securing consent for further activities on indigenous land under the Native Claims Act will be more difficult. Furthermore, the miners’ collapsing reputation for community engagement may hamper dealings with remote communities around the world, not just in Australia.
Rio’s next step is to find leaders willing and able to change its culture, to be more accountable and avoid future actions that harm the communities upon whose land they mine. The sooner they are able to put forward a new face of the company, the quicker it can begin to rebrand itself and heal its image. By its very nature, rebuilding a reputation cannot be achieved overnight, and thus will require decades of proactive consultation and careful consideration when initiating any new mining site in a culturally sensitive area.
Rio Tinto’s story exposes the ease with which a reputation can be tarnished and the social, financial and environmental consequences such disasters can have. Companies not embroiled in such controversy should heed of the importance of fighting off complacency and avoid these calamities altogether.
Dominic Holden is a Research Analyst for UNIT – University of Melbourne, specialising in economics, finance and public policy. Connect with Dominic on LinkedIn at https://www.linkedin.com/in/dominic-holden-244944182/
Campbell Rickard is a Commerce student majoring in economics and finance and is currently a UNIT research analyst.
Disclaimer: The views expressed in this article are solely that of the author’s, and do not necessarily reflect the position of UNIT nor the University of Melbourne. The advice given is general in nature and does not consider an individual’s personal financial circumstance. Transacting off this information is done so at one’s own risk, and individuals are encouraged to consult a finance professional before making investment decisions based off of this article.