The 89th annual Prospectors and Developers Association of Canada convention kicked off yesterday a little differently – in an online format thanks to the ongoing coronavirus pandemic.
The highlight of Day 1 was a conversation on “profits with purpose” between Barrick Gold (TSX: ABX; NYSE: ABX) president and CEO Mark Bristow and Evy Hambro, a managing director and global head of thematic and sector-based investing at BlackRock – the world’s largest asset manager.
Moderated by Aline, Cote, global head of mining technical services with Glencore International, the conversation covered the current state of the markets, the evolving nature of ESG (environmental, social and governance) metrics and expectations, how companies and investors are adjusting to the new reality, and a glimpse at where it’s all headed.
The hour-long discussion started off by acknowledging the strange times in the markets.
Hambro noted that very low interest rates, negative real rates and the huge amount of liquidity in global markets have people searching for returns in “unusual places” – such as GameStop stock.
As a gold miner, Bristow also puts cryptocurrencies in the same bucket.
“Everyone’s so desperate, they’re not sure about exactly how things are going to work and so they’re buying things that have no real, inherent value in the market,” he said. “We saw that overexuberance in 2009-10, then a major crash and of course you measure it with the gold price,” he added, predicting: “We’ve seen the first spike in the gold price – there’s another one coming.”
Layered on top of the unusual and confusing market conditions is the recent, real and incredibly rapid shift among investors towards incorporating ESG into their investment decisions.
“It’s a fundamental shift – people are investing from a different, or an evolved perspective and they’re orientating towards companies and securities that are compliant through the ESG lens,” Hambro said.
While ESG is already playing an increasing role in determining the cost of capital for companies, Hambro said this is just the beginning.
“The scale of the flows that BlackRock is seeing in terms of the money that’s coming in this direction is extraordinary. And you can see it in the results of companies and the size of the funds that are receiving this capital. On the other side, you can see it in the very, very low bond rates that the company’s able to issue new debt securities at.”
ESG ‘balance sheet’
While there are clear benefits for companies who take ESG seriously, the lack of standardization of ESG metrics means any company’s ESG standing is far from clear.
ESG and responsible mining are not new concepts, but how ESG is measured varies even among mining industry groups. Hambro likened the current state of ESG with the early days of the safety culture.
“There were loads of different metrics people were using and it took a while for that to become standardized. Once it became standardized, the whole industry was moved forward,” he said.
Another issue is that current ESG metrics are inadequate to provide a full picture of a company’s performance.
That’s why BlackRock visits operations as part of its due diligence to see firsthand the infrastructure that’s been built, meet the locals and see how they are benefiting from the operation, see the new businesses that are created because of it, and meet with local governments and regulators.
“We can see how well the company is perceived in terms of how it operates and how it shares the benefits from its operations with the people around it,” Hambro says. “That isn’t captured in a standard ESG report. Therefore you only get a very, very narrow look at a company’s performance by just relying on those reports.”
He added he’d like to see a more “rounded view” – something akin to an “ESG balance sheet” so investors can see both sides of the equation. “If there is something unfortunate that happens, that should be able to be balanced by the positives that get so little daylight,” Hambro said.
While BlackRock will conduct site visits, that’s not the case with other large capital pools globally that are looking to invest but don’t have the same kind of fund manager control and due diligence, Bristow said.
“The problem at the moment is most ESG reports are generated by artificial intelligence (bots). Once there’s something on the internet, whether it’s right or wrong, it arrives in a report.”
Barrick has created its own ESG score for the company, scored against its peer group, and has used it to present to shareholders and engage ratings agencies on how they arrive at their ratings.
“It’s hard to get to them and force them to be transparent in the way they’re dealing with that,” Bristow said.
10 years down the road
The discussion ended with Cote asking Bristow and Hambro for some predictions about the future.
Bristow responded to a question about where Barrick would be in 10 years’ time by stressing the need for the mining industry to connect with younger people.
“The question we need to ask is: ‘How can mining become acceptable to future generations?’”
While mining is essential, and “everyone uses it every day,” it’s an unloved industry, Bristow said. “We’ve got to change that.”
Bristow suggested the first step towards that change is for the industry to become more diverse – something that was personally exciting for him to watch in action with the Barrick Gold-Randgold merger in 2019. The merger “exposed North America to South America and Africa” and brought together senior executives in all those continents, he said.
Second, the industry needs to recruit younger people, who naturally make organizations more agile, and invest in technology that will help with ESG compliance.
The industry needs to be “nimble and agile and super smart,” Bristow said. “And that’s like an oxymoron for the mining industry – bar a few exceptions, of course.”
For his part, Hambro said that the implementation of circular economy principles will affect commodity pricing – for starters.
“I think we’re going to see pricing differentials emerge based around the “greenness” of commodity production. I think we’re going to see a new source of raw materials being exploited which is from recycling and urban mining.”
Changing consumer habits and consumption patterns are also going to have a huge effect within the next decade, and will require a new mining business model.
“We’re seeing it play out already – look at carbon pricing today, it’s almost doubled in the last few months. If that starts to get priced into commodities and you get a price differential, some players are not going to survive,” Hambro said. “I think that will be the key difference over this decade is the evolution of the mining industry and how it actually satisfies the shift from the end consumer.”