LAND GRABBING IN THE MINING INDUSTRY

THE CASE OF NEWMONT MINING

By Daniela Carosio ECPI, Director Institutional Relations

MARCH 2012

2 WHICH IS THE PROCESS OF LAND GRABBING IN THE MINING INDUSTRY?

Land grabbing in the mining industry is generally the result of a development project which involves one or more mining companies, the Government and the local communities. The majority of the new mining locations are in remote areas in developing countries. In most cases the Central Government lacks financial capital as well as know-how for big infrastructural projects. Therefore it incentivizes foreign direct investment and new developing activities in his territory by multinational enterprises. Big mining projects are often managed through the creation of a New Company with mixed domestic and foreign shareholders. Sometimes it is asked for a financing by the International Finance Corporation IFC, member of the World Bank Group, the largest global development institution focused exclusively on the private sector. To be eligible for an IFC funding a project must meet a number of criteria, among which also benefit the local community and be environmentally and socially sound, satisfying IFC environmental and social standards as well as those of the host country. In some big projects IFC even enters in the capital up to 5%. In big projects many players are involved and private players do not hold themselves accountable to local communities as long as the host country does not require it. This happens in most poor countries or developing ones that dont have strong rule of law with human rights enforcement as well as environment and biodiversity protection regulations. Whereas no such guarantees are provided, the land where local communities have been living is grabbed to develop new projects and the people who are affected are dislocated with minimum or insufficient compensation. Most of the projects are in far remote areas where indigenous people are living and where the biodiversity is rich as well as there are abundant reservoirs of water. There is also a relevant impact in terms of deforestation, soil erosion and desertification endangering local biodiversity. Another serious environmental issue is the climate change impact both in terms of higher GHG emissions due to the energy intensive mining production and relevant decrease in CO2 absorption capacity as a result of deforestation, soil erosion and desertification.

S- SOCIETY
The consequences of mining activities on local communities are severe and have to do with the human right to a sound living, health and safety as well as the basic human right to access to water (CERES Aqua Gauge). Highly impacting projects meet the opposition of local communities and strong protests as well as violence can be expected in case of no dialogue with them. Ultimately land grabbing for mining could lead to violation of basic human rights if native communities are massively displaced without free, prior and informed consultation (FPIC) and compensation or if their sources of drinkable water and food are contaminated or deplenished.

G- GOVERNANCE
The whole Board of a mining company must be responsible to its stakeholders. There is a serious governance risk in case of no responsibility and accountability at top management level towards the stakeholder and no attention to communitys relationship and engagement. A sound governance process with strong and enforced anti-corruption and anti-fraud provisions is required, in particular for investment and operations in countries with lack of transparency, and corruption risk at Government level, whereas there is no respect of human and indigenous rights, no certainty of propriety rights and weak rule of law.

WHAT ARE THE RISKS FOR INVESTORS?

Investors run serious reputational risks if they invest in a mining company which does not adopt a proper community relationship program and has a poor track record or is accused of not respecting human rights and the environment. In case of investment in companies vulnerable to accusations of complicity in corrupt behavior, investors run operational risks from interruption in the production up to most material one, i.e. the loss of the license to operate. These are significant business risk rendering companies vulnerable to local conflict

WHAT ARE THE ESG THEMES INVOLVED? E- ENVIRONMENT

The most severe impact is the water pollution and contamination and the unsound practice of riverine tailings disposal. E.g. in the case of open-pit gold mining, the minerals are encased in rocks and to obtain a paste of pure gold, poisonous chemical cyanide is added to rocks, as well as zinc and sulfuric acid. The tailings are thrown in the water and in the soil.

Copyright 2012 by ECPI Group S.p.A., ECP International S.A. and ECPI S.r.l. All rights reserved.

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and insecurity, and possibly compromising their longterm commercial prospects in these markets. encouraging the implementation of the EITI as a mean to contribute to improvements in governance and transparency. Also the high social and environmental risks of land grabbing in the mining sector particularly in developing countries are to be carefully considered by investors. The major obstacle is to guarantee communities the Free Prior and Informed Consent (FPIC) which means aligning the interests of the shareholders and the stakeholders (specifically the affected communities). This is a necessary condition for extractive projects to be successful in contributing to sustainable development. Since 2006 ICCR members, among which CBIS, Calvert, Wespath, etc. managing several billion of US$ in assets have been engaging in dialogue with Newmont Mining and filing resolution on the introduction of the FPIC, with the goal of preventing some severe reputational and operational risks of their investment. These dialogues are meant to improve the sustainability, transparency and accountability of investments in mining to which the investors commit, inviting also other investors to follow their lead.
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BEST PRACTICE CODES AND REGULATION IN THE MINING INDUSTRY

Specifically in consideration of the governance risks of investing in the mining sector, stakeholders industry initiative such as The Extractive Industries Transparency Initiative (http://eiti.org) has now become a standard, improving transparency and accountability in the majority of mineral and metals rich countries. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which regulates the U.S. financial market, has two provisions on disclosure intended to promote transparency and governance in natural 1 resources in countries outside the United States. Companies operating in areas of political instability, violence, bribery and corruption face business risks that can significantly affect their commercial prospects and returns to investors. Companies in the extractives industries oil, gas and mining are increasingly subject to these risks as they move to source more production from assets in countries with higher risk profiles.

THE CASE OF NEWMONT MINING ECPI ESG RATING

HOW CAN RESPONSIBLE INVESTORS MITIGATE THE RISK OF THEIR INVESTMENT IN THE MINING SECTOR?
It is very important that investors engage on promoting transparency and community relationship in mining projects in developing countries. A double check should always be done also at country level: if the Government is not transparent high risks of corruption in the market are to be expected. A relevant engagement initiative by responsible investors has been the support of the EITI initiative. Over 80 investment institutions, which collectively manage over US$ 16 trillion of assets, have signed the Investor Statement on Transparency in the Extractive Sector. Institutional investors with exposure to extractives companies have an interest in
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Since 2007 ECPI has rated Newmont Mining as ineligible (F) because of serious environmental and social concerns. In the last decade community protests occurred in the Newmont Mining sites in Indonesia, Ghana and Peru because of severe environmental pollutions caused by the mine tailings and waste disposal contaminating community water sources and as well as poor health and safety labor conditions. These severe impacts have prompted violent communities demonstrations and complain against land grabbing and poor compensation for the damages caused by the mine operations. In the recent 2012 review of the US mining company, ECPI confirmed the rating F for its still relevant high social and governance concerns, but with an higher score because of improved standards in environmental management. According to ECPI Environmental analysis the company has a fair environmental performance. It has a wide and ambitious environmental strategy.
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Section 1504 mandates oil, gas and mining companies, registered with the Securities and Exchange Commission (SEC), to publicly disclose the tax and revenue payments made to any government; Section 1502 requires that companies using minerals from the Democratic Republic of Congo provide disclosure that the payments did not fund armed groups in that conflict country, or adjoining countries, under what conditions those minerals were mined, and measures taken to exercise due diligence on the sources of minerals and their chain of custody.

ICCR includes 275 faith-based institutional investors, including national denominations, religious communities, pension funds, foundations, hospital corporations, economic development funds, asset management companies, colleges, and unions. Each year ICCR-member religious institutional investors sponsor over 200 shareholder resolutions on major social and environmental issues. ECPI has been a member of ICCR since 2002.

Copyright 2012 by ECPI Group S.p.A., ECP International S.A. and ECPI S.r.l. All rights reserved.

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However, it is involved in several environmental litigations and had significant scandals in the recent past. From the S and G analysis, after entering the dialogue with responsible investors, who are members of ICCR, the company made some progress such as the release of the Community Relationship Review, commissioned by the Board in 2008 to the Law Firm Foley Hoag. However the Review has not yet been implemented across the five mine sites evaluated. dialogue. Consultations, community relationship and engagement are common in developed democracies, they are however rather delicate issues implying a long process which takes into consideration pros and cons of project and finds ways to align incentives among all those players who have a stake in the project itself. E.g. Mina Conga is a contentious project which is imposing a trade-off between exploring one of the world's top sources of base and precious metals and the right to preserve the blue gold, water. This delicate balance of interests is causing growing tension within the Government, between the Ministry of Mining and the Ministry Environment and between 3 the President and the Prime Minister .

PENDING DISPUTES
GHANA Newmont Mining has recently been accused by NGOs of human rights abuses. Specifically, the NGO Livelihood and Environment Ghana recently released a documentary which chronicles the accounts of people alleged to have been affected by the operations of Newmont Ghana in the Brong Ahafo Region. Wacam, a human rights and mining advocacy NGO, has called on the Government to investigate the causes of death of 15 persons in the course of the company operations in the same region. In the Peruvian Amazon (Bagua) in June 2009, 40 indigenous people protesting against the exploitation of natural resources in the forest were killed and at least 200 injured.

WHICH ARE THE INDICATORS TO DETECT AND MITIGATE THE RISK IN INVESTING IN MINING?
As for the return, the risk of an investment is to be measured over its life cycle. In order to address, assess and monitor the risk of investing in mining it is important to identify the main phases of its life-cycle and analyze how each phase is connected to ESG/Responsible Investing. For mining investment the phases are define as following: Evaluation of the investment: careful analysis of the Government and major contractor transparency, no corruption, ESG impact and dialogue with affected community. FPIC for indigenous people has to be guaranteed as well as fair compensations. Operations have to prove the soundness of the environmental management as well as of the social impact, appropriate waste disposal, and replenishment of water sources; Dismissal of the mine according to a sound ESG impact analysis. For each phase there are general ESG KPIs and sector specific ones. It is also relevant to refer the sector-specific indicators to the country ESG rating. I.e. the legal framework of enforcement of Human Rights, Labor Rights, Health & Safety, Environment protection is related to country governance and ESG rating.

PERU - MINAS CONGA The massive US$ 5 billion Mina Conga mining project in the Perus northern Cajamarca province is subject to strong protests by the local population. This is Perus largest ever mining investment. Newmont is proposing to mine a high-altitude ecosystem at a site at the headwaters of multiple rivers and wants to remove 4 lakes and replace them with 4 man-made reservoirs, 3 for drinking and the fourth one to hold mining waste. Civil society groups are making pressure to lawmakers to ban mining in the headwaters of river basins because of risks of water pollution and depletion. They also want Peru's constitution to recognize water as a human right and resource that cannot be privatized, as in nearby Ecuador. The EITI initiative has contributed to raise the standards of awareness and accountability in the hosting countries. Ghana has been designed compliant by the EITI Board in October 2012 and Peru in February 2012. Indonesia must complete EITI validation by April 2013. However Perus new Government of President Humala is under tension on how to address the mass protests against the project and to keep the line of

The Ministry of the Environment has reviewed the Newmonts Environmental Impact Study (EIS) for the Conga mine approved by the Ministry of Mining and concluded that it needed further evaluation because it would cause drastic changes to the ecosystem. The declaration of the state of emergency in Cajamarca region last December caused the protest and following resignation of the Prime Minister, replaced by a retired army officer and marked a reversal in the relations of the Government with the communities and a closure to any dialogue.3

Copyright 2012 by ECPI Group S.p.A., ECP International S.A. and ECPI S.r.l. All rights reserved.

5 CONTACTS
ECPI Group Milan Via G. Carducci, 9 20123 Milan (Italy) T +39 02 97165700 institutional_relations@ecpindices.com www.ecpigroup.com Bloomberg: ECPS Reuters: ECAPITAL

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Copyright 2012 by ECPI Group S.p.A., ECP International S.A. and ECPI S.r.l. All rights reserved.