Sheila Khama – The Mining Industry Explained

“Investors are looking at their self interest and that’s how they’re coming into Africa. The question is, how are we preparing ourselves to interact with those people in a way that does not place us at the disadvantage? “

Marcus Courage for Stories Africa (SA): Hello and welcome to this issue of the Voices of Africa Podcast. I am fortunate to be joined today by Sheila Khama, we live not too far apart in Gaborone, Botswana. But more than that, she’s an expert policy advisor and before working in policy advice, she was a CEO of Botswana’s biggest diamond mining company DeBeers, which she left the Beers in 2010, and moved to Accra, where she became the natural resource’s advisor at the African Centre for Economic Transformation. She went on to the World Bank, the African Development Bank, and she spent a considerable proportion of her career advising governments in Africa, on natural resources, how to introduce and implement policies to ensure sustainable development, and the best outcomes for mineral-rich and oil-producing countries. She’s now a non-executive director at Tullow Oil. She’s also consulting in her independent capacity. She has recently launched a website, I know Sheilakhama.com, and you can read some of her commentary observations and view the podcast channel there. Sheila tell us a little bit more about what you’ve been doing over the last year?

Sheila Khama (SK): I’ve put together a personal portfolio consisting of three elements. One, being to serve as a non-executive director on corporate boards and I’ve recently published a book titled, ‘Corporate Governance’, a personal perspective of boards of mineral oil and gas companies, but specifically companies in which the state has an interest. So that’s a big chunk of what I’m doing, together with a podcast and other features. I’m also looking at writing my memoirs, my time at Anglo-American and I’m working with an agent in Dallas, USA and that’s coming along nicely. Finally, I do consulting work, as you say, I’ve been doing work in eight countries for the African Development Bank, examining the effects of the COVID-19 pandemic on supply chains, and in between all that I’m keen on rose gardens.

(SA): I wonder if we could start where we’re at and COVID-19 and specifically the consultancy work you’ve been doing for the AfDB and how the mining industry in particular performed during the COVID-19 pandemic? Additionally, I suppose I’m specifically interested to know whether the industry has stepped up to the plate and is capable of, not only maintaining and managing its operations in this tough social distanced environment, but whether it’s stepped up and supported the community around operations as well, as you give us an observation of what you’ve been observing across the continent.

(SK): I mean, to the question, has the industry stepped up to the mark? From my perspective, the answer is a resounding yes. These are unprecedented times, and nobody could have anticipated that in the early part of 2020 a virus would essentially affect the world in the way it has. An ability to respond to that unprecedented event in itself speaks to a significant level of resilience. To contextualise, we are speaking of mining as if it’s a single composite entity and on some levels that is true, but on others, it is not. Mining is essentially a different industries with different commodities and levels of sensitivity to events like a pandemic. Therefore, the extent to which you have different commodities, some of which are bulk and need movement through rail and ports, in an event like this, these become more vulnerable. Comparatively, how much you have other products, like diamonds that can be lifted in small quantities, they then become less than susceptive.

Having said that, the main driver of what happened to the mining industry on the continent was not so much the pandemic itself, but the emergency measures taken by the individual countries. This is where you notice the differences and the challenges faced by operators in different countries. South Africa, for instance, an extensive mining jurisdiction in the region, shut their entire country from March to mid-April for nearly six weeks and except for coal, all the mines were closed. However, their mining industry quickly, through the Minerals Council of South Africa, engaged the government and agreed on rules that enabled people to go back to the workplace. Of course, that is a measure of resilience, the ability for them, through enlightened self-interest to say, we can rectify this, and if we bring new rules of engagement that is possible. Consequently, by the end of last year, operations in terms of production had bounced back to the levels of about 80%. Now let’s speak to the specifics of whether the industry has been sufficiently responsive to the needs of the communities. Across the continent in Ghana, DRC, or South Africa, mining companies came together with host governments and assisted the response in several ways, particularly in the earlier stages. The most important was material in South Africa, the companies put together roughly one million US dollars to buy PPPs. In Ghana, the government and the chamber did the same. Ultimately, there has been an enormous amount of work done by mining companies to fill that gap. A specific area impacted by the pandemic due to supply chains, that are paramount, is small and medium enterprise companies. A significant way that the mining helped supported sub-sectors is through the supply chain. In South Africa, for instance, the Anglo American Group decided instead of terminating contracts, they will prepay their suppliers and enable them to pay salaries and keep their business alive. Those are my indications of how well I think the mining industry responded. Similarly, in my home country, Botswana, that sort of joint venture between the government of Botswana and DBS also sprang into action and among other things, helped galvanise small businesses to produce masks, that not only help protect the public but also generate an income for several communities.

(SA): Thank you for sharing those insights. Sheila. Your observations chime with some of mine, certainly when it comes to how industry supported their communities at this difficult time. I can think of examples of mining jurisdictions around Africa, where ultimately communities were wholly dependent on the support of the medical facilities, and the sanitation and provision provided by the mining companies, and actually, the government was relatively absent, unable to reach, in some cases, these remote locations.

(SK): One thing that I want to recognise, which I mention in my book on governance, is the role of state-owned entities. Something that I have found is there is no evidence of this, with respect to mineral companies that are wholly owned by the state. There’s a disconnect there because I would have anticipated in these circumstances there is an opportunity for such entities to spring into action, take a leadership position and show the level of commitment that those countries expect of foreign investors by setting an example.

(SA): So you’re disappointed, by the response of state mining companies?

(SK): I’ve done a lot of research on the response of the state owned mining companies to the pandemic. Whilst this response might be there, I don’t see evidence of it. On the other hand, I see evidence of those interventions by foreign or privately owned and publicly listed companies, which may be as a direct consequence of the greater publication of their work. However, my sources are not the companies themselves, my sources are mining journalists and journalists who have no vested interest in stating anything other than the fact that they observe them.

(SA): You referenced there, that perhaps the private sector is better at publicising their activities, than the governments or state mining companies. I wanted to talk about this issue of perception and the image of the industry. You’ve been clear to point out that it’s an oversimplification to talk about the industry when different components of the industry are distinctive in their own right, and depending on the commodity, and some have complex value chains, others slightly and slightly more straightforward. But solely in the last two/three years, and, you know, we’ve had the Brumadinho tailings dam disaster in Brazil towards the end of last year. We then had the destruction of the Gorge caves in Western Australia. At the beginning of this year, I think I’m right in saying we’ve had the prosecution of Beny Steinmetz in a Swiss court for nefarious corrupt dealings in Guinea, related to a prominent mining asset, and Dan Gertler currently in the headlines for his activities in the DRC. In the mining sector, I would argue, the industry continues, to be characterised by bad news and to be perceived, as a simply extractive industry. These are sophisticated companies in the sector and why is it they’ve been so woefully poor at overcoming this admittedly oversimplified perception of the industry, but influential one of an industry that isn’t necessarily aligned with good governance practices, and working in the interests of the society in which they’re invested.

(SK): Firstly, I don’t necessarily agree with you that the perception is a reflection of the failure or inability of the industry to communicate. So let’s contextualise that and say I’m not buying into that, what I’m buying into is the perception persists. Therefore, I would sense that the question is, why, despite the efforts by the industry, both communicating but also tangibly what they do in the boots on the ground, why is this perception consistent? That for me is the paramount question, and with third markers, I think there are several reasons. First, let’s take your question, you gave me three examples there, and when I look at the statistics of numbers of mines that have since been opened in South Africa since the pandemic, following initial closure, I count 385. Now you’ve just named four incidents, and I’ve just given you one country. Essentially, the statistics don’t speak to reality. What speaks to the reality is media coverage, which is to say, if you have a person like Benny, and the outcome of the court case, for whatever reason attracts more news than what I’ve just told you, which is that Anglo American and other companies in the first month of the pandemic gave about 10 million US dollars. It seems to me that this is the reality we are dealing with. We live in a world that consumes the negative news, a lot better than the positive are the headwinds that any industry including mining faces.

I believe the second reason is the perceptions persist in the public narrative. Whether it is political rhetoric, or civil society activism, or the prevailing level of trust worldwide, in the industry, in government, and big business, when you put all that together, mining is set along with that tide. Now, the question then becomes why the obsession with mining?
Sadly, for me it is ironic. This is precisely because the mining industry is covered in Africa or Latin America or South Asia. In countries that are relatively impoverished in communities  mining investors take the risk of investing hugely, and they become the only show in town. And because they are the only show in town in some communities the expectations of what they should deliver are invariably disproportionate and then multiply that with the levels of poverty, unemployment and, and growing populations. The lag time is almost infinite. I think it is this inability by mining companies to ever reach a level at which they can fully meet the expectations and as long as this inability to satisfy expectations persists, the assumption that they are not doing enough remains.

Those are some reasons I see, but it isn’t for insufficient communication. Now, when you’re reminded that you’re faced with a choice, can I invest? Is it worth investing time communicating on something where I know the expectation is disproportionate to reality, therefore, I will never succeed? Or do I just work based on what I believe is the right thing to do? I think most executives have accepted this is not a battle they can win and that the best thing to do is the right thing and leave it at that.

(SA): Thank you for those insights. I wanted to move on and talk about the renewable energy and the trend to invest in renewable energy, and everything that implies, namely, securing the rare earths and other metals that are a core component of electric vehicles, electric batteries, and energy storage. We know that sometimes restrictions in Africa are rich in cobalt, and lithium, and some of these key components for battery storage, and electric vehicles. We’ve witnessed companies like Tesla, their share price at exorbitant levels and this trend seems not to be dissipating. Do you worry these dominant manufacturing countries that will be looking to source these rare earths and metals, will employ tactics that will alter the geopolitics of the continent, and specifically these producing countries, and that you can envisage some sort of either direct or proxy battles being played out between China and America and Europe, or other manufacturing countries? Is that something that you’ve started to observe or that you worry about?

(SK): I’m not a sceptic, but I suppose if I’m anything, I’m a Pan-African and a pragmatic person. The way view this, is that when there’s a drive for demand towards any minerals, the burden is on the African governments’ to design the policies that position themselves to profit from that. This is my focus, rather than worry about whether some other person in the countries that import these materials may not mean the African region? Well, if you do that, I sense you get nowhere. Realistically, this is because it’s a competitive world and somebody is always deliberating primarily from their own perspective and that might translate it to them not meaning well. I think this is something we need to accept as a given. There’s investors there, considering their self-interest and that’s how they’re coming into Africa. If we understand that, then the question is, how are we preparing ourselves to interact with those people in a way that does not place us at the disadvantage? When I was a schoolgirl, they said Africa’s going to become independent and have self-determination. That was my subsequent interpretation of that service assimilation that we would go on to take proactive positions, and meet the world halfway to make sure that we, too, were part of the conversation of what happens, particularly to our resources. So no, I don’t worry about that, I regard it as an opportunity. Will there be some geopolitical tension nevertheless? Take the Dodd-Frank clause, which essentially addresses conflict minerals coming out of the Lake District in Africa. I believe this was de facto America’s way of ensuring that there was not a level playing field, but that use of American companies was is advantageous, at a time which they perceived to be rapidly slipping into Chinese territory. Some people argue that war has already started. Despite this, as far as I’m concerned, assuming that is correct, the African governments’ should have been engaged in the United States and making sure that those clauses were not placing them at a disadvantage.

Let me speak also to the notion of race. So for you and me, people who speak English are rare means of limited availability. Let me elaborate, in regards to minerals, when we say rare, we don’t mean rare earths or rare geologically in more frequency than regular minerals, rareness in this instance simply means they rarely considered feasible to mine for your average investor or geologists. If you have the Tesla’s of this world, and the appetite for electric cars and other gadgets, those otherwise traditionally marginal deposits may well be now considered not marginal and therefore this rareness may just go away even as we know it.

Finally, on the continent, we know the availability of certain substances is low and the only country that has explored for rare earths, is South Africa, but even then little. So it suffices to say that with a mere undertaking of exploration, there may well be a hell of a lot more than we think. Finally, the country with the most rare earths in the world is China. So when we take geopolitics, they’re likely to be in the rest of the world and in China before they become a major issue on the African continent.

(SA): I wanted to turn to the oil and gas industry. You’ve been advising governments, not just in the mineral sector, but also in oil and gas policy as well. You’re also currently serving as a non-executive director on an oil company board. There’s no doubt that the pandemic has introduced huge challenges for the oil and gas industry and what we’ve just been discussing, namely, the flow of investment into the renewable sector, and the real growth of that sector, has led to oil and gas being less in vogue and oil prices being at a stubbornly low prices, although I know there’s been there’s been an increase over the more recently, and we’ve got back up to a sort of normalised level. I’m not going to speculate as to where the price of oil will go once vaccines are more ubiquitous, and people are travelling again. However, I want to invite your thoughts on the industry as a whole and to the observations of many, the industry’s real slowness to adapt to renewable energy and clean tech. I’ve spoken to you about this before, so I know that I’m inviting you to tell me that’s not necessarily the case. But I am reminded of something I saw written, that said, of all the clean energy spending, by the world’s biggest oil companies over the last five years, a quarter of it has been performed by one company, one company only. This begs the question, what are the others doing? And why are they not up to par and up to speed? Why is it that the industry has been really as slow as it has been to embrace low carbon investments. Perhaps you could give us some insight into exactly what proportion of these portfolios are now invested in low carbon, we’ve seen big statements this year from BP. So there are companies who are really progressing, some would argue, very belatedly, but I just like to get your perspectives for the benefit of our audience, as to this industry, and its future and the topic.

(SK): Let me try to unpack the questions as I see them. So firstly, why has the industry been slow? Why is there no synergy? Why are we seeing different actions out of majors, leading to potentially different outcomes, what is on the horizon? To begin, let’s take the fossil fuel space, this is driven from two angles. The first being the oil space and oil emissions including through flaring. We are told by scientists that this accounts for the world’s biggest source of global warming. This is where the focus has been, by contrast, gas, associated with oil or not, are deemed to be potentially clean subject to technology. Therefore, you’ve got within the same petroleum space, a product that is considered particularly bad for climate change and one that is, at least in the intermediate solution. So it’s important for your listeners to understand that in the petroleum space, we have this difference. Currently, the majority of oil companies, are typically both oil and gas companies because the value chains upstream and to a limited extend midstream, are very much the same. More importantly, when you produce, you almost invariably have some associated gases with it and therefore capture this in the process of those which don’t involve flaring. That’s the big picture. Subsequently, when we then ask them to move away from fossil fuels, in the current dispensation, they have an option to dump oil and stay with gas illicitly entirely, but for many of them, gas is proportionately a much smaller component of their investment, and therefore revenue. As a result, they would be essentially having to redefine themselves going into the future. It’s a hell of a lot easier just to say, look, we’re getting out of petroleum, because it’s like, giving away or walking away from 90% of your core business, assuming you are in business. Therefore, that’s the challenge I think some of the oil companies have had. Now, why is the transition slow? My guess is and I can’t speak for all companies, that if you think about it, you’re asking a great big African elephant guru to turn around like a snake with that same level of agility. Therefore, these companies are heavily invested, so you’re asking them to divest very quickly. I suspect there’s no such thing, not given this, the order of magnitude of the financial commitment. So I would imagine dislodging themselves from the investment they’ve already made, the commitments they’ve made to the bankers for a return on investment over 50 years, etc. Those are some of the logistics and then the investment in research and development, in people, in physical infrastructure. Think about this, when we ask an oi major to divest, not only are we asking them to withdraw financially; we are also asking them to decommission huge pieces of engineering, infrastructure, etc. They have to think about what they are going to do with this equipment and how to fund the cost of decommissioning something which, by the way, is now for all intents and purposes, a sunken cost. There’s an absence of future development in terms of revenue to compensate for that cost. I’m trying to give you a sense of the level of investment and the logistical challenges for private companies. Now let’s move closer to home. You spoke earlier about geopolitics and then additionally there are state-owned entities. For example, the traditional arms costs of this world, the gas compression in Iran and Iraq, in Russia, in Nigeria, in Algeria, these companies have a completely different set of problems. Their problem is not just everything else I’ve stated. It is that when you pull the plug from the sole breadwinner or the biggest contributer in Nigeria, Algeria, Egypt or Angola, what we have done in one fell swoop is change the fate of our whole country, these people. So if you put that cocktail of issues, I hope your listeners will agree with me, nobody’s moving fast here. It’s not a function of not wanting to, it’s just the reality of what they are confronted with. Now, somebody will then say, wait a minute, Sheila, but they just pulled out. The truth is, this has long been coming. What we’re seeing now is a negotiated exit plan. It’s not an exit, at least as I see. Take the Shell CEO, last January announcing to shareholders that they are now a utility company in other words, saying that they are moving out of this. He is essentially buying time to say here is the top line, here is my two seconds elevator speech and my commitment to you. My guess is that he will return stating his commitment to stakeholders and call on his company to make it happen, find a strategy. Then, all the elements I’ve spoken about come into play and then they come to the board, and they say, well, you’re looking at about 40 years. They then have to negotiate with all the stakeholders whether 40 years is reasonable. Between all this BlackRock came and stated that they are the jurisdiction and this is what you are to do and they will put the squeeze on you financially. Then you have the edge of the British Monarch and also with BP and others coming together, you have an avalanche. It then becomes a case of examine the details. That is the big picture, as I see it.

I want to return to what is going to happen in the geopolitical sphere now, because this is what worries me. BlackRock has now spoken and BP and others have said yes. Now we’ve got President Biden, saying I’m going to put a trillion US dollars of investment behind green energy and there they have the ability to print money, but can the African’s print money too? The economics of monetary policy says the IMF prohibits this because they’ll witness inflation.

I’m worried that when the world has made peace with itself, and the north has reached some consensus, what will become of the children and women of Nigeria? What will become of the children and women of Angola? In God’s name, what will become of the women and children of Mozambique, who have been expecting that the wealth of guests of the show will finally transform their lives? That is what keeps me awake. Those are the geopolitics that I see, and that is what I don’t have the wisdom to resolve.