A pension fund manager recently called a meeting of Anglo American's institutional shareholders to consider the possibility that a second acquisition attempt of the mining giant might emerge. Topics for discussion included potential impacts on social and environmental performance standards if that were to happen.
Earlier this year BHP mounted an audacious bid to buy Anglo-American, which eventually failed.
Ever since, there’s been plenty of talk of consolidation in the mining sector. An article in the publication Crux Investor on 22 October flagged a pick-up in mining M&A suggesting that 2025 onwards could see some more attempts at mega-deals. The drivers: Rising metal prices, particularly gold and copper, a need to replenish depleting reserves, a focus on stable jurisdictions and general market cycles.
Communities should be safe
A change of ownership of a mine shouldn’t have any negative impact on the wellbeing of people living in a nearby community. However, the amount of debt often needed for large corporate acquisitions and pressure to cut costs to justify a deal could tempt some mine operators to skimp on social budgets for host communities.
Coming back to Anglo American, the pension fund manager highlighted the company’s leading role on best practices in social and environmental performance standards in the mining sector.
Would a takeover of the company heavily funded by debt or involving an acquirer less squeamish about human rights threaten the care of Anglo-American’s host communities? It’s possible. The same applies to any target company practicing high ESG standards.
Therefore, it is really good to see an institutional investor raising these issues with their peers. Institutional investors can carry considerable weight with the boards of listed companies - especially when they band together on a particular issue.
I wouldn’t expect consolidation at the upper echelons of the mining sector to automatically lead to a degradation in the treatment of host communities.
If it involves publicly listed companies there will be pressure for them to stay on course, there are various legal obligations and the public image of the company and its management would be at stake. Banks involved in the financing would want to feel comfortable that the deal won't lead to negative social consequences. Furthermore, host countries such as South Africa likely wouldn’t tolerate it.
Temptation to go cheap
However, cost pressures could see an acquirer just try to get by doing the bear minimum. For instance, if Anglo American were to be bought in a heavily debt funded deal there would surely be a temptation to row back on the quality of many of its social programmes to save money.
I view the fact that a pension fund manager is speaking up for social and environmental performance in the event of a mining deal as a good sign.
A future deal-breaker?
A paper published on 25 September by White & Case is a reminder that mining companies are expected to be holistic and proactive in their approach to responsible business practices and social responsibility. It further highlights the role of community engagement by mining companies as a key component to earning a social licence to operate.
Given the growing focus on the well-being of host communities in the West - is there a chance of a mining M&A deal one day getting scuppered because an acquirer has a less than stellar track record in dealing with host mining communities? It’s not beyond the realm of possibility.
