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Pacific Road Capital says miners' executive compensation should be tied to ESG

Australian private equity firm Pacific Road Capital Management Pty Ltd. Managing Partner Matt Fifield says executive compensation will be increasingly linked to environmental, social and governance metrics as the vast majority of investors want to increase allocations to responsible investment.

SNL Image
Matt Fifield addresses IMARC on Oct. 31.
Source: International Mining & Resources Conference

Sydney, Australia-based Fifield told S&P Global Market Intelligence that there is "huge demand for companies that are not going to end up with headline surprises, and that will help create a better world."

He said the mining industry is "losing the race" when competing for capital, and risk falling into the "exclusionary bucket [for investors] that this is too hard," if those investors are not confident that a company's tailings protocol or stakeholder engagement is worked out appropriately.

Capital then becomes scarce and expensive, making it hard for companies to compete and get good valuation, Fifield said.

This hits private equity firms, particularly those like Pacific Road which are normally either outright control owner or one of the largest shareholders of a miner's register, "because we want our companies to have good valuations and to potentially combine with other companies to create scale."

Given investors are looking for higher ESG consideration in mining companies, he believes this will flow through to executive compensation that is tied to ESG factors, as this is one way to communicate to shareholders that board members will support such moves.

Founded in 2006, Pacific Road has two funds that have US$776 million in commitments combined, predominantly from the U.S., across 21 investments in listed and non-listed companies, predominantly later-stage companies going into production seeking construction capital.

While the top 50 mining companies globally that are worth over US$2 billion each have "relatively sophisticated systems" to deal with tailings compliance and other ESG issues, outside that market — which is where Pacific Road participates — Fifield said there is much "growth and learning which needs to and can happen."

He said there are about 250 companies with between US$100 million and US$2 billion market capitalization that are generally single-asset companies, though sometimes multi-asset, running or building one mine or moving from one mine to two.

This segment is the most inefficient area in the marketplace where Pacific Road is focusing on how it can, as an investor, work both within the miner's boardroom and as an owner to "engage thoughtfully" with board and management to drive better and more resilient businesses within key ESG areas.

These areas include environmental performance, stakeholder interaction and how miners systematically identify and manage risk.

He said that while miners are already dealing with these factors, most are not telling anyone about it, nor with enough clarity.

Rising ESG interest

This is costing miners potentially lucrative investment, Fifield said, considering a 2018 "U.S. Trust" survey by Bank of America Private Wealth Management revealed 71% of individual investors are interested in sustainable mining and 90% want to boost allocations to responsible investment.

However, he told the International Mining and Resources Conference in Melbourne, Australia, on Oct. 31 that technology is helping miners manage "headline risk" around issues like water, tailings, indigenous people and corruption.

Fifield's comments were echoed at IMARC on Oct. 31 by Brisbane, Australia-based Tyler Mitchelson, CEO of Anglo American PLC's Metallurgical Coal business, who said ESG issues were fast becoming mainstream.

Mitchelson said that with the world going through "unprecedented change at extraordinary speed thanks to a revolution affecting markets, technology, demographics, development and social values," "technology for the sake of it can lead to nowhere."

Thus miners' stakeholder ecosystem is becoming increasingly complex, "and from this, we can expect that the next decade will bring fundamental changes in stakeholder expectations about the way we develop and operate our businesses."

Mitchelson cited the FutureSmart Mining initiative Anglo American launched in 2018 as an innovation-led pathway to sustainable mining, applying thinking and technological advances to be safer, to use less land, water and energy and to be more productive.

Fifield said industry is also "doing well" on ensuring project designs are environmentally sound, "human capital developments" involving social infrastructure, community development and mine rehabilitation.

He cited Base Resources Ltd., in which Pacific Road has a 27% stake, as "probably one of the best examples of community engagement and development," which in turn support's the company's Kwale mineral sands project in Kenya.

Madagascar's government just asked Base to suspended on-ground activity at its Toliara heavy mineral sands project due to a few recent localized events involving illegal actions by a small minority of the local community.

While this will not impact Toliara's definitive feasibility study, it will hit community development programs and several hundred local Malagasy people undertaking training programs with the project.