In light of the tailings pond breach at Imperial Metals' Mount Polley mine and the toxic leak at Grupo Mexico's Buenavista, it's certainly a good time for investors to revisit the importance of social license.
The value of a mine is generally determined by the amount of resources available, the cost of extraction and the price of the commodity being mined. Yet there is now another factor in valuing a mine: whether it has community support, or social license. A recent tailings pond breach at Imperial Metals' (TSX: III) Mount Polley mine in British Columbia has gotten plenty of news coverage, as has a toxic leak at Grupo Mexico's (OTCMKTS:GMBXF) Buenavista copper mine, with that leak turning river waters orange. To be sure, those disasters give weight to community concerns surrounding mining projects and illustrate part of why it is so important for miners to secure approval from multiple stakeholders. The fourth factor "Today, I can show you two mines identical on these three variables that differ in their valuation by an order of magnitude," Witold Henisz, a management professor at Wharton School at University of Pennsylvania, quoted a mine executive as saying in a podcast related to his research on the subject. "Why? Because one has local support and the other doesn't." Social license, or community buy in, is valuable not only in an ethical sense or for publicity — it also has a very real and significant financial impact on a mine's value in many cases today. "The value of the relationship with politicians and community members is worth twice as much as the value of the gold that the 26 mines (studied) ostensibly control," Henisz said of his research, which looks at the role that stakeholder engagement played in the profits for 26 mining projects. Understanding social license Also known also as "social license to operate," or SLO, social license refers to the level of approval that local stakeholders give to mining companies and their projects, according to Mining Facts. The concept stems from corporate social responsibility initiatives and theories. Many mining companies now believe social license is simply a necessary part of doing business, and that the expenses required in order to secure social license are worth the return on investment.