As Mines Become More Automated, What Happens to the Social Licence to Operate?

At Rio Tinto’s Yandicoogina mine in Western Australia, 22 trucks the size of houses roll 24 hours a day, 365 days a year, hauling high-grade iron ore. They don’t stop to change drivers: they have none.

The trucks are part of a fast-growing fleet of autonomous vehicles in mining operations the world over. There are also autonomous long-distance haul trains, tele-remote ship loaders, automated drilling and boring systems, rock breakers, shovel swings and semi-autonomous crushers, to name a few. These are a few of the many technologies that are changing the nature of mining so that it has a lot fewer faces.

The mine of the future will be operated primarily from distant centralized control centres that rely on GIS, GPS, autonomous equipment monitoring and programmable logic controllers. This future is not that far away. These technologies are being used now and spreading quickly.

We recently completed a study with a team of researchers that examined the impact of this automation on local spending and employment. They sought to determine the impact on economic development in host states and, by extension, the mines’ social licence to operate.

The social licence to operate—that is to say the legitimacy and trust required to gain and maintain the support of local stakeholders—is grounded in the notion of shared value. The basic concept is for the mine to create social and economic development benefits for local communities and host states while also promoting the core business of the mine operators.

We often think of mining contributing to host countries through taxes and royalties, but that’s a relatively small slice of the pie. Take Anglo American as an example: 11 per cent of its expenditures in 2014 were taxes and royalties paid to governments. That’s significant. But much more significant is the 80 per cent of expenditures that went to suppliers (43 per cent), capital (21 per cent) and employees (16 per cent). If a significant portion of that spending remains in the host countries—and that portion varies widely from country to country, operation to operation— it can have a much larger impact than the taxes paid.

Our study focused on examining the impact of new technologies on local employment and local purchasing. What happens to that spending when mines introduce labour- and fuel-saving automations?

We analyzed actual procurement data from two mining firms: one operated a large mine in a developing country and the other firm operated several small to mid-sized mines in an OECD country. We surveyed technology trends, we parsed out those elements of spending that would be affected by reducing employment (such as workers’ camps, food and uniforms) and we posited three scenarios: workforce reductions of 30, 50 and 70 per cent.

We found local procurement was only moderately affected: it dropped by 2 to 4 per cent in the OECD mine and 6 to 11 per cent in the developing country mine.

The numbers are striking though, if we look at the overall contribution of the mines to the host economies. Typically that number will include:

• Local procurement of goods and services.
• Salaries and wages paid to nationals of the host country.
• Indirect impacts: spending by suppliers to meet demands from the mining operation (e.g., purchase of materials by camp builders).
• Induced impacts: consumer spending by employees of the mine.

Our study found that automation-related losses in all these categories slashed the contribution to the host economy by 8.5 to 19 per cent in the OECD country and by 6.2 to 14.1 per cent in the developing country.

While the OECD country’s economy was sufficiently large and diversified to absorb this shock, the impact was concerning in the developing country scenario. Our study found that developing country’s gross domestic product (GDP) shrank by 2 to 4 per cent as a result of the impacts of mining automation.

These numbers are estimates, based on data from only two mining companies, and subject to a host of caveats. But if they are in the right ballpark, and if we multiply the impacts by many mining operations, the impacts in the coming years will be significant.

The data we collected also revealed a drastic difference in local procurement levels.  At the OECD-based mine, 91 per cent of all goods and services purchased were sourced locally, amounting to 58 per cent of total operational expenditures. In the lower-middle-income country operation, by contrast, only 21 per cent of procurement was local, amounting to just 12 per cent of operational expenditure.

Closing that local procurement gap is a central plank in the development strategy for many resource-rich developing countries. Whether by favouring investors that employ locally, building up the capacity of local suppliers, mandating local purchasing, or by other strategies, most host governments work hard to try to increase the impact of investment in their countries by boosting local spending on goods and services.

One of the concerns raised in the study is that the new technologies may make closing the local procurement gap much more difficult. These technologies are typically tied to overseas manufacturing and maintenance contracts that limit the potential contribution of local suppliers. It is also likely that developing country suppliers will not have the skill sets needed to work in the higher-technology environment, at least in the short and medium term.

The take-home message from our study is not that we need to stop technology from improving efficiency in mining operations. For one thing that would be impossible, and for another it would negate benefits such as reduced emissions, higher profits and taxes, and fewer human-error-caused workplace accidents.  

Nor is it that the importance of shared value is diminished. More likely, host countries and operators will begin to review the allocation of emphasis between the various elements of shared value. If, as we suggest, employment and local purchasing become less significant, governments will increasingly turn to taxes and royalties, infrastructure, downstream benefits, equity positions and alternative forms of contracts with mining companies in order to deliver the benefits that they trade for access to their natural resources.

There are many examples of this already happening, and governments can rationally be expected to look at emerging practice in this area. How governments, communities and companies work together in this process will determine whether shared value continues to motivate collaborative—as opposed to conflictual—strategies.