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Key Findings  Pilot: In a $2 billion (CAPEX) project, sustainability investments add $500 million value (including all costs) over life of mine.  Investments.

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Presentation on theme: "Key Findings  Pilot: In a $2 billion (CAPEX) project, sustainability investments add $500 million value (including all costs) over life of mine.  Investments."— Presentation transcript:

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2 Key Findings  Pilot: In a $2 billion (CAPEX) project, sustainability investments add $500 million value (including all costs) over life of mine.  Investments made very early (e.g., pre-feasibility) can yield such high return that it may be worth investing even before the “go/no-go” decision has been made on the project. Ex: local work force  The process brought business functions together in more collaborative ways, underscoring complementarities and inter-dependencies that were previously missed or under-recognized.  Financial platform provided a common language for communicating across business functions and decision-makers.  Several political risk insurers have stated that using this model on an iterative basis and thus demonstrating a strategic approach to managing project risks could reduce annual political insurance premiums by 50% in high risk countries 2

3 Challenge Sustainability (CSR/local/social development) investments are not well- integrated into the extractives industry’s operational/financial models Currently, there is no way to assess financial value and rationalize/ optimize sustainability investments It is difficult to communicate value of sustainability investments in terms that internal and external constituencies can understand Solution A tool that estimates expected net present values (NPVs) for a given project’s sustainability investment portfolio Evidence-based customization and “plug-and-play” usability Provide a framework for prioritizing, structuring, timing and resourcing sustainability investments Challenge Being Addressed 2

4 What it can do: Estimate (based on a range of probability) the expected NPV of a given portfolio of sustainability investments, including value-creation and value- protection components Show relative benefit of specific investments (workforce vs. resettlement), to facilitate rational analysis and strategizing –> provide a strategic framework for decisions Best used for comparing different portfolios and scenarios within one project by one company What it can’t do: It cannot accurately predict the precise NPV Not really useful for comparing across companies or contexts, because assumptions would generally vary considerably Provide an unbiased assessment of the quality of a sustainability investment What to Expect from this tool 3

5 Background 4

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8 Understand the Key Sustainability Issues: Prioritize Issues 7

9 IssueSustainability Program (Key Investments) Community Engagement Two-way consultation/communication mechanism Community baseline studies and develop intervention program Legal Legal risk assessment study Legal risk mitigation plan and ongoing support Workforce Qualification and quantification baseline study Development strategy Early literacy, pre-employment and vocational training activities. Technical training program to qualify workers for Construction and Operation phases Local Suppliers Suppliers’ qualification inventory study Local SMEs’ development program and Support of national specialized suppliers Biodiversity & Environment Assessment of water & land biodiversity and monitoring impacts Biodiversity programs and Offset alternatives Resettlement Resettlement fact base and local benchmarking Collaborative development and implementation of RAP Health Fact base on existing local health infrastructure and health programs Health infrastructure and health programs Employee and Community Health Prevention Programs Primary Education Catalyst of primary education programs development and implementation Upgrade primary schools; Enhance existing secondary schools Housing Baseline housing study (included in ESIA) Quality homes for Construction/Operations workers Food Supply Impact assessment study of the Project on national and local food supply Quality food development programs; Monitoring inflation Access to water Impacts of mining operations on water Feasibility study to evaluate potential for water infrastructure extension Electrification Catalyst and facilitator in executing the national electrification plan Feasibility study to evaluate potential for incremental electricity generation Electricity efficiency management solutions in plant design Sustainability Program: Results of Risk & Opportunities Assessment 8

10 Key Features of the Model 9

11 Provide expected range of NPVs for a portfolio of site-level sustainability investments" The expected value is the sum of two separate calculations Direct value (creation) results from the direct cost-benefit of the sustainability investments. Indirect value (protection) refers to the indirect risk mitigation potential of sustainability investments.  Less risk of delay, disruption, and/or expropriation  Value protected is not readily calculated - e.g., investments in social cohesion, reputation, cultural heritage, etc.  Cost of inputs decreases or productivity rises  Value created can be readily calculated ‒e.g., workforce training enables substitution of local hires for expensive expatriates Objectives of the Model 10

12 Data Sources 11

13 Architecture : The model is structured like a traditional business case, it estimates the difference between the value impact of two user-defined scenarios. In our pilot: ‒Scenario A is defined as “base case“ ‒Scenario B is defined as the proposed sustainability program for the bauxite mine and alumina refinery in Africa Scenario B : user defined, most often a greater investment than scenario A, though this is not required. Scenario A: user defined, e.g. business as usual Estimated NPV of the sustainability investment portfolio under consideration. Architecture of the Model 12

14 Historical Fact Base: 21 confidential interviews 13

15 Historical Fact Base: 83 cases studied 14

16 Pilot: greenfield bauxite mine and alumina refinery in Africa The Case study used is a Rio Tinto Alcan greenfield bauxite mine and alumina refinery in Africa Project design (realistic but not actual) cash flows are as follows: 4 yr Construction phase: Capex = 2 billion $ total, 500 M$ per year 64 yr Operations phase: 231 M$ annual opex and 740 M$ revenues 3 yr Closure phase: 61.6 M$ closure costs per year Project Total design NPV, before applying the sustainability valuation methodology = 1,5 billion $ (Theoretical Present Value of the Mining project) 15

17 Pilot: Financial Model Output 16 Monte Carlo is a: Statistical technique by which a quantity is calculated repeatedly Using randomly selected “what-if” scenarios. Results approximate the full range of possible outcomes Value in Billions Occurrences

18 Sustainability Investments (project: bauxite mine/alumina refinery in Africa) Expected Value (NPV: 50th percentile) Direct ValueIndirect Value Community engagement program- 6,65835,519 Legal support-16315,786 Workforce development215,79731,573 Local Suppliers development63,39115,786 Biodiversity & Environment-8,91723,680 Resettlement plan-6,44411,840 Health program5,15427,626 Primary Education-1,15819,733 Housing plan45619,773 Food Supply monitoring-65319,733 Access to water-8223,680 Electrification-8311,840 TOTAL ADDED VALUE OF SUSTAINABILITY 260,638 K$256,530 K$ +517,168 K$ 17 Pilot: Sustainability revealed as a driver of Increased Profitability for the Project

19 Direct value (creation) results from the direct cost-benefit of the sustainability investments. Indirect value (protection) refers to the indirect risk mitigation potential of sustainability investments.  Less risk of delay, disruption, and/or expropriation  Value protected is not readily calculated - e.g., investments in social cohesion, reputation, cultural heritage, etc.  Cost of inputs decreases or productivity rises  Value created can be readily calculated ‒e.g., workforce training enables substitution of local hires for expensive expatriates Objectives of the Model 18

20 Step 1: External Fact Base 19

21 Step 2: Risk (Value Protection) Assumptions For each risk, the sustainability/risk/finance professionals can define multiple intervals of time to reflect changing conditions (e.g. split a 6 year construction phase into two 3-year intervals) For each interval of time, the expert group enters min-likely-max values for: a)likelihood of occurrence (during the interval as a whole); b)financial consequence of each risk, through its duration, one-time and/or recurring costs during the delay, lost production, etc a.Assumptions regarding likelihood of occurrence of specific risks: Occurrence of each risk has been derived (though not statistically calculated) from the fact based, but adapted to specific project risks conditions The occurrence was informed by qualititatve remarks regarding the level of risk occurring at specific interval of time (e.g., start of construction = higher risk phase) as well as by external regerence (e.g., MIGA reference for expropriation) 20

22 Step 2: Risk (Value Protection) Assumptions - example 21

23 Step 2:Risk (Value Protection) Assumptions, cont b) Assumptions regarding duration, one-time cost and recurring cost related to each specific risk: Observations in the fact base have been used to identify: Plausible ranges of duration for delays Plausible ranges of one-time costs (e.g., management time, lawyers fees) as well as other plausible ranges of values The basis of recurring costs (e.g.: % of salaries, % of overhead costs, % of lost revenues) as well as their plausible range of values Project cash flows (revenues & costs) are shifted as a whole as a result of delays, and all costs translated into cash flows 22

24 Step 2:Risk (Value Protection) Assumptions - example 23

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26 Step 3: Quality of Sustainability Program 25

27 Sustainability Program can reduce the level of sustainability risks by reducing their occurrence, duration and financial impact. Two key parameters have been used to determine the risk reduction potential of sustainability investments: 1.Issue Importance: reflects the relative weight of each issue evaluated by project teams stakeholder engagement process and company subject matter experts. 2.The Quality of Sustainability Program for Scenario B (Step 3) Step 4: Risk Reduction Factor 26

28 It has been recognized through the Fact Base and the interviews process that some sustainability risks, such as the risk of expropriation, are primarily related to macro political issues and not so much to sustainability investments. In order to be conservative in our value protection estimates, we have introduced a Sensitivity factor which reflects the risks’ sensitivity to Sustainability programs (e.g. expropriation risk has been estimated to be only 20% sensitive to Sustainability Issues) These numbers also need to be revised in subsequent phases of the project. Step 5: Context Specific Sensitivity Factor 27

29 Step 6: Total Impact of Risk Calculation of the total impact of risks (value protection): – A risk reduction factor is applied, based on the the relative weights of the sustainability issues and the quality of the sustainability investment – A sensitivity factor is applied to only account for the portion of the risks that can be addressed by sustainability investments – Risks are translated into financial impacts (effects on production, increased costs, net cash flows, based on risk=probability*consequence) and the resulting NPV is calculated. – The financial impact of these risks is estimated through Monte Carlo simulation, to reflect the variability in the inputs. 28

30 Step 6: Financial Impact of Risks 29

31 Evaluation of the Value protected is the most complex element of the Model Multiple assumptions were made in order to come up with the final inputs for this pilot. Although they are out best estimates so far, they need further refinement through: Systematic Qualitative assessment methodologies used in baseline studies (e.g. ESIA), which could be beneficially used in order to populate assumptions necesssary for the Model Engagement of additional project pilots, which could bring together expert panel groups to estimate the necessary inputs to strengthen the following: Sustainability Risk Assumptions Quality Matrix Risk Reduction Factor and Sensitivity Factors Comments on Value Protection 30

32 Cost-Benefit Evaluation of Sustainability Program 31

33 Cost Benefit Evaluation of Each Investment: Workforce 32

34 Cost Benefit Evaluation of Each Investment: Biodiversity 33

35 Sustainability Investment Portfolio Evaluation: Value Creation 34

36 Capex 2B, sustainability investments adding 517 million of direct and indirect value (costs included) 35

37 Wrap-up: What the Tool Provides A tool that estimates expected net present values (NPVs) for a given project’s sustainability investment portfolio Evidence-based customization and “plug-and-play” usability Process that leads to harmonization of strategies across business functions Selecting /prioritizing the right sustainability projects (which bring the most value for the company and stakeholders) Choosing the scale and timing of sustainability investments The best time to use the Model is in early planning phases Potential positive ripple effect: e.g. reductions in political risk insurance premiums 36

38 Areas for Further Refinement Expand applicability to a variety of projects (breadth of Sustainability issues covered, etc) Expand the fact base of extractive industry projects Test the model with new pilots Refine some methodological steps & assumptions: Double counting of risks/impacts Quality of Sustainability program (-2 to +5) Risk assumptions (likelihood, consequence) Risk reduction factor Sensitivity factor Improve Usability 37

39 Why Participate in Piloting the Model? Benefits from participating: Access to technical support and expertise from IFC, Deloitte, Rio Tinto Leverage available funds and get a pilot study at a fraction of real costs Leverage the tool to demonstrate the value of sustainability investments within a difficult economic context Strengthen then a key strategic project with a better sustainability program 38

40 Benefits for Corporate Functions 39

41 The Potential Impact of the Tool 40

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