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

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

3

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 companyWhat 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

4

Background

5

6

7

Understand the Key Sustainability Issues: Prioritize Issues

Issue Sustainability 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

9

Key Features of the Model

• 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

11

Data Sources

12

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

Historical Fact Base: 21 confidential interviews

13

Historical Fact Base: 83 cases studied

14

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

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

Occ

urre

nces

Sustainability Investments (project: bauxite mine/alumina

refinery in Africa)

Expected Value (NPV: Median @ 50th percentile)

Direct Value Indirect Value

• Community engagement program - 6,658 35,519

• Legal support -163 15,786

• Workforce development 215,797 31,573

• Local Suppliers development 63,391 15,786

• Biodiversity & Environment -8,917 23,680

• Resettlement plan -6,444 11,840

• Health program 5,154 27,626

• Primary Education -1,158 19,733

• Housing plan 456 19,773

• Food Supply monitoring -653 19,733

• Access to water -82 23,680

• Electrification -83 11,840

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

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

Step 1: External Fact Base

19

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

Step 2: Risk (Value Protection) Assumptions - example

21

22

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

23

Step 2:Risk (Value Protection) Assumptions - example

23

Step 3: Quality of Sustainability Program

25

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

• 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

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

Step 6: Financial Impact of Risks

29

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

Cost-Benefit Evaluation of Sustainability Program

31

Cost Benefit Evaluation of Each Investment: Workforce

32

Cost Benefit Evaluation of Each Investment: Biodiversity

33

Sustainability Investment Portfolio Evaluation: Value Creation

34

35

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

36

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

37

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

38

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

Benefits for Corporate Functions

39

The Potential Impact of the Tool

40

41