Transcript Slide 1

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
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Challenge Being Addressed
Challenge
• Sustainability (CSR/local/social development) investments are not wellintegrated 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
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What to Expect from this tool
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 valueprotection 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
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Background
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Understand the Key Sustainability Issues: Prioritize Issues
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Sustainability Program: Results of Risk & Opportunities Assessment
Issue
Sustainability Program (Key Investments)
• Community
Engagement
• Two-way consultation/communication mechanism
• Legal
• Legal risk assessment study
• Community baseline studies and develop intervention program
• 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
• Resettlement
• Resettlement fact base and local benchmarking
• Biodiversity programs and Offset alternatives
• 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
• Housing
• Baseline housing study (included in ESIA)
• Upgrade primary schools; Enhance existing secondary schools
• 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
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Key Features of the Model
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Objectives 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
Indirect value (protection) refers to
the indirect risk mitigation potential of
sustainability investments.
Direct value (creation) results from the
direct cost-benefit of the sustainability
investments.
 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

Less risk of delay, disruption,
and/or expropriation
 Value protected is not readily
calculated
- e.g., investments in social
cohesion, reputation, cultural
heritage, etc.
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Data Sources
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Architecture of the Model
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
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Estimated NPV of the
sustainability investment
portfolio under
consideration.
Historical Fact Base: 21 confidential interviews
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Historical Fact Base: 83 cases studied
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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)
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Occurrences
Pilot: Financial Model Output
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
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Pilot: Sustainability revealed as a driver of Increased
Profitability for the Project
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
-163
15,786
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
260,638 K$
256,530 K$
• Legal support
• Workforce development
TOTAL ADDED VALUE OF
SUSTAINABILITY
+517,168 K$
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Objectives of the Model
Indirect value (protection) refers to
the indirect risk mitigation potential of
sustainability investments.
Direct value (creation) results from the
direct cost-benefit of the sustainability
investments.
 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

Less risk of delay, disruption,
and/or expropriation
 Value protected is not readily
calculated
- e.g., investments in social
cohesion, reputation, cultural
heritage, etc.
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Step 1: External Fact Base
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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)
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Step 2: Risk (Value Protection) Assumptions - example
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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
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Step 2:Risk (Value Protection) Assumptions - example
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Step 3: Quality of Sustainability Program
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Step 4: Risk Reduction Factor
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)
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Step 5: Context Specific Sensitivity Factor
•
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.
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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.
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Step 6: Financial Impact of Risks
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Comments on Value Protection
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
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Cost-Benefit Evaluation of Sustainability Program
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Cost Benefit Evaluation of Each Investment: Workforce
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Cost Benefit Evaluation of Each Investment: Biodiversity
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Sustainability Investment Portfolio Evaluation: Value Creation
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• Capex 2B, sustainability investments adding 517 million of direct and indirect value (costs included)
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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
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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
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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
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Benefits for Corporate Functions
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The Potential Impact of the Tool
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