Editor’s Note:

The piece below by Uwe Gneiting, a Research and Policy Advisor for the Private Sector Department at Oxfam America, and originally published here on July 13, 2017, struck a chord with Cornerstone’s research team.

In October 2016 we published Extractive Company Values, an in-depth report illustrating how mining companies’ “attentiveness” to material environmental and social issues provides predictive insight into their potential for successful execution of their strategies. In the report, we posited that a mining company’s approach to managing local community concerns is one key indicator of attentiveness, and therefore of a company’s likelihood of strategic success.

As Uwe’s piece highlights, Tahoe Resources’ alleged mishandling of community concerns at its Escobal silver mine in Guatemala hit the stock hard in the near term and throws a shadow over its operations there; and the signs were there for investors who look beyond pure financials.

Further, July 18, Seeking Alpha reported that the gold mining company Goldcorp “experienced a significant setback when its proposed Coffee Gold project [in Canada] was delayed based on a failure to sufficiently consult potentially affected indigenous groups.” Read more on this instance here.

One of the world’s largest silver companies just lost 40% of its value – it shouldn’t have surprised investors:

It doesn’t happen every day that a mining company, and investment analyst darling, loses more than a third of its stock market value within just a few days. Tahoe Resources, the parent company operating the Escobal silver mine in Guatemala, saw its stock price plunge last week after the Guatemalan Supreme Court suspended the company’s mining license for two of its projects in the country.  Escobal is Tahoe’s flagship mine and one of the largest silver mines in the world.  The temporary suspension is the result of a legal suit brought by Guatemalan civil society organization CALAS (an Oxfam partner) against the Ministry of Energy and Mines for the ministry’s failure to respect the consultation rights of indigenous Xinca communities’ when granting the mining license for Escobal to Tahoe’s Guatemalan subsidiary.

Tahoe’s stock price plunge as a result of the suit has left investors furious. Just days after the announcement, some began to file a class action law suit against the company arguing that it provided false and misleading statements, and failed to disclose to investors the details of its consultation obligations and the resulting risks of suspension.

The case of Tahoe’s Escobal mine is illustrative of the risks companies face when they do not seriously consider the concerns of the indigenous communities where they operate and their right to free, prior and informed consent. It also highlights investors’ challenge to marry financial and social considerations in their investment decisions and to obtain accurate information on local practices and the impacts of mining companies abroad.

Did Tahoe mislead its investors?

Tahoe’s troubles around the Escobal project shouldn’t be news to investors. Tahoe has faced significant community opposition in Guatemala for years, which civil society organizations, including Oxfam, have amply highlighted. Furthermore, the company has faced legal challenges in Guatemala and Canada for its conduct around obtaining its mining license and responding to community protests. Just over the past few weeks, communities located around the Escobal mine have reengaged in peaceful protests to bring attention to the harmful social and environmental impacts of the project.

Yet, in its public communication, Tahoe’s executive leadership has repeatedly denied claims of community resistance or wrongdoing. The company’s CEO has refuted claims of conflict with communities by arguing that ‘indigenous issues’ do not play a role at Escobal and that legal procedures are without merit. The company has also boasted its strong corporate social responsibility programs and community relations as reassuring evidence that the project is advancing smoothly.

Investors looking at buying or selling Tahoe stock have thus been faced with competing accounts of the situation in Guatemala. Attempts to strengthen regulatory oversight to clear up these information gaps have so far been without success. As a result, investors have been forced to use their own judgment to put together an accurate picture of Tahoe as an investment prospect.

Some investors drew the right conclusions early on. In 2015, the Norwegian Pension Fund pulled out of Tahoe citing human rights concerns. Yet, for the majority of Tahoe’s investors the company’s favorable production schedule and revenue forecasts appear to have trumped concerns of potential human rights risks and their financial implications.

This is sobering not only because the costs of company-community conflicts in the extractive sector have been shown to be significant, but also because community resistance to mining projects is extremely common in Central America – which any informed investors should have been aware of.  El Salvador, for example, recently passed a law banning mining in the country. Guatemala also has a long history of communities resisting mining projects (Goldcorp’s Marlin mine is case in point) and trying to change its current mining law. Community-level conflict is thus not a risk that can be managed by an individual company, but illustrates fundamental opposition to the extractive industry’s development model in a region where governance isn’t strong enough to adequately manage risks and distribute benefits.

The key lesson here is this:  Investors need to take a closer look at the human rights implications of their investments. Those investment advisors and fund managers who are forward-looking enough to consider the risks associated with corporate disregard for human rights are better equipped to avoid the sorts of precipitous drops in stock price demonstrated in the Tahoe story. This case exhibits yet another way in which the socially-responsible investment community can outperform mainstream investors.

Photo: Horses and cows graze in the shadow of the Escobal mine. Los Planes, Santa Rosa, Guatemala. (Credit: Giles Clarke)