Harmony Gold's Accident Threatens Industry's Social License to Operate

Implications: Harmony Gold’s recent accident that trapped 3,200 gold miners for a day or more points to the increasingly sensitive "social license" the Gold Mining Industry has to operate in various countries around the world. This license is only granted to if they are perceived to be responsible citizens and to contribute to, rather than detract from, the social welfare of local and regional communities. Once a company loses its social license to operate in a particular country because of negative publicity stemming from catastrophic events like accidents, environmental contamination, etc., it can be very difficult, if not impossible, to recover and continue profitable operations. Local reaction can include government intervention and investigations causing production cessation, strikes and labor unrest, local community demonstrations, etc. Nothing can damage a mining company's good will in a community like a major accident that threatens or takes the lives of many workers.

Analysis: Gold mining companies are particularly susceptible to attack by critics because gold is not perceived as a necessary commodity to sustain human life but rather one that caters to the rich.  Although gold has some commercial applications, most production is used in jewelry or is hoarded as an investment.  As a result, the Gold Industry's social license to operate around the world is increasingly tenuous.  Social license is not an official, legal term, but one that pertains to the perception that a gold mining company contributes to, rather than detracts from, the social welfare of local and regional communities.  This perception is most often put in jeopardy by major accidents that threaten or take the lives of mine workers or by significant environmental contamination or damage resulting from mine operations.  The consequences of losing one's social license to operate can include significant government intervention, including the loss of operating permits and/or more stringent regulation, major labor force disruptions likes strikes or prolonged collective bargaining negotiations and local community demonstrations.

As a result of Harmony Gold's accident at its Elandsrand property near Johannesburg, as well as other high profile mining mining accidents in other parts of the world, fuel is being added to the efforts of international labor groups to call for increased government regulation of the Mining Industry in the area of safety and worker health.  The  Mining Industry's social license to operate around the world has deteriorated from these events.  This is not good news for an industry that cannot compete through the price of its products (since the products are primarily commodities whose prices are determined in international markets) but must compete by trying to produce its products at the lowest possible cost.  The Gold Mining Industry is particularly susceptible to this trend since the utility of its product to the common good is often questioned by critics.  The only way the Gold Mining Industry can head off increased regulation (and restore its social license to operate) is to approach the issue of mine worker safety even more diligently, investing more resources in mine equipment maintenance, safety monitoring and rescue response.  Investors would be wise to expect higher costs in these areas in the future.