Mining deaths: moral hazard or externality?

That debate is perhaps beyond the scope, and arguably contrary to the job of this publication. But there are still clear examples of moral hazard in many industries. We know this, even if we employ a detached and entirely profit-oriented view of the world, because companies regularly attempt to head off ethical qualms and improve their image in the public's eye, of which investors form a part. Some of these attempts at corporate social responsibility are either dubious or ring hollow.

British American Tobacco (BATS), for example, claims to want to reduce the public health impact of its products, which, as we know, can kill people. The text and images adorning packets of cigarettes say as much. Through the publication of its annual Energy Outlook, BP (BP.) is keen to be seen as a reliable and unbiased source of predictions on global energy supply and demand, though it stands to gain from a maintenance of a status quo which is leading to ecological disaster. In one of the most egregious examples of this tendency, natural resources companies talk up their commitment to worker safety while publishing alarming numbers of deaths and injuries next to production figures.

Whenever fatalities occur, miners regularly use words like "regret" and "committed". But any observer could be forgiven for assuming that such fatalities - alarmingly so in far-flung parts of the world - are a routine part of extraction. Mining may be inherently dangerous, and even more so when underground operations are involved, but that is what health and safety standards are for. If there is a clear risk of death or injury, then procedures have to change, and not just retroactively.

Last week the market was informed of the loss of four workers' lives at Polymetal International (POLY) in 2016, and that - in a cack-handed use of corporate speak - management "cannot view this result as satisfactory". Nevertheless, it's hard to square the group's commitment to worker safety with the 14 deaths that have occurred at the company's mines in the past four years. Acknowledging this dissonance, Polymetal will this year roll out a 'Critical Risks Management' system aimed at improving worker safety, which the company told us will improve the detection of "the dominant risks and implement concrete measures to reduce their potential impact".

Under the new system, employees will also stop working until a potential critical risk has been rectified, or continue working with measures that ensure there is "no longer a potential threat to life and health". While health and safety is essentially risk management, some of which is unforeseen, it is difficult to understand why anything short of the new regime wasn't already in place at Polymetal.

The mining industry also uses raw financial incentives to focus executives' minds on worker safety, and link it to both performance grading and bonus entitlement. At Polymetal, safety carries a 25 per cent bonus weighting for executives, while fatalities and heavy injuries can halve other bonus-linked performance measures. After six workers were killed in 2015, chief executive Vitaly Nesis' annual bonus declined by three quarters to $122,005, a year after he was paid more than 120 per cent of his base salary in bonuses.

As the table below shows, Polymetal is on course for the worst safety record among the FTSE 350 gold miners for the third year in a row, although Fresnillo (FRES) has a higher fatality rate over the decade. There's no explaining away this loss of life, though some companies in the table distinguish between deaths which occur on the road, and those which happen in the mine proper. It is also very hard to imagine this collective track record being tolerated by an industry with operations in the UK or US. Perhaps then it's safer to assume that the 5 per cent share price decline which greeted Polymetal's fourth-quarter trading update had more to do with net debt, rising costs and a forecast increase in capital expenditure.

FTSE 350 gold miner fatalities 2010-16