Global Mining Industry

Keith Slack

Mining is one of the world’s oldest industries and is the most economically important for many developing countries. With prices of minerals such as gold and copper having reached record highs in recent years, the industry’s importance and influence have risen dramatically. Large-scale, industrial mining operations present a broad range of economic, social and environmental management challenges to governments and local communities that live near mine sites. There is a broad range of issues and concerns about the costs and benefits of mining that should be of interest to journalists.

Characteristics of Modern Mining

Modern mining is done on a truly massive scale and involves the excavation of massive open pits, which can be as much as 4 kilometers wide and 1.5 kilometers deep. The excavated rock that is not used as part of the mining process is known as “waste rock” and is dumped into piles that can also be massive, as high as 100 metres in some cases. In gold mining, ore taken from pits is sprayed with a cyanide solution to extract the gold from surrounding rock. Liquid wastes known as “tailings” are another by-product of the mining process. These are dumped into huge storage “ponds” that can be hundreds of meters deep and hundreds of meters long.

Gold produced at remote mines is often flown out of the mine on board small private jets that land at airstrips built at the mine site. In some copper mines, copper is transported via a liquid slurry pipeline from the mine to port facilities hundreds of kilometers away.

Mines are generally operated by companies based in Australia, Canada, the US or Europe. Among the largest companies are BHP-Billiton, AngloAmerican, Barrick Gold and Newmont. These larger companies are joined by thousands of small “junior” companies that may have only one project in their portfolio. Many of these companies are from Canada where they have easy access to capital on the Toronto Stock Exchange. The juniors often do the preliminary work at a mine site (exploration, feasibility studies) with the intention of selling the rights to the project to a larger company with greater capacity to actually mine the deposit.

In recent years, Western mining companies have faced increased competition from Chinese companies, which have been aggressively seeking minerals to feed China’s roaring economy. Chinese companies have been active in Latin America, Asia and, in particular, Africa.

Environmental concerns

Mining is one of the world’s most polluting industries. It is by far the largest producer of toxic chemicals in the United States, according to the US’s Toxic Release Inventory. Toxic chemicals used in the mining process, including cyanide, can leak into ground and surface waters near mine sites, killing fish and rendering the water unfit for irrigation or human consumption. Cyanide spills have been a chronic problem at mines in Ghana, where they have destroyed rivers and contributed to health problems among local communities. "1

Gold mines also produce massive amounts of mercury as part of the gold smelting process. This mercury is released into the air and can contaminate soil, water and air hundreds of miles away from the smelter site. Mercury is a powerful neurotoxin, particularly for children. Exposure to mercury can cause significant neurological and developmental problems such as attention and language deficits and impaired memory, vision and motor function. "2

One of the most serious environmental problems at large mine sites is called “acid mine drainage”, in which rock containing sulfides, when mined and exposed to air and water, can begin to produced sulfuric acid. This acid leaches into groundwater and surface water, killing plant and animal life and making the water unusable for any purpose. Once this acid-generation process begins, it is impossible to stop. Acidic water can be treated, but this must be done in perpetuity. Many developing countries lack the resources to effectively treat this problem.

In some countries in the Asia/Pacific region, mining companies dump their liquid tailings directly into local rivers and/or the ocean. These disposal methods are called “riverine or submarine tailings disposal”, and are highly controversial. They are effectively banned in the United States and Canada due to water quality regulations. Mining companies argue that the technology is safe and safer than keeping the liquid tailings on land in seismically unstable areas. Scientists, however, have not definitely proven that these disposal methods pose no long-term risks for the environment and human health. In 2006, US-based Newmont Mining Corporation paid a settlement of $30 million to the Indonesian government over pollution allegations relating to the company’s dumping of waste into an ocean bay, which local communities claimed had caused serious health problems.

Mining uses masses amounts of water, which is required as part of the mining process. Mines must also pump water out of the ground (or “dewater”) to prevent mining pits from flooding. One mine in the US pumps out 380,000 cubic meters of groundwater per day. "3 In one region of Chile, the mining industry’s demand for water amounts to 20,000 liters per second. "4

To regulate mining effectively requires a skilled cadre of well-trained professionals in government agencies who have access to all the relevant information they need to do their jobs effectively. Unfortunately, in many developing countries there is very little government capacity to keep effective tabs on the mining industry. Thus governments find themselves at a huge disadvantage in trying to ensure that a given mining project is complying with environmental laws and regulations. Even in the United States, which has a strong Environmental Protection Agency, mining has caused very serious environmental problems.

Social concerns

The introduction of a large mining operation into a rural community can often have a huge disruptive impact. People can be physically displaced by the operation in large numbers and forced to resettle in areas that may be unfamiliar or incapable of sustaining them economically. Mining companies often bring in workers from outside the local community who may hold different cultural values, which can also cause disruption of the existing social order. Mining is often associated with significant increases in rates of HIV/AIDs, alcoholism, prostitution and domestic violence.

There are often significant human rights concerns associated with large-scale mining projects. In some situations, local community members have suffered human rights abuses committed by security forces working for mines or from government security forces acting at the behest of mining companies. In Ghana, artisinal miners have been beaten and killed by mine security forces. In Indonesia, rape, torture, detention and killings have been committed by the Indonesian military against indigenous communities living near the massive Grasberg mine. 5

Indigenous peoples often bear the brunt of the negative impacts of mining operations. They often receive little information about the costs and benefits of a proposed project and have no meaningful voice in deciding whether a project goes forward. In some situations, indigenous peoples may see the establishment of a mine as a threat to their cultural survival.

In recent years, social protest related to mining has increased dramatically. In Peru, for example, according to government estimates, there were more than 45 active social conflicts connected to mining projects recently. This rise in conflict has mirrored the rise in mining exploration as mining companies have sought to take advantage of high minerals prices. In some situations, community protest and conflict have forced mining companies to change or abandon complete their plans to mine in particular areas. This was the case in Tambogrande, Peru where community protests against a project forced the Peruvian government to deny a Canadian mining company’s mining permit. The company ultimate lost $60 million on the project.

In response to this state of affairs, communities and activists have increasingly called on mining companies to demonstrate that they have a “social license to operate” in a particular area. In other words, mining companies must not only have a legal right to a concession granted by a government, they must also demonstrate that their presence is welcomed by the local community. Such individuals have called on mining companies to respect the right of communities to “free, prior and informed consent”, i.e. to not operate without the express consent of the local population.

The Economics of Mining

Mining can be tremendously profitable for mining companies. Indeed, when minerals prices were at or near record highs before the onset of the global economic crisis in 2008, mining companies earned record profits. Unfortunately, governments usually see less return from the mines operating in their countries. This is because countries frequently provided concessions in the form of greatly reduced or waived taxes in order to attract mining investment. In some cases, this may mean that countries may receive little or nothing from companies in the form of income taxes until after the company has recouped its initial investment costs. This period can last five years or more. Some unprofitable projects may generate no tax revenue at all for a government. "6

There are two primary kinds of mining-related taxes: (1) profit-based taxes, which tax the profits mining companies earn from the minerals they extract and (2) royalties, which are taxes assessed on the volume of material extracted, e.g. ounces of gold or tons of copper. Mining companies prefer to pay profit taxes rather than royalties, as they are obligated to pay royalties regardless of costs and market prices of minerals. Some countries may charge no or very low royalties (1-3%) as an incentive to attract mining investment.

In the 1990s, many mining-dependent developing countries reformed their mining sectors in order to attract foreign investment. These reforms were often done at the behest of the World Bank and International Monetary Fund. Many countries privatized their state-owned mining companies and significantly reduced tax and royalty rates. This occurred during a time of low minerals prices when it was believed that such measures were necessary to entice foreign firms to invest in riskier developing countries. Now, however, many mining countries are revisiting the concessions given to mining companies in that era and are claiming a greater share of minerals profits for the government. Some governments have called for the renegotiation of mining contracts and increased taxes and royalties. Zambia, a leading copper producer, is one example. "7

Mining operations tend to be “enclaves” that are isolated from the rest of a country’s economy. In most situations, very little “downstream” economic activity springs up around mining operations. This is largely because it is usually not cost effective to produce higher “value added” products in the countries where the source minerals are mined. Thus, it is cheaper to ship copper from Zambia to China to be processed into copper wire than it is to build a processing plant in Zambia itself. By the same token, large-scale industrial mining requires relatively little labor. Only a few hundred people may be needed to operate a major mine. Thus the employment generation benefits produced by mining tend to be fairly minimal.

Mining’s lack of linkages to other economic sectors and its relatively scant employment generation have important implications for the overall benefits that a country may reap from its mining sector. The benefits will come almost entirely from the taxes generated by the mining operations. Thus it is all the more critical that these revenues are managed transparently and appropriately by governments. For this reason, in recent years the disclosure by mining companies of their payments to governments has become an increasingly important topic within international development. These concerns led to the creation of the Extractive Industries Transparency Initiative (EITI), which brings together governments, corporations and nongovernmental organizations to review and publish oil and mining company payments to governments on a national-level basis.

Another critical area of concern that has emerged in recent years in both the mining and oil sectors is the production contracts signed between governments and oil and mining companies. These contracts often determine the amount of revenue that a government will receive from a given project. They also often contain “stabilization clauses” that serve to “freeze” the laws and regulations that may pertain to a company during the course of a project. Such clauses are designed to protect investors’ interests against arbitrary changes to laws and regulations after a contract is signed. Unfortunately, they may also have the perverse effect of exempting companies from new human rights and environmental protection regulations that a country may adopt following the signing of a production contract with a company. "8

Economists have found that economic dependence on mining is linked to a variety of socio-economic problems, including lower education rates, lower levels of health care and a higher propensity to civil war and conflict. "9 These factors may be attributable to the ease with which natural resource revenues may be manipulated by governments and directed away from constructive uses. Competition among armed factions for control of minerals resources can be a driver of violent conflict as has been the case in the Democratic Republic of Congo."10

Key Questions for Journalists

Mining presents many interesting potential angles for enterprising journalists. Some key questions that can be asked about a particular mining project include the following:

  • How much will the project cost to construct? How much will the government earn from it? What is the tax rate that the company will pay? Have these terms been disclosed to the public?
  • What systems does the government have for effective environmental management of the project? Has the company agreed to post an independently-verified financial surety or bond to ensure full costs of clean up of the mining operation?
  • How will water quality at the mine by monitored? Will local citizens’ groups have a role?
  • Does the company have the consent (or “social license to operate”) of the affected communities? How will it demonstrate this?
  • What is the company’s past track record on human rights and environmental issues? What processes does it have in place to ensure its security forces comply with human rights standards?
  • Will the project produce acid mine drainage? How will this be monitored?
  • What will the government do with revenues it receives from the company? Will these be disclosed publicly?
  • How does the project fit into a broader development plan that contribute to economic development and poverty reduction?

Endnotes

1 Mike Anane, “Lethal Cyanide Spill in Ghana Outrages Gold Mining Communities,” Environmental News Service, July 25, 2006.

2 Earthworks, “New Evidence Shows Mine Releasing Massive Unreported Mercury Air Pollution,” June 2007.

3 Oxfam America and Earthworks, “Dirty Metals: Mining, Communities and the Environment,” 2004, p. 12.

4 BN Americas, “ Water and Mining: A Thirsty Business”, May 2007, p. 4.

5 “Dirty Metals”, p. 20.

 James Otto, et. al, Mining Royalties: A Global Study of Their Impact on Investors, Government and Civil Society (World Bank, 2006), p. 13.

7 Bank Information Center, “Anti-corruption Advocate Endorse Renegotiation of Zambia’s Mining Contracts”, March 29, 2007.

8 See generally, International Finance Corporation and UN Office of the High Commissioner for Human Rights, “Stabilization Clauses and Human Rights,” March 11, 2008. Available at www.ifc.org

9 Michael Ross, “Extractive Sectors and the Poor”, Oxfam America, 2001.

10 See generally, Human Rights Watch, The Curse of Gold, June 2005.

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