Why we should care about this topic

So….you might think didn’t this guy just recently write an article about mining and the environment? And is this not a very similar topic? And is this not an investment blog, not one for development economists?

All correct, all right. But…I believe a true investor also should be aware about what he or she is impacting with the investments granted. And what is more, I feel that few other sectors are so packed with upfront accusations as the mining industry.

These accusations might be associated with colonial times, where mining largely took place under a so-called ‘extractivist’ regime, i.e. without and linkages to the host economies. Or it could be the sometimes striking difference between multi-billion international corporation operating in countries whose annual GDP can hardly match the market cap of the respective miner. Or the fact that despite gold, copper or gemstones are lifted out of the ground in the millions, the mining site is surrounded by impoverished huts and communities.

So, it is no wonder that many who have never worked in the sector or in a poor resource rich country are quite much set on their opinion that the riches of the mining industry are based on unequal, exploitative behaviour vis-à-vis the host nation. Adding some corruption to the cocktail, we now have the perfect ingredient for sustained poverty on the one side, and ‘dirty money’ on the other.

Hey, investors: Would you really like to invest in an industry that has a modus-operandi as just described? While I think it is ok to follow ones self-interest, there should be some limits, and I am also confident that most of us have their boundaries. Making others worse off with every dollar invested should not provide for a comfortable sleep.

Why mining could help

Artisanal Mining - Harsh. But Important

Let’s start with one form of mining which is largely restricted to developing countries, and which looks especially poor, tough, dangerous and exploitative: I talk about the form of mining which is mostly undertaken without mechanization, and often without a license: artisanal mining, where cohorts of mostly men toil the ground, extracting gold, gemstones, but also tin and lithium.

Most people will have seen pictures of Brazilian or African artisanal mines, and one often finds reports by NGOs that talk about ‘the ugly side of (insert mineral xyz here)’, or ‘the dark secret of (insert another mineral here)’ together with such images. Child labour is often mixed into this cocktail.  

But is this really exploitative? Is that modern slavery, where rich countries count their money on the backs of marginalized workers in the developing world?

Let me make one thing clear: This is extremely tough work. I have seen artisanal diamond mines in Western Africa where workers stood for hours in the torching sun washing gravel. The hottest mine that I have visited was an artisanal gold project in Mauretania – in the f****g desert. I was delighted at that occasion when I was able to enter my car after about an hour or so. I couldn’t survive a day in such a mine – most of us couldn’t.

Also harsh: The realities of growing up poor in poor countries

But was is important – and this often seems to be totally neglected: Life in most poor developing states is hard. Very hard. It is an unfortunate fact on our globe, in which wealth is all but distributed equally. Part of this reality is that almost all workers in the mines do this voluntary! That is not the same as doing it out of joy. But most artisanal miners are migrants from neighbouring countries who were born in a subsistence farming community. As subsistence farming household has its limits on how many people it can sustain. And so doe subsistence agriculture. After a small number of people on a field, each additional worker doesn’t add any value-added.

So people leave to look for new jobs. Working as day labourer in agriculture is one of the worst jobs. So anything else is normally preferred. Being offered a job in an artisanal mine is…one of the better ones. The average daily wage of a digger in a gold mine is around five times as high as that of a rural labourer. And if you work in a gemstone mine, you could increase your luck as diggers receive share of the value of each stone they or their team finds. So it is attractive, even though of course not every miner finds a new Star of Africa diamond.

Are our comparisons flawed?

Helping to improve mining is helping to improve opportunities for the poor

Of course, the goal has to be to make artisanal mining safer and more efficient. To connect these miners with capital so they can buy some machinery. To move them into the formal economy so they can get market prices for thee goods they have mined with their hands. All of that is being worked on by many initiatives, often involving industry or associations in OECD countries, such as the Responsible Jewellery Council. Certificates and standards are being set in place to alleviate the situation, and promote artisanal mining in a way that it is a sustainable source of income.

For me, this is the way to go for the moment. Engage and support, rather than feel sorry and sideline by trying to appeal to the consciousness. Economic development is a long and tyring process, involving multiple generations. While there is no guarantee that every low-income economy gets elevated to at least a middle-income country where most of its citizens can lead a somewhat humane life, mining and artisanal mining included could be one of the industries to support this way.

Because artisanal mining is an extremely important source of income for millions of people worldwide. A crucial source of revenue on a local level, and even for foreign exchange on a national one.

If these operations can proceed to mechanized ones, these effects become even greater. The revenues generated are being spent locally on consumer goods, giving raise to other services. And in some cases, miners also process what they have mined, for instance raw gold to doré bars, or cutting for gemstones etc.

This is still different from our Norwegian IT worker, but it is a start. It is important to recognize that the general circumstances of life and progress are simply much harder for most people in the developing world than in the developed one. Using the mineral wealth is one option for countries. Of course, not every mining operation, and surely not every artisanal mining operation contributes to the accumulation of capital in the developing world, so looking at standards for instance through certification bodies is useful: There is the Better Gold Initiative, the Responsible Mica Initiative, the Responsible Minerals Initiative, the ICMM’s Mining Principles and others. They will not be capable to check every single operation, but as I have said – it is a start. With more income generated through the export of minerals, states will also become more capable to monitor what’s going on.

As such, mining in general, and artisanal mining specifically, under the right frameworks, can contribute in many ways towards a betterment of social and economic issues. Fighting or sidelining it does not constitute a solution, but would add just another major problem to the difficulties of surviving and developing.    

Updated sub-chapter: Large-scale mining, poverty and exploitation

I realized that I have originally finished this blog without talking about thesecond important pillar of mining, which is the mining that most of us know: the large mines, that either have spectacular undergrund tunnels or manifest themselves by large holes in the ground. These are the operations that normally belong to huge international mining giants like Rio Tinto, Newmont, SQM, Tianqi etc. Most are listed on the key stock exchanges for the mining industry, i.e. in Toronto, the ASX in Sydney, London or New York. Building such mines costs 1bn USD upwards. In developing countries, such mines are often of strategic importance due to the foreign exchange and export value they generate.

So, do such large-scale operations exploit the poor or foster poverty?

There is no simple answer for this, and neither could one fully agree or fully disagree, as the situation is complex. Let's first look at how the developments over the last years have helped in building a mining sector that is in general more supportive to their host countries than it was traditionally the case:

Of promoters...

The link between modern mining and poverty or exploitation is not through slave- or other forms of exploited labour. The times that poor gangs of workers have to toil for foreign corporations are gone. In fact, jobs in the mines are in high demand, since they are paid exceptionally well. The problems with labor in modern mines is that they employ only relatively few people, and often require high levels of skills and/or education, so that only a small minority of the local population are eligible for such jobs.

The link by which some mines do potentially help to sustain poverty levels, or at least prevent raising levels of economic development is done through paying little or no taxes. If they then import the machinery they need from abroad, fly in their skilled workforce instead of using local labor, fly out unprocessed minerals and conduct tax evasion, then....then there is really no benefit of such mines, except for some high ranking government staff who probably have been bribed in order to allow such a scheme to happen.  

However, running such 'models' is also much more difficult today. This was probabyl the norm until 30, 40 years ago. But we should not forget that also developing countries have learnt by negative examples, and are supported by international organizations and other interest groups. As such, most resource-rich poorer countries use model contracts that stipulate the requirements and the obligations of a mining license. Often, such model contracts are not far off from a contract you would find in Canada. Regulations in most countries also require to use a share (mostly the majority) of labour to be natives. In Namibia for instance, more than 90% of staff in mines in indeed Namibian. Over the last 20 years or so, cooperations between international organizations, the mining industry and Namibian colleges and universities have resulted in the country producing now its own engineers, metalurgists, mechatronics etc.

Also, most countries have provisions in their laws or project level contracts that require mining companies to use local content. That means they have to hire local services, buy at least lower tech equipment from within the borders, and also make various other contracts with local businesses. This can also be a significant opportunity for those businesses, as a contract with a mine opens up opportunities to get credit etc.  

So, I have witnessed quite considerable progress has been made over the last 20 years in making mining more of an engine of local economic development. Whether that all has happened voluntary or not - the contribution of mining to nationaland indeed local economies is much stronger than it used to be.

This will cut into the profits of your African subsidiary. Less profits, or better even no profits mean less or even no taxes. The main holding company of course takes a big profit from overselling its African subsidiary, but...it is based in a zero-tax jurisdiction, so, no taxes here either. The system works as well when selling gold. Because your African subsidiary is a very kind company, they sell the gold to your main holding company at a low price. The holding company in trun will sell the gold onwards for the market price.

Of course, this is a bit simplified, but it depicts what is often employed between a mining/trading group that has set up a complex web of subsidiaries and holdings. Here too, progress is being made to limit the space for corporations to act in such ways, and tax professionals also get better and smarter in developing countries. So while the example used above is probably too crude to work in real life, more refined methods are employed, and a lot of taxes that should be paid to governments do get lost.

As a final verdict: In general, global corporations that are listed on international stock exchanges normally don't play such games. They have to be too transparent to allow that. And most follow model contracts and have become (nor always, but often) a sort of partner to their host countries. Privately owned companies are more difficult to deal with, and it is probably here where the blac sheeps are to be found. In general though, mining, while complex and with lots of due pros and cons is better and more valuable to developing host countries than is its general image in Western press. As I said above, sound regulation, certifications and transparency have helped over the last decade to build a more development-oriented mineral industry.