Permitting a new mine: Insights from the community debate

When a mining company selects a site for development, the company begins a dialogue with the local community about receiving the necessary approvals for the mining permits. The dialogue focuses on how well the company can use science and technology to manage risk to the local environment, and on how much economic benefit will be gained by the local community for accepting the risk. A useful approach to better understand how the debate affects the outcome of the permitting effort is to use the method of “discourse communities and analysis”. This paper analyzes two efforts by Kennecott (Rio Tinto) and one by Exxon to develop base metal mine sites in the Upper Midwest of the USA. As the three case studies show, the local pro- and anti-mining discourse community members will not be changing their basic positions as the permitting of a new mine is debated. Accordingly, both communities are trying to convince undecided stakeholders rather than talking to each other. Both sides are using ever more sophisticated media methods to communicate their message to the undecided residents of the community. By winning the support of the majority of the undecided residents, political pressure can be used to sway the decision.     

The impact of commodity price risk management on the profits of a company

It is well recognized that for the producing companies hedging the commodity price using financial products like forwards or futures has become an important part of the company's production process. But apart from the direct impacts of hedging on the production and hedging costs the use of financial products affects the financing of the company: hedging the volatile commodity prices leads to a reduction of the risk premium the company has to pay for its debt capital, since hedging contributes to more confidence of the investors in the redemption of the debt. In this paper we therefore analyze this dependency of hedging and financing and derive optimal hedging extents for companies in different market situations based on a long-term model. By hedging the commodity price, companies can realize a surplus in profits. Thereby, the optimal hedging extent for a monopolist is often up to 100%, whereas for companies in a polypolistic market the optimum is always less than 100%. These results are illustrated by examples for a producing company.     

Estimating the volatility of mining projects considering price and operating cost uncertainties

In the real option pricing model of valuation and decision making, the estimation of future volatility is a key input parameter. For traded commodities or financial assets, past volatility is used as a proxy for predictions. But, for projects, this approach is not feasible because, in most cases, historical data of traded projects are not available. As an alternate solution, it is usually assumed that project volatility is equal to that of commodity price. In order to investigate this assumption, we estimate the project volatility considering that both commodity price and operating cost evolve as a geometric Brownian motion (GBM). Results of a hypothetical gold mining project indicate that project volatility is higher than that of commodity price and it only drops to price volatility under very unrealistic industry conditions, such as very high prices or very low production costs. In addition, we find that project volatility is independent of production capacity and taxation, but depends on increments in price and cost, as well as strongly on their degree of correlation.     

International renegotiations: the case of the Dominican Republic and Falconbridge

In 1969, Falconbridge Ltd agreed to expand greatly the facilities operated by its subsidiary in the Dominican Republic. Over the succeeding years, the company mined, processed and exported a large proportion of the country's nickel reserves. Due to worldwide market conditions, however, the company made losses rather than profits, and the Dominican government received little financial benefit from the company's operations. Matters came to a head in November 1987 when President Balaguer of the Dominican Republic unilaterally imposed taxes on company imports and exports. This action was significant because under a long-standing agreement with the Dominican government, Falconbridge was only obligated to pay income taxes and had an exemption in perpetuity from all other taxes. When the company refused to pay the new taxes, the government began to curtail nickel exports. Meanwhile, on world markets, the price of nickel soared. This paper briefly describes how the world nickel market has evolved, and then focuses attention on the relationship between Falconbridge and the Dominican Republic. It outlines the issues that arose, describes the renegotiation process itself and analyses how matters were resolved.     

Designing tools to track health and well-being in mining regions of India

The objective of this article is to illustrate the use of a framework to design a set of tools to assess progress towards improved well-being in a mining region. The framework uses an ecosystem approach to assess human well-being and is sensitive to the needs, concerns, and interests of at least the major stakeholders: government, company and community. The framework seeks to be useful to stakeholders and to be of policy relevance. The article presents the proposed framework with illustrations from a case study in Goa, India. Mining in Goa has had both positive and negative impacts on the well-being of local people. These impacts vary depending on the age of mining. In areas where mining is well established and active, the economic impacts are more positive. The social and environmental impacts are more negative in the regions where mining is new or is closing down. These characteristics generate their own set of issues of concern to stakeholders. Based on these issues, three types of tools to assess current well-being and progress towards improved well-being are suggested: (i) Indicators based on identified issues using the Pressure-State-Response (PSR) framework; (ii) A quality of life instrument, which can be developed either as an aggregate measure of well-being or in a more limited way to capture the satisfaction of the community with their living conditions; (iii) A regional income accounting framework to assess whether the mining region is able to continue functioning into the indefinite future without being forced into a decline through the degradation of its key natural, social, and human assets and resources. The article suggests that if these tools are used regularly, an information system will emerge that will, over time, provide markers of what mining is doing to the region and to the local communities.     

South African gold mining taxation : An example of a resource rent tax

Theoretically, a resource rent tax is neutral in that it does not influence the allocation of resources. However, the application of such fundamental principles in the tax formula of the South African gold mining industry negates the neutrality principle. A progressive element in the tax rate encourages mining of submarginal ores - leads to misallocation of resources. However, it substantially reduces the financial risks of a mining company engaged in the extraction of a commodity characterized by price volability, such as gold, and permits economies of scale in mining and encourages conservation of a non-renewable resource. As long as prices increase faster than costs, the advantages of this system probably exceed the disadvantages. The choice of the threshold rate in such a tax system is critical. If it is too high it will encourage mining of submarginal ores, and if too low it does not recognize the peculiar risks of gold mining investments.     

Long-term trends in the Real real prices of primary commodities: Inflation bias and the Prebisch–Singer hypothesis

In his recent article on measuring the long-term trends in the real prices of primary commodities, Cuddington (2010) extends in several important respects our earlier efforts (Svedberg and Tilton, 2006) to correct real commodity price trends for biases in the Consumer Price Index and other deflators. First, he argues for a log-linear relationship between prices and time. Second, he proposes a simple and quick method for obtaining corrected price trends from the published but uncorrected estimates. Finally, he illustrates, for the case of copper and presumably for many other commodities as well, the difficulties of obtaining real price trends significantly different from zero when the log values of the price data contain a unit root, requiring the use of difference stationary models.We welcome these insights, which should improve and make easier efforts to estimate correctly real commodity price trends over the long run. We would stress, however, that it is still important to correct for the biases in inflation indices, notwithstanding the failure of difference stationary models to obtain long-run real price trends (both corrected and uncorrected) significantly different from zero.     

An assessment of time series methods in metal price forecasting

The international price for metals is pivotal in the profitability equation for mining companies. If producer prices rise, assuming production levels and costs remain the same, profits are expected to increase. Accordingly, producers welcome any means by which price instability and unpredictability can be reduced. The paper analyses the ability of two user-friendly time series forecasting techniques to predict future lead and zinc prices. The conclusion is that price forecasting is difficult. It should, however, be acknowledged that whilst neither of the two models are definitive, they are useful for the mining company vis-à-vis its planning process. In particular, the results from the analysis in this paper suggest that ARIMA modelling provides marginally better forecast results than lagged forward price modelling. The methodologies employed in this paper have a broad based application to base metal forecasting by mining companies in general, that is, the applications are transferable.     

Long-term trends in the Real real prices of primary commodities: Inflation bias and the Prebisch-Singer hypothesis

Following the Boskin et al., (1996) report, it became widely recognized that price indexes in the U.S. and elsewhere overstate inflation. Svedberg and Tilton (2006) highlighted that this inflation bias may have important implications for estimated long-term trends in nonrenewable resource prices. ST construct an inflation-bias corrected CPI (and PPI) for the U.S. and use their corrected deflator(s) to define a so-called ‘real real’ price of copper. Their ‘real real’ price of copper is then used to re-estimate long-term trends in real copper prices. This paper proposes a quick method for obtaining inflation-bias-corrected estimates of long-run trends in real primary commodity prices directly from estimates in the published literature. Our approach obviates the need re-do existing empirical studies using a corrected or ‘real real’ price of nonrenewable resources. The two approaches are mathematically equivalent.     

Modelling mining: Open pit copper production in British Columbia

Open pit copper mining in British Columbia is modelled to examine how different price levels affect rates of output and stocks of reserves and to consider the existence and distribution of economic rents. The model depicts the influence of different economic circumstances on production plans, for example, with respect to scale of operations and cutoff grade. To achieve this it represents a balance between the high level of abstraction which has characterized the writing of most economists and the degree of detail and complexity required of models used by operating mines. The model provides a basis for the study of the consequences of alternative forms of taxation, a subject to be pursued in subsequent articles.     

Trends in real commodity prices: How real is real?

Testing for the existence of downward trends in real commodity prices has been the focus of several studies since the Prebisch–Singer hypothesis was formulated back in 1950. In this article, we focus on annual and monthly series of various commodity categories and consider alternative price deflators. Based on the methodology of Harvey et al. (2010), which is robust to the order of integration of the time series, we conclude that the time frequency and the price deflators play a key role when testing for the Prebisch–Singer hypothesis. For instance, at an annual frequency (1900–2003, 1900–2008), it becomes considerably more likely to support it when deflating by the unadjusted US CPI-all items than when deflating by the Manufactures Unit Value (MUV) Index or the Historical Price Index of Manufactures (HPIM). This finding is in agreement with the Svedberg and Tilton (2006) discussion on the CPI's overestimation of inflation and the measurement of the real price of copper. When dealing with monthly data (January 1957–December 2010), our results show that real prices tend not to reject the null hypothesis of a trendless series, except when deflating by the PPI-Crude Materials and, to a lesser extent, by the HPIM.     

Perspectives on mineral policy in Ireland

Mining firms have a greater incentive to invest in a country with effective and efficient mineral policies, given favourable geological and commodity price conditions. This paper examines and appraises mineral policy in Ireland. The legislative, regulatory and fiscal frameworks for mining are examined. Inherent administrative issues surrounding these policies are also discussed. Despite the positive reviews of Irish mineral policy in the Fraser Institute Annual Survey of Mining Companies 2004/2005, this paper concludes that a number of policy improvements are needed to maximise the industry's potential. The paper suggests that a National Mineral Policy document be produced to provide greater clarity to potential investors through a transparent legislative framework and a balanced fiscal framework.     

Tri-sector partnership for community development in mining: a case study of the SAPI Foundation and Target Fund in the Republic of Sakha (Yakutia)

This paper explores the nature of tri-sector partnerships applied to community development in the mining sector. The case study approach was used to examine an initiative for environmental improvement and socio-economic development in the diamond province of the Republic of Sakha (Yakutia), in the Russian Federation. The study follows the journey of this initiative from a potential tri-sector partnership model between the diamond mining company ALROSA, the Government of the Republic of Sakha (Yakutia) and the SAPI Foundation, to a bi-lateral partnership between ALROSA and the Government represented by the Target Fund. The study explores the community development in the diamond province in the light of economic and political transition within the mining sector of the Russian Federation.     

Mining taxation issues for the future

During the 1970s and 1980s the main concern of mining policies was to attract investment whilst at the same time balancing the interests of governments and companies. By the turn of the century a new spectrum of challenges faces governments and companies in the mining sector. The need for fiscal regimes to adapt to price cyclicity is to some extent superseded by the requirement that they adapt to a long-term decline of metal prices. The growing importance of environmental and community affairs in the mining sector will force governments to design coherent and comprehensive tax regulations to complement the wide range of initiatives being taken in these fields. Finally, the age-old problem of tax collection continues to raise its head in transition and developing economies.     

Bolivia's strategy for restructuring the state's mining sector and promoting private investment in mining

Bolivia is a country of great mineral wealth with known reserves estimated to be worth over US$7 billion. Despite this great potential wealth, in the early 1980s the mining industry of Bolivia found itself in a crisis characterized by excessive state intervention in the industry, a financially troubled state mining company, large areas of the country off-limits to mineral development, an irrational tax system which discouraged mining and labour unrest. To deal with these problems, the government decided to restructure the mining industry so as to encourage private participation. This paper describes the policies introduced to revitalize the mining industry as well as projections of what the future benefits would be to the country if those policies are successful in achieving their objectives.     

Investigating the sustainability of the global silver supply,reserves, stocks in society and market price using different approaches

The authors have collected data for the silver market, shedding light on market size, stocks in society and silver flows in society. The world supply from mining, depletion of the remaining reserves, reducing ore grades, market price and turnover of silver was simulated using the SILVER model developed for this study. The model combines mining, trade markets, price mechanisms, populations dynamics, use in society and waste and recycling into an integrated system. At the same time the degree of sustainability and resource time horizon was estimated using different methods such as: 1: burn-off rates, 2: peak discovery early warning, 3: Hubbert's production model, and 4: System dynamic modelling. The Hubbert's model was run for the period of 6000 BC–3000 AD, the SILVER system dynamics model was run for the time range 1840–2340. We have estimated that the ultimately recoverable reserves of silver are in the range 2.7–3.1 million tonne silver at present, of which approximately 1.35–1.46 million tonne have already been mined. The timing estimate range for peak silver production is narrow, in the range 2027–2038, with the best estimate in 2034. By 2240, all silver mines will be nearly empty and exhausted. The outputs from all models converge to emphasize the importance of consistent recycling and the avoidance of irreversible losses to make society more sustainable with respect to silver market supply.     

COSTS AND EFFECTS OF A WATER PROGRAM FOR A SMALL STRIPPING COMPANY-SOUTHEASTERN OHIO1

The purpose of the study was to use economic analysis in determining the ability of a small strip mining company to incure the financial burden of carrying out various alternative mine drainage abatement programs. The quantity and quality of water with which the company has to deal were determined and treatment and diversion programs were costed out. The company's market area and the market structure were analyzed. It was found that pricing policies were determined by a dominant firm, so the target company had no control over its price per ton of coal. The costs and revenue of the firm were analyzed for the period 1960-1970 and, even without a water quality program, losses were incurred in six out of eleven years. Analysis of the average cost curve indicates that the per unit cost could have been reduced by increasing output thereby increasing efficiency. The conclusions of the study were that the small company could not unilaterally implement mine drainage programs because the added costs would seriously worsen its already precarious financial position. Even uniformly enforced legislation might reduce the small firms competitive position because of economies of scale associated with the large treatment facilities used by big mining companies.     

Government and voluntary policymaking for sustainability in mining towns: A longitudinal analysis of Itabira,Brazil

The socio‐economic fabric of single‐company mining towns needs to be carefully considered by both Government and companies in sustainability policymaking. Policy design and effectiveness in such towns are significantly impacted by the city's economic dependence on a single company. This paper explores the perceived effectiveness of government and voluntary private sector mining policies for pursuing sustainability in the historic mining town of Itabira, Brazil over a period of 20 years. Itabira serves as a worthwhile case study because it allows for an in‐depth and longitudinal analysis that can reveal valuable lessons to policymakers of different sectors and jurisdictions located elsewhere. Based on extensive face‐to‐face interviews and literature reviews, study results indicate that changes to the state environmental licensing policies in the 1990s led to significant socio‐environmental improvements in the area. The globalization of the mining company also contributed to an increase in the quantity and quality of voluntary industry policies. Recent technological improvements in the beneficiation processes of the mining company promises to extend the life of the mine to 2050. Although there are significant incremental socio‐environmental policies and programmes, sustainability remains an elusive vision in Itabira, with no clear objectives or monitoring and accountability mechanisms. The paper concludes by recommending a more formal integrated policymaking framework.     

Maintaining land use agreements in Papua New Guinea Mining: ‘Business as usual’?

Most large scale resource extraction projects in Papua New Guinea (PNG) require companies to negotiate with customary landowners for access to development sites. In the discussion of process and challenges of development and operation of projects, particularly mines, the paper, basing as a case study of land use arrangements in PNG mining, has several objectives to address. First, it discusses land use arrangements in the mining industry and how they have evolved over the last few decades. Today, most of these arrangements involve pluralistic framework agreements which have been shaped by land tenure debates, civil uprisings, government initiatives and increasingly politically savvy customary landowners. This pluralistic process encourages key stakeholder involvement, particularly customary landowner participation which has been an innovative piece of sustainable mineral policy development in PNG. Second, the paper argues that ‘it is not business as usual’ for mining companies as it would generally be the case in developed and many developing countries because they are increasingly forced to be proactive in addressing landowner and community interests while managing mining projects. A brief overview of land use debates in PNG is summarised at the outset to provide background to mining and development in the country. Third, the significance of the corporate social responsibility (CSR) paradigm and its impact on business, particularly the mining industry is acknowledged intermittently in the discussion to shed light on how it is influencing development of local communities. Finally, the paper argues that the post-Bougainville period has led to a change of the old enclave model of mining development to a broad based community driven form of development around mining. However, it is difficult to predict as to how this model of mining led development in rural PNG will span out in the long run. In the meantime, genuine landowner partnerships with developers and government in the management and operation of mining projects in the country are proving to be a positive outcome for everyone despite some major challenges.