Shortfalls in minerals investments

Shortfalls in minerals investments

N. A. Butt and T. Atkinson

The international minerals industry continues to have a substantial investment shortfall. The widening exploration and mineral development gaps, not only in the lesser developed countries but also in the developed nations, are sowing the seeds for future mineral supply disruptions and conflicts. Mutuality of interests demands concerted initiatives, individual as well as collective, to reverse the investment trends established by international mineral finance and the multinational corporations in order to pave the way for secure mineral supplies in the future at acceptable prices. Keywords: Development

(economic); Mineral deposits; International finance

Dr But-l is Professor at the University of Engineering and Technology, Lahore, Pakistan, and at the time of writing this article was Colombo Plan Fellow in the Mining Engineering Department, University of Nottingham. He has many years of public sector mining operations in LDCs. Professor Atkinson is Head of the Mining Engineering Department, University of Nottingham, University Park, Nottingham NG7 2RD, UK. He has 40 years experience in international private sector mining. ‘J.S. Carrnan, Obstacles to Mineral Development - A Pragmatic View, Pergamon Press, Oxford, 1979. ZN.A. Butt, ‘Future mineral supplies and the lesser developed countries’, IMM Transactions/Section A, Vol 91, January 1982, pp Al O-Al 7. -‘D.H. Meadows, era/, The Limits to Growth, Earth Island Limited, London, 1972.

0301-4207/82/040261-l

Mineral development has traditionally been financed either through the internal cashflows of the mining industry or through issues of new equity. International financial institutions have also provided substantial loan capital, especially during the successful years of mining after the second world war. More recently, rapid rising energy costs; delayed reaction to the wave of expropriations and nationalizations that took place in the late 1960s and early 1970s; world-wide inflationary pressures; massive infrastructure and project installation costs; increasing intervention by the governments of both the developed and the less developed countries (LDCs);‘and the recessionary state of the world economy have restricted the flow of much needed high-risk investment capital to the world’s mineral industry. The mineral industry is substantially failing to provide the level of investment needed to secure future mineral supplies. Multinational corporations, after their recent experiences in the developed countries and especially in the LDCs, now adopt a very cautious approach to international mineral investments. Over the past 20 years, various UN agencies have attempted, with a good degree of success, to accelerate the process of mineral exploration and development in the LDCs, but their efforts are inhibited by lack of positive response from the developed world’s mineral community and governments. l While the LDCs, the probable source of most future mineral supplies,2 are beset with acute inadequacies of mineral development finance, the present policies of governments in the developed countries are close to economic introversion. There are hardly any indications to suggest that mineral investments are taking place at the required level. Mutuality of interests demands individual as well as collective initiatives to pave the way for increased investments in the development of mineral resources wherever they occur to ensure adequate supplies of future mineral raw materials at acceptable prices.

Present investment levels In the wake of Limits to Growth,3 a spate of articles appeared in the international minerals literature discussing the adequacy or otherwise of the world’s mineral resources. Although it was generally agreed that the Limits to Growth thesis was untenable, mainly because of the dynamic nature of mineral resources and reserves concepts, the discussions did produce general awareness about the future of mineral supplies which had hitherto been mainly taken for granted. Consequent discussions

S$OS.OO0 Butterworth & Co (Publishers) Ltd

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Shortfallsin minerals investments

revolved around levels of production and consumption, sources of production and their distribution and, above all, the investment levels that were necessary to keep a steady flow of minerals and metals to the world economies. According to a study initiated by the British-North American Committee (BNAC)4 and a later study by Radetzki and Zorn,s $12 billion/ year (1977 dollars) will have to be invested in non-fuel mining and processing facilities to see us through to the year 2000 if no disruptions in the supply of minerals are contemplated. As is widely reported by a number of studies,6 LDC sources of minerals production may already account for 40-50% of present mineral supplies, and it is therefore a fairly safe assumption that out of that $12 billion at least $4.5 billion/year investment in the minerals industries of the LDCs is needed (with a proviso that economic growth in the coming years is not very high). Annual Engineering and Mining Journal surveys’ (1977-82) of mine and plant expansion provide some insights into the current state of the minerals industry and the likely trends for the future. Figure 1 illustrates an overall review of the total number of projects planned or under construction, together with their proposed investment levels and average investment cost, broken down on the basis of developed country and LDC locations. Similar information is shown in Figure 2, but only for the projects for which finance has been committed and construction under way. It is relevant that: 0

Committee, American in the Eighties: Prospects and Problems, BNAC, New York, London, 1976. SM. Radetzki and S. Zorn, Financing Mining Projects in Developing Countries, Minina Journal Books, London, 1979. 6R. gosson and 8. .Varon, .The Mining Industry and the Developing Countries, Oxford University Press, Oxford, 1977; K. Takeuchi, et al, ‘Investment requirements in the non-fuel mineral sector in the deveNatural Resources loping countries’, Forum, Vol 1,No 3, April 1977; T. Atkinson, ‘Future strategic mineral supplies and the EEC’, Mining Engineer, No 211, April 1979, pp 721-728. 7Engineering and Mining Journal, Survey of Mine and Plant Expansion, January issues, 1977-82.

4British-North

Mineral Development

262

0

l

The overall number of projects has fallen below 1977 levels. Since 1978 there has been a steady decline in the number of projects (all categories) on a world-wide basis with a greater number of projects being increasingly located in developed countries. By 1982, the number of projects under construction (Figure 2c) had falled by 40% from 1978 levels; a 53% drop in the LDCs and 27% in the developed cquntries. In 1981/82 this trend has been predominant mainly because of high investments planned for oil shale and tar sands. In 1981, 17 projects were planned at an estimated cost of $29.2 billion; this had since been increased to $48.9 billion for some 28 projects by 1982. Because of the world-wide recession and, more importantly, the present oil price crisis, it is easy to be sceptical about the viability of these projects and their planned starting dates, but they are nevertheless indicative of the direction in which future mineral industry investments are headed. Engineering and Mining Journal, January 1982, reported no new investment plans for iron, aluminium, copper or lead/zinc. While the number of projects does not indicate specified planned capacities and thus provides only vague interpretations regarding the mining industry’s world-wide activities, investment levels are a true measure of planned expansion. The mining industry may have very ambitious plans (Figure lb, $130 billion for 1982) but it is the projects under construction which are of greatest relevance; estimates (Figure 2b) indicate that, especially after 1979, the ‘real’ investment levels for projects under construction have registered an increase (but they are still below 1977 levels). While in money terms investments in the developed countries show an upward trend catching up with 1977 levels, ‘real’ investments in the LDCs continue to decline. Another relevant feature (Figure 2b, 2c) is that, in spite of a smaller number of projects under construction in the LDCs, it is obvious

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POLICY December 1982

Shortfalls in minerals investments

World

IDN

World totol (current $

-

)

World totol

60 Investments in LDCs (current $1

-----

b

I

0

”

g

Figure 1. Mine and plant expansion, 1977-l 982, from projects proposed to projects under construction.

2 2

----------

I

--__

I

I

Investments (1977 $*I

I

1

400

in LDCs

Worldshore

200 LDC shore

Source: Engineering and Mining Journal. *Assuming 10% average price deflator over the survey period. IDN = industrially developed nations

1C

0 1977

I

I

I

I

I

1978

1979

1980

1981

1982

from Figure 2a, that the overall investment volume is comparatively high. The average investment cost of projects in LDCs is from 30% (1977) to 75% (1982) higher than that of projects in developed countries. This is a trend of all kinds of projects in the LDCs, whether planned or under construction. (Convergence of individual averages and that of the world as seen in Figure la is brought about by heavy investments planned for oil shale and sand projects, all in developed countries.) Average investment costs can be affected by differences in capacities of individual projects, availability of services and facilities, infrastructure, proximity to the markets, etc; or, conversely, environmental protection measures, grade of the ore, labour costs,

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December

1982

263

Shortfalls in minerals investments

LDCs

World IDN

I

I

I

I

I World total hrrent $,

World total (1977 $*I

I

0

L

0 .z g

1977-l tion.

982, projects

Source: Engineering

under construe-

i $ _

0

264

LC 1977

0

I

Investments (I977 $*,

in LDCs

I

1

World total

1

LDC total

100

and Mining Journal.

*Assuming 10% average price deflator over the survey period. IDN = industrkliy developed nations

I

in LDCs

200

b

Figure 2. Mine and plant expansion,

I

investments (current $1

I

I

I

I

I

1978

1979

1980

1981

1982

access to mineralized areas, etc. It could also be suggested that this difference is required to cover the investment ‘risk’ of the foreign investors, or can it be interpreted that equipment, technology and other services to the LDC are available only at a premium? Projects under construction in 1982 entail an expenditure of $25 billion (1977 dollars) over a number of years. Expansions of existing plants can be completed within two to three years. Projects where ore bodies have already been identified may take anything up to ten years. Greenfield projects require much longer lead times. Furthermore it is likely that some projects may not reach completion. It may, therefore, be assumed that the mineral industry will spend roughly

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POLICY December 1982

Shortfalls in minerals investments $2-2.5

Table 1. Estimated costs of capacity for the 3980s (1977 $ annual ton). Mineral

Unit cost

Iron ore

225 7000

Copper Aluminium

100 600 2400 17500 2oooo 1400

Bauxite Alumina Al metal Zinc Nickel Lead

.

0

billion (1977 dollars) yearly on mine, plant and expansion, less than half of this investment being incurred on projects in LDCs. The estimate of $2-2.5 billion seems representative of the mineral industry’s general investments over the years and is not any significantly different from the results of the BNAC study in 1976, ie global mineral investments approximate $2 billion/year. The gradual decline in the number of projects planned and the drop in overall investment levels in LDCs confirm earlier findings8 that the exploration budgets of multinational corporations in LDCs dropped from 60% (1960) to a meagre 12-13% (1973), and that mine construction expenditure has also declined. As much as 85% of new mining investment since 1974 has reportedly been concentrated in the USA, Canada, Australia and South Africa.9 Finally, it is apparent that the overall investment plans of the multinationals and the other financial institutions involved in the mineral industry have maintained almost constant levels of investment expenditure with an increasing trend not to invest in LDCs.

These huge shortfalls in mineral investment do not augur well for the future of the international economy, especially when seen in the light of long lead times generally required for exploration and developing an ore body into an operational mine. Furthermore, the days are gone when exploration budgets of, say, $500000 would suffice to initiate a sizeable mineral discovery programme, for, in addition to price rises, the easily accessible, exposed and near-surface mineral deposits near to centres of population have mainly been discovered and the search for deep, hidden,. mineral deposits in often inhospitable terrains, is difficult and expensive. Exploration budgets are more likely to be of the order of several million dollars.

Project costs

*RF.

ment:

Mikesell, ‘Trends in foreign investAgreements in the resources

In the 1971 Engineering and Mining Journal project survey, the largest projects listed were the Caujone, La Caridad and Bougainville copper projects, all of which were projected to cost in the range of $30&350 million. A cursory glance at the latest figures reveals that billion dollar projects have become common; many projects are projected to cost more than $350 million, projects costing less than $100 million are becoming rare. After fairly long periods of stability, the real cost of establishing new capacity in mining and processing operations (measured in constant dollars per annual ton) has increased rapidly in the last decade. From 1970-75, costs/annual ton of gross iron ore (including pelletizing) capacity are estimated to have risen from $35to $100, and costs/annual ton of copper capacity (from mine to refinery) have risen from $2500 to $6000 in the same period. A similar study for selected minerals is shown in Table 1. Projects conceived and developed during the past 15 years have been victims of the vagaries of inflation. Estimates published and indicated in project planners handouts appear naive and underestimated when the projects are completed. This is illustrated by the following examples.1°

industtY’l -Resources pofic~~ “0’ 4, No 31 0

September 1978, pp 194-l 99. %osson and Varon, op tit, Ref 6. *oCarman, op tit, Ref 1.

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POLICY December 1982

In 1971 the Cujone property in Peru was calculated to go into production at a cost of $355 million. Five years later, that stage was reached at a cost of $680 million.

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Shortfalls in minerals investments

0 0

The budget of $240 million for Sar Cheshmeh in Iran in 1971 had become $1400 by 1977. The financial requirements calculated for Cerro Colorado, Panama, rose in two years from $500 million to $1 billion, are now over $2 billion, and the project has been shelved.

It is against this background of rising mineral exploration and development costs, long lead times, the inherently risky nature of mineral investments and the lacklustre performance of international mineral finance that the shortfalls in global mineral investment levels exhibit their most dangerous ramifications. Trends and attitudes developed over the last decade or so still continue and falling prices and oversupply of most minerals hardly inspire investment confidence. However, as a recent article in Mining Journal pointed out: ‘Although most metalliferous raw materials are now obviously in over supply there are many who recognize that the lack of sufficient capital investment in new mining projects is now sowing the seeds of serious future metal shortages’. *I Slower growth in minerals consumption, increased recycling and development of substitutes could provide some relief to the shortage, but world-wide mineral demands still need much higher levels of investments than have been maintained recently. While the mineral consuming countries may be content with the present oversupply of minerals and low mineral prices in the international markets, any complacency at this point could lead to a very uncertain future. It is only through sustained and substantial investments in all phases of the world mineral industry that mineral supplies can be ensured.

Sources of mineral finance There is a multitude of sources of finance available to the world mineral industry. While collectively the likely finances available from these sources are far in excess of the needs of the mineral industry, each source has different criteria for releasing its funds, depending on its needs, interests and priorities. Domestic sources of finance in LDCs

“‘Another warning on metals famine to come’, Mining Journal, Vol 285, No 7318, 1975, p 385. ‘2F.H. Skelding, ‘Financing mineral developments in underdeveloped economies’, Proceedings: Council of Economics of AIME, February 1969, pp 3346; and Radetzki and Zom, op tit, Ref 5. 13J.E. Tilton, The Future of Non-Fuel The Brookings Institution, Minerals, Washington, DC, 1977.

A primary feature of most LDCs is their lack of domestic capital, which implies an immature and incomplete financial system and absence of traditional fiscal attitudes on the part of the people. Private investors in these countries, because of the nature and size of mineral investments, are more interested in consumer product industries where profits are good, relatively low-risk and immediate. Most LDC governments, on the other hand, may want to undertake mineral development from their own meagre public funds, but would find it hard to justify such expenditures in view of other highly pressing social and economic trends. Some LDC governments have attempted, with some degree of success, to channel public funds through state-owned corporations for the development of mineral resources. Brazil, Zambia, Chile, Peru, Zaire, Iran, Bolivia, Burma, India and Indonesia have all used this method.‘* There are cases in which the host government has relied mostly on its own financial resources (Cerro Colorado in Panama and Sar Cheshmeh in Iran),13 but most LDCs do not possess adequate financial resources to undertake major mining projects on their own. Their ability to borrow from international financial institutions is limited because of their already heavy external debt.

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Shortfalls in minerals investments

Conventional sources of finance The Multinational corporations. Much of the high-risk exploration and the development effort has traditionally been funded either through their own cash flows or equity share and managed by multinationals from the USA, Canada and Europe, often with assistance of Japanese capital. These corporations have acquired over the past 50 years or so a virtual monopoly of the various skills and techniques required to develop and operate the mining industry. Although their financial resources have come under great strain beause of the current international economic climate, they still have the ability and the capacity to invest in mineral resource developments wherever they occur. With ready access ‘to their own capital and high credit rating with the international financial institutions the multinationals are able to spread their risk by carrying out a number of activities and operating in a number of regions. Although engineers, geologists and other specialists can easily be hired by governments or national mining companies, the fully integrated teams needed to develop large projects can rarely be assembled without the cooperation of the multinationals. With their own financial resources and a nearmonopoly of techniques, methods and processes, the multinationals occupy a unique position, the implications of which cannot be ignored when discussing the question of financing international mineral developments.

14‘What bankers look for in project loan Mining applications’, Engineering, December 1978, pp 1646-l 648. IsNewsweek, 16 November 1981. %ee G.J.S. Govett and M.H. Govett, World Mineral Supplies -Assessment and Perspective, Elsevier Scientific Publishing Co, Amsterdam, 1976; T. Atkinson, Evaluating Mining Projects in Developing Countries, DIC thesis, Imperial College, London, 1968; W.M. Gordon, The N/E0 Proposal: A Cool Look, Thames Essay No 21, Trade Policy Research Centre, London, 1979; E.B. Steinberg, et al, New Means of Financing lntemarional Needs, The Brookings Institution, Washington, DC, 1978; and Carman, op tit, Ref 1.

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Commercial banks. The developed countries’ commercial banks, both national and international, are the biggest source of private capital in the world. In recent years the larger multinational banks have favoured participation with multinational corporations to invest in the mineral industry and have provided substantial loan capital to the multinationals, even for mineral projects located in LDCs. However, the banks want their capital fully guaranteed against such risks as expropriation, inconvertability, war, revolution and insurrection. Undertakings to this effect by the host governments alone may not be adequate to placate their fears. The insistence of the commercial banks on a continuing role for technically qualified companies and their re-verification14 of the economic viability of the mineral project before any proje’ct loan application is considered appear to confirm that a multinational must be a part of any mineral development programme, no matter where it is undertaken. Furthermore, the banks are reluctant to give loans to developing countries because of their mounting external debts and their potential inability to pay them back (as an OECD study indicated, the external debt of the LDCs already exceeded $500 billion by the end of 1981). l5 Bilateral and multilateral aids. In the past this kind of assistance has been provided to LDCs, particularly by Canada, France, the UK, the USA, FR Germany and the USSR. A number of other intergovernmental and regional organizations such as OECD, Colombo Plan, the Commonwealth, NATO, etc have also been active in providing technical assistance in the general area of mineral development. However, these services are short-term and advisory in nature rather than involving large-scale operational activities. While the LDCs have benefited from these aid programmes, many have questioned the intentions, mode, amount and effectiveness of such assistance .16 However, with a changed outlook and approach responsive to future mineral needs, the governments of the

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Shortfalls in minerals investments

developed world can certainly activities in the LDCs.

provide

a boost to mineral

development

Export credit institutions. Supply of equipment on credit, equipment leasing, merchant finance, etc do provide some financial help, but this is only remedial in nature and generally available only for on-stream projects. The contribution of these sources of finance to international mining development is therefore limited. Non-conventional

sources of finance

In addition to traditional sources of mineral finance, oil companies, and oil-producing countries, and insurance companies have recently emerged on the international financial scene as providers of finance. With their large cash flows and their long working associations with LDC governments oil companies are well equipped to become involved in mineral projects. This involvement has taken the form of either setting up new mining subsidiaries and entering all phases of mining or outright acquisition of operating mines,17 and could provide some relief to the capitalstarved mineral industry. The oil companies may be able to persuade the international financial institutions to provide them with loan capital. However, recent indications are that the oil companies are prepared to summarily cease their mining investments. Although the current financial health of most OPEC members may be suspect, petrodollars have played a role in financing mineral developments. Much of the liquidity held in euro-currency is provided by these petrodollars and the amount that is recycled for mineral development is not precisely known, but there have also been a few cases in which Arab states have made funds available for specific mining projects.18 So far, direct investments from the OPEC members have not been very impressive, but there is scope for channelling petrodollars either directly or indirectly into the development of the world’s mineral resources. In common with oil companies, insurance companies in the developed world are another major source of capital. Because of their stable and predictable financial structure, they are better suited to advancing longterm loans to the mining projects. These companies have long been active in the iron ore sector of the USA, but their involvement in other mineral projects, especially in LDCs, is quite recent. There are at least two major mining projects which have partly relied on insurance companies’ financing; Erstberg Copper Project in Indonesia and the FalconbridgeDominicana Nickel project in the Dominican Republic. These insurance companies have, so far, made their funds available to projects owned by the private sector. With their vast financial resources and capacity to play an important role in any mechanism of underwriting investments in LDCs, they are potentially useful partners in the development of mineral resources.

International agencies “FIX FellsI ‘Financingnew mining Pro-

jects: Recent trends and prospects’, paper

presented at 11 th Commonwealth Mining and Metallurgial Congress, Hong Kong, May 1978. Wadetzki and Zom, op cif, Ref 5; Fells, op tit, Ref 17. 19Catman, op cit. Ref 1.

The World Bank, either on its own or through its subsidiary bodies has provided more than $750 million in loans for assisting mineral-related developments in LDCs since 1957. l9 It is clear that the World Bank is not a major contributor to international mineral finance, but it has often served as a catalyst for much larger loans and investment from other sources. It has also provided technical assistance in the early stages of

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in minerals investments

project development and undertaken surveys that have led to identification of viable mining projects. Besides the World Bank, its affiliates and subsidiary bodies, there are many other agencies sponsored, funded and staffed by the UN which are active, especially in the mineral resource sector of LDCs. More importantly, the Special Fund, the forerunner of the present United Nations Development Programme (UNDP), earmarked $34 million for some 42 different projects in its first year of operation. The UNDP budget has since risen to $500 million. The main feature of this programme is that recipient goverments are required to contribute an almost equal share to match the UNDP contributions. In spite of the limited financial resources at its disposal, some major discoveries have been attributed to the UNDP: copper in Malaysia, Panama and Ecuador; bauxite in the Solomon Islands; iron in Chile; nickel in Burundi and coal in Bangladesh. All of which started from scratch. There are many other mineral discoveries which were updated to enhance their economic viability. In the words of one of its exponents: ‘for every cent allocated by the UNDP to its mineral development programme, nearly two dollars worth of recoverable minerals have been outlined’.20 Sensing the widening ‘exploration gap’ that was developing in the early 197Os, in 1973 the UN created the Revolving Fund for Natural Resources, separate and in addition to the existing UN bodies engaged in different aspects of mineral development. Although initially funded by contributions from UN members (the major share coming from developed countries) this fund is designed to revolve, ie become financially selfsufficient through a ‘replenishment contribution’ of 2% of the gross value of production for a period of 15 years, when one of its discoveries reaches production stage. Feasibility studies are not part of the programme until increased funds are available. By the end of 1978, a total of $24 million had been contributed or committed (by Japan, Canada, The Netherlands, Belgium, Iraq and the USA) for some 15 exploration projects in LDC areas. Although it has met with some criticism that the 2% ‘replenishment contribution’ is excessive, the creation of this fund appears to be a major step in the right direction. Although the efforts of the various UN agencies are commendable, they are hampered because of the lack of adequate funds at their disposal and because the necessary back-up from the world mineral community and the governments of developed countries is lacking.*l The international financial scene certainly appears to contain the potential for releasing the funds so urgently required for investment in the securing of future mineral supplies. Arrangements and mechanisms also exist in various forms and shapes which can be utilized to the benefit of the world mineral industry. However, the fact that in spite of the necessary funds and framework being available the mining industry is substantially falling back on its required investments, suggests there is something seriously amiss in the international financial system.

Constraints

2olbid. Vbid.

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on mineral investments

There are several reasons for the failure of the international mineral industry to invest adequate sums of capital. Uncertain economic conditons coupled with the inflationary pressures on the establishment of new mine and plant capacities have limited the industry’s capacity for investments. High bank rates in the early 1980s not only caused cash flow

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Shortfalls

in minerals investments

problems for the industry, but further limited the availability of risk capital for mineral ventures. Cyclical market behaviour of most of the metals prices does little to inspire any confidence among the investors. While some of these reasons are transient in nature, a major stumbling block to mineral investments, especially in the developed countries, springs from the general attitude of the people and their governments on issues such as environmental protection, its regulatory controls and the withdrawal of large areas of land in the name of plant and animal life and recreation .** However, the most important constraint has been the attitudes of host governments towards foreign investment in their mineral industry sector. Even countries like Canada and Australia have recently sought to increase their share and control of profits from the development of their mineral resources. While government pressure has at present been partially relaxed in Canada and Australia, there are no indications to suggest a similar change of attitude on the part of LDC governments claiming a bigger share of profits from mineral projects and insisting on ‘indigenization’ of their mineral resource industry. The problem is further accentuated by multinationals’ lack of trust in the political and economic stability of the LDCs. With the developed countries becoming increasingly dependent on the mineral resources of the LDCs, any financial equation for the development of the world’s mineral resources must revolve around the multinational corporation and the LDC - the two most important denominators determining the pace and course of international mineral development. Absence of any mutually acceptable mineral development approach between the two will inevitably lead to an uncertain future for mineral raw material supplies - precisely the environment of the international mineral scene today.

Conflicts of interests between multinationals

22Atkinson,op cif, Ref Ref 12. 23&&t

270

and Govett,

6; Skekfing,

op tit, Ref

16.

op tit,

and LDCs

There is no doubt that ‘the main change in the world mining industry this century has been the increasing dominance of the multinational corporations, coupled with rising demand for a whole range of new minerals’.*3 The vast financial and technical resources accumulated through their operations all over the world, combined with easy access to international finance, place the multinationals in a unique position. Their dominance in the mineral industry is further strengthened both by integrating backward to obtain ore supplies and by integrating forward to the processing and/or fabricating stage of a particular mineral, thus extending the scope and range of their activities and dominating, if not controlling, not only production but also the major marketing institutions. From this position of strength multinationals have certain distinct leverages that are not available to, say, a state-owned company. They extract resources from one country, manufacture products from these resources in a second, and sell the products in a third. Thus the geographical distribution of their activities enables them to capitalize on the special advantages of a particular country. It is irrelevant whether the multinationals undertake mineral developments in developed or less developed countries, their obiectives are geared to growth-and maximization of their profits. Ideally speaking, the multinationals would like de facto control of mineral operations in the host country; complete or majority ownership; full management and RESOURCES POLICY December 1982

Shortfalls in minerals investments

operational control over production, employment, finances, investments, purchases, marketing and distribution; freedom to deal with their parent and/or subsidiary companies; little or no processing in the country of extraction unless justified by their overall strategy; favourable and stable fiscal regimes; a minimum of 30 years of tenure (covering all phases of mineral resource development) with financial legislative guarantees and compensation in case of expropriation; no re-negotiation of mineral investment agreement over the life of the contract, with a provision to take the host government to the international arbitration in case of a dispute. 24 Such an approach is untenable in the post-independence LDC where mineral resources are considered as part of the national heritage, the development of which should not only be under national control and subject to maximization of profits locally, but the benefits of which should permeate the whole economy as well. On their part, the LDCs would like to see their sovereignty over their mineral resources restored; 100% local ownership; an effective voice in the management, policy making and control of the project regarding production, sales, marketing, distribution, etc; training of locals and replacement of expatriates at all levels; economic development and environmental protection provision; monitoring the foreign deals of the multinationals, especially those with their parent/subsidiary companies; local processing and foreward integration; application of national practices, laws and institutions on taxes, imports, exports and foreign exchange transactions of the project; separate contracts for exploration and development; renegotiation when it is in the national interest; and dispute settlements in accordance with their national laws. These then are the diametrically opposite viewpoints of the multinational corporations and the LDCs. Pre-independence practices and policies of foreign investors and their continued adherence to the same basis for investments in the present-day LDCs are unacceptable to LDCs. Had there been alternative choices available, mineral developments in the LDCs would have ceased to exist long ago. But, because of the needs and interests of multinationals (and their home governments) and the LDCs are to an extent inseparable, new mineral agreements will continue to be negotiated and signed, although not at the rate necessity demands. Possible

*‘RF. Mikesell, ‘Mining agreements and conflict resolutions’ in Mining for Development in the Third World, Pergamon Press, Oxford, 1980, pp 198-203.

compromises

Mineral agreements signed in the 1970s (Bougainville, Papua New Guinea, 1974; OK Teddi, Papua New Guinea, 1976; Cerro Colorado, Panama, 1976; Teluk Tomini, Indonesia, 1977; and El Indio, Chile, 1977) shed some light on possible compromises and to some extent accommodation of the opposite viewpoint. The multinationals have accepted, in principle, the sovereignty of the host governments over their mineral resources; a share in equity ultimately leading to 100% local ownership (on a pre-agreed formula); some voice in the management and control of the project; hiring and training of locals and economic development provision; and some role for the federal bank in the foreign transactions of the project. The LDCs have agreed to accelerated depreciation and amortization (lower take of the government in earlier years of the project); a sliding scale of corporate tax based on discounted cash flow rate of return (DCFROR); international arbitration; and highly-geared external finance (tacit approval for the disguised equity of the multinational).

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Shortfalls in minerals investments

I On closer examination, however, these ‘compromises’ should not constitute a basis for optimism insofar as shortfalls in mineral investments are concerned. Increased equity share has raised the host-country’s risk in the project but a commensurate increase in profits is not apparent. In the complex financial arrangements which are now being negotiated, both commercial banks and government export credit institutions from several different developed countries are involved. This helps the multinational, or consortia of multinationals from different countries, to not only reduce their ‘commercial risk’, but more importantly to ensure international pressure against a host country that contemplates actions against a multinational.2s Involvement

25J. Kinna, ‘The development of a resource oolicv in Paoua New Guinea, 1967-77’. jourial of the Royal Society ofArts, March 1978, pp 221-232. 26S.A. Zom, ‘Mining agreements in developing countries: Some recent examples’, M&ail, 28 May 1978, pp 79-63. 27S.A. Zom. ‘New developments in Third World mining agreements’, Natural Resources Forum, Vol 1, 1977, pp 239250. See also T.W. Waelde, ‘Liiing the veil from transnational mineral contracts: A review of recent literature’, Natural Resources Forum, Vol 1, 1977, pp 277-284. 28Panama owns 80% equity shares of the Cerro Colorado project but veto on major policy decisions and management are retained bv Texasaulf. zSA. Kransdorff, ‘khy multinationals may have to face a more muscblar Third World’, Financial Times, 8 July 1981, p 9. 30M. Kidron, Foreign Investments in India, Oxford University Press, Oxford, 1965. ‘Evaluation method for 31H. Douglas, mining investment risks for countries and commodities’, in Proceedings of Conference on National and International Management of Mineral Resources, Institution of Minining and Metallurgy, London, 1981, pp106-111.

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of financial institutions

The increasing involvement of a number of financial institutions from the developed world, especially in drafting the key elements of the agreements, is a tactical advantage for the multinationals and designed to perpetuate the traditional positions of the parties involved. The internationalization of financial arrangements; high loan to equity ratio (8.5: 15 in the case of El Indio project, against 66:33 in international practice); and the imaginative superimposition of management, sales and marketing, and other specialized service agreements, separate and in addition to the main agreement, have substantially reduced the risks for the foreign investors without any decrease in their share of profits. The important question of processing and further integration continue to be postponed. Wherever some voice on management and policy matters is given to the host governments, this is likely to be stifled by the overriding veto resting with the multinational. Environmental protection, economic development provisions and the ploughing back of part of the revenue into the local economy are usually too vaguely worded to be of any tangible advantage. In some agreements - Cerro Colorado and Teluk Tomini - a ‘phase-out’ of the multinational has been negotiated in advance at a price which appears to be very high. 26 While reviewing the Cerro Colorado and OK Teddi agreements, Zorn concludes that substantial changes have taken place in the form of the agreements, but the substance remains more or less intact.27 Under these circumstances such agreements, with similar undertones, should not be taken as a sign of improved relations between the host government and the foreign investors. Instead, they highlight the lack of alternatives and, where alternatives are available,28 the inexperience of the LDCs and their lack of negotiating skills often work to their disadvantage: ‘To sit across the negotiating table from the multinational company can be an intimidating experience - especially for the greenhorn. With their vast transnational experience and heavy-weight legal support, multinationals can frequently tie up contracts which the other party soon considers less than fair’.29 Profit margins Higher average specific investment costs for mineral projects in the LDCs (Figures la and 2a) may not always be because of design parameters and may be attributed to ‘good business’. Kidron cites evidence ot ‘oreign companies in India which marketed issues at 50-100% above par.3 Further, it has been argued that mineral investments for, say, copper projects in a ‘politically unstable country’ might be considered if the investment yields a return of 50% or more. 3l It is interesting to note that

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during the last two decades, when investment in the LDCs from the West-based multinationals was declining, Japanese, expenditure on mineral exploration and development did not follow the same trend. It would seem that the West-based multinationals’ definition of a ‘politically unstable country’ is quite different from that of the Japanese corporations. The next question is - was political risk as important as has been suggested by the Western companies. T3* Modern mineral investment ‘straitjackets’ - hyperbolically inflated project installation costs, coupled with the kind of profits expected by the multinationals from their mineral investments in the LDCs - hardly provide any grounds for optimism regarding increased mineral investments in the LDCs. The multinationals cannot perhaps be blamed for their ‘successes’ because this is the edifice on which their whole philosophy stands. Any talk of altruism - or for that matter, just distribution of profits - accruing from mineral developments is therefore alien to their way of conducting business. Consequently, more responsible elements of the world community must search elsewhere for the forces that will pave the way for substantial investments based on equitable arrangements.

Mutuality of interests

32P.C.F. Crowson, ‘Constraints on investment in minerals’, /MM Transactions/ Section A, Vol 87, July 1978, pp AlO5-Al09. 33R. McCullock, ‘Global commodity politics’, The Wharton Magazine, Spring 1977, pp40-45. 34A. Sampson, ‘A muted dialogue’, Newsweek, 5 January 1981, pp 50-51.

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Obviously LDCs cannot extract better deals from the multinationals unless they improve the financial viability and political stability of their regions. While the former invariably leads to the latter, the road to improved financial health of the mineral producing LDC rests with the international marketing mechanism. It is ironic that whereas the products from developed countries are priced to reflect inflation, the international prices of mineral commodities and other raw materials not only have no such linkage but are determined by the consumers in the West. The call for ‘New International Economic Order’ (NIEO) was an attempt on the part of the LDCs to redress the international economic imbalance. The Brandt Report went even further by suggesting massive transfers of resources to the LDCs to mitigate the international inequalities in the name of what the Report called ‘mutuality of interests’. After some initial interest and some academic discussions, the Brandt Report, it appears, is headed for the archives. The NIEO proposals have bogged down in political polemics and any hope of an early agreement on stabilization of raw material prices has been lost in the modalities of mechanisms.33 The recent ‘North-South summit’ held in Mexico has produced no shift in traditional postures. Whatever response has been generated over ‘North-South’ issues in the 1970s is apparently being dissipated by the introverted economic policies of the governments of some of the leading developed countries. The present US administration and UK government feel that the best solution to North-South disparity is through private investment, obviously from the multinationals. These governments regard international institutions, including the UN and the World Bank, as global equivalents of the welfare state undermining the principles of self-help and free enterprise.34 Business corporations are being urged to search deeper into their hearts and dig deeper into their pockets to improve the lot of the people. The Reagan administration’s plea to the multinationals to lead the development in the less developed world is not new; the great trading corporations of the 18th and 19th centuries proclaimed the same worthy intentions. Nevertheless, these corporations were and still are in

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the business to make money and not to develop except as markets or sources of raw materials.35 Leadership

W.T. Vittachi, ‘Reagan and the Third World’, Newsweek. 8 Februan/ 1982, p 4. 36P.C.c. Crowson,. ‘The natibnal mineral policies of Germany, France and Japan’, Mining Magazine, June 1980, pp 537-549. See also Mining Journal, 30 May 1980, p 435, and 8 August 1980, pp 105-l 07. 3%. Tugendhat, ‘Raw materials, the Third World and the European Community’, Inaugural Lecture, 11 th Commonwealth Mining and Metallurgical Congress, Hong Kong, May 1978. asAtkinson, op cit. Fief 6.

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from governments

in the developed

less developed

countries

world

It appears change has to come mainly from the political and social leaders of the developed world. Apart from the rhetoric of ‘North-South’, mineral investment issues and future mineral supplies certainly provide a real need to see the development of LDC mineral resources in the light of ‘mutuality of interests’. Multinationals will inevitably be part of any mineral developments envisaged anywhere in the world, but the developed world can serve its own interests through a ‘transfer of resources’ that enables LDCs to participate in equitable arrangements for the development of their mineral resources. As pointed out earlier, bilateral and multilateral aids have not provided the necessary impetus to LDC economies, partly because of the mismanagement of such funds by the recipients, but mainly because all such grants, aids and credits are tied to the donor’s home markets. If the whole purpose of extending a helping hand is economic self-interest and, indirectly, strengthening the bargaining position of the home-based companies, the consequences of such an approach will be no different from today’s situation. Individually, many governments of developed countries are reformulating their national mineral policies with a view to ensuring a steady supply of mineral raw materials. 36 However, such policy changes hinge primarily on inducing home-based multinationals to invest abroad. Instead of treating the symptoms, a real effort is needed towards rectifying the causes of the problem. It seems, therefore, that a collective approach may have a better chance of success than discordant individual efforts designed to serve only national interests. Unlike the USA, Canada and Australia, the EEC possesses relatively few indigenous mineral resources and already relies on the LDCs for no less than 55% of its raw material imports, and the trend is towards increasing dependency. On the other hand, the EEC provides the LDCs with their largest export market, taking more than 36% of their total exports (the US market is only 11%) .37 This mutual dependence on one hand breeds confidence, and on the other provides a framework for continued cooperation between the EEC and the LDCs. The financial resources of the EEC are adequate enough to enable the LDCs to prepare the groundwork for smooth and steady development of their mineral resources. When mineral development involves national and international agencies, domestic private capital will be more than willing to make its contribution. The EEC needs to adopt a more direct and ‘taming’ influence on the activities of the multinationals in the LDCs. While at home the EEC may consider a little ‘sweetener’ to the multinationals’ mineral development efforts and moderation in legislative procedures and environmental controls, there certainly is a case for an increased EEC involvement abroad. It could:38 0 0

stimulate investment in foreign mining ventures by its multinationals; provide political and economic safeguards that are mutually satisfactory to the host governments and the EEC participants.

The multinationals realize the enormity of the problem and its implications, and might welcome an ‘ombudsman’ for their mineral activities in the LDCs. Whether it was the political muscle of the EEC that they

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needed or a genuine desire to further international mineral development, the multinationals (especially those from the EEC) did approach‘the EEC in 1976 proposing framework treaties between member states and foreign host governments, including a tangible EEC presence in foreign mining projects. 39 The participation of the EEC in the mineral developments of the LDCs and the fact that a framework has already been proposed in the OECD’s ‘Guidelines for International Investment’ and ‘Code of Conduct’ should assist towards a rational, equitable development of LDC mineral resources. More importantly, such an approach could help stabilize the LDC-multinational relationship - an essential prerequisite for development. UN

39European Group of Mining Companies, Raw Adaterials and Political &ks, S’ubmission to the President of the Commission of the European Community, 1976. 40D.N. Smith and L.T. Wells, Negotiating Third World Mineral Agreements,Ballinger, Cambridge, MA, 1975, p 267. 41Butt, op tit, Ref 2. 42See Lee Kimball, ‘The long road ahead: Third UN Conference on the Law of the Sea Eleventh Session’, Marine Policy. Vol6. No 4, October 1962, pp 342-344.

assistance

The efforts of various UN agencies towards bridging the exploration gap and raising LDC capabilities are noteworthy. The UN can provide the kind of technical and financial help which is not readily forthcoming from any other source. However, UN efforts are hampered because of lack of adequate funds. If the governments of developed countries and the rich oil-producing countries can enhance their contributions and if the 2% ‘replenishment fund’ can be made more palatable, the fund could prove a major instrument in reducing the mineral exploration gaps that have developed over the last two decades. The UN Centre on Transnational Corporations is an important UN agency offering mineral-related technical and advisory services to the LDCs. The Centre can also make available corporate profiles on a selection of multinationals. The objective is to upgrade the background knowledge and negotiating skills of the host governments to make them more equipped to sign mineral agreements.40 The World Bank is by far the most influential international financial institution. Its role as a lender could be substantially extended if adequate back-up is available from other groups of the world mineral industry. Sustained World Bank Group involvement through the acquisition of equity; and the negotiating, planning, financing and technical reappraisal facets of the project could provide a powerful balancing effect in reconciling the differences of investors and the h,ost governments. Such a proposal was sponsored by the UN and discussed in Washington by participants from major multinationals, public servants concerned with world-wide mineral developments and World Bank officials.4* The Bank’s attempts to increase its participation in financing and developing the world’s mineral resources was heartily endorsed by all the participants, although what became of the recommendations of this meeting remains unclear. If the current minerals shortfall persists, some form of involvement by the World Bank or another world body that oversees mineral developments, especially in the LDCs, and keeps watch over the interests of all those involved may ultimately become inevitable. Such an approach may be in the offing for seabed minerals, where the UN is likely to play a pivotal role.42 A similar UN involvement in areas which supply the bulk of future mineral supplies would seem appropriate, but it must be remembered that mining does not seem to thrive in a political/legalistic environment and that history has shown that private sector operations are invariably more efficient and can provide a better cost-benefit ratio.

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Conclusion The world recession has resulted in many mining corporations having aetal inventories as large as l&months’ normal production; prolonged mine closures and minimal sales have catastrophically reduced their cash flows and even the previously best performers are reporting losses with little hope of an early return to profits. Exploration activities are at an all-time low. Geologists, drillers and other exploration personnel have been laid off in unprecedented numbers. The long lead times needed to bring a mineral project into production require exploration activities to be increased now to meet world mineral needs when prosperity returns. The key to increased mineral investments, whether through national, regional or international sources of finance, rests with the public leaders of the developed world - the countries that need the minerals the most. How far they are willing to go in addressing themselves to the real issues responsible for massive shortfalls in mineral investments around the globe will determine the future course of mineral developments. As the world recession bottoms out and economies get ready to pick up, any advantages flowing from the present low cost of raw materials will prove short-lived. Sustained efforts will be needed to reverse the trends set by the traditional sources and channels of mineral finance and development, thereby paving the way for the investments required to secure future mineral supplies.

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