The key nonfuel minerals in terms of value of total production are—in decreasing order of importance—iron, copper, aluminum, manganese, zinc, nickel, tin, lead, and phosphate rock. These nine commodities account for over 90 per cent of the value of world mineral output while over two thirds of this is accounted for by iron. At least another 20 minerals play vital roles in industrialized economies.
The striking factor about current demand for these resources is the enormous hunger for minerals in the developed economies when contrasted with that of the developing economies. For example, per capita consumption in the United States for major mineral commodities ranges from three times to eight times higher than in the rest of the world.
The mineral industry
To meet this enormous demand for mineral resources is the business of a vast international mineral industry. The primary mineral industry is concerned with the search for and mining of orebodies and the recovery of minerals from the ore by means of a wide range of concentrating and purifying processes that develop a product suitable for secondary fabricating processes.
The search phase is characterized by uncertainty, hence a high risk of failure, and the utilization of specialized skills. The difficulty of discovery varies widely from commodity to commodity. The cost of discovering one mineral deposit of copper, lead, or zinc could range from US$200,000 to US$500,000 in regions with good mineral potential. However, the chances that such mineralization would prove to be economic may be only 1 in 50 or even lower. Also, after discovery, further exploration work is required to find out the size of the potential ore-body; such costs may range from US$5-10 million for larger deposits.
Assuming that the search is concentrated in a region of good mineral potential—judged on the basis of geological inference—and that there are no known mineral discoveries in the region, the chances of at least one economic discovery being made would be considered to be about 50 per cent at an expenditure level of about US$10 million. The total cost of exploration, when distributed over the orebodies brought into production, may thus range from 0.5 to 10 per cent of their contained mineral value, depending on the mineral and the region. The magnitude of the expenditures on exploration may be illustrated by examining the expenditures of one large mining company—The International Nickel Company of Canada. Over the period 1959-69, it spent nearly US$120 million on exploration, which is equivalent to the total expenditure on mineral surveys and exploration by the United Nations Development Program over the same period.
The mining and purification stages are characterized by large capital investments and an increasing trend to minimizing the labor input. Most new production is being generated from projects which cost more than US$100 million and have a capital investment per job approaching US$20Q,000 or even more.
Industrial specialization has narrowed the minerals sector down to about 150 major companies which dominate the exploration and extractive stages and which, through forward integration, control in large measure primary fabrication and subsequent metal purification stages as well. Most of these companies have operations in more than one country and may be termed multinational mineral companies (MMCs).
The profitability of mineral companies does not differ significantly from that of companies in other sectors: specific mining ventures show a very wide distribution from some very profitable ventures through many of average profitability down to many failures. However, the few notable successes have tended to create in the public mind an image of high returns for the industry as a whole. The modern trend is to manipulate where possible the variable factors of a venture (particularly, the average richness of the material mined, termed grade of ore, and scale, hence life, of the operations) to yield an acceptable return commensurate with the risk—an approach essentially no different from that in other business operations where variables are adjusted to meet goals.
The oligopolistic nature of the industry is also evident in the large degree of foreign control, particularly of the extractive and purification stages. This stems from two basic reasons. The first, and now less important, is the historical development of mining ventures—particularly in the early 1900s—in colonial and undeveloped territories where some operational control has been retained to the present day. The second, and far more significant reason, is the desire to establish security of supply of mineral inputs into the “downstream” processing and fabricating facilities which are largely located in the United States, continental Europe, and Japan. The basic means of control have been direct investment (termed the Anglo-American pattern) and long-term purchase contracts with or without debt participation (termed the Japanese pattern).
Contribution to growth
It is clear then that the mineral industry is profitable (although not excessively so), and that it is essentially international. Although it is at present very much in the hands of major corporations in the industrialized countries, this need not always be the pattern. What prospects do mineral resources provide for less developed countries?
Of 103 developing market economies (with a population greater than 400,000 and per capita GNP below US$1,000) only 18 have a minerals sector whose annual value of production exceeds US$100 million. Another 24 countries have a value of production ranging between US$10-100 million. This leaves a total of 61 countries with a small mineral sector or none at all. Many of these countries devote most of their economic effort to trying to produce enough food to feed their growing populations and are experiencing serious difficulties in diversifying their economies beyond the agricultural sector. Many of them also have a high mineral endowment but assessment of potential is, in general, patchy and superficial. Should these countries seek to develop their mineral resources and what should the objectives of such development be?
Undoubtedly the minerals sector could fit into the economic development pattern of a particular country and contribute significantly to economic growth. Most commonly the initial objectives of the sector have to be quite modest: the generation of foreign exchange through exports, and the provision of opportunities for acquiring technical and managerial skills through rather limited employment. Net foreign exchange earnings to the host country have been estimated at 65 to 70 per cent of mineral export value—the most tangible contribution of the minerals sector.
A long-term objective is that the minerals sector should provide inputs into the economy, thereby stimulating forward integration into the fabricating process and backward integration into service and manufacturing industries. The ability to provide such linkages is determined in large measure by domestic demand, the availability of domestic capital and know-how, and corporate policies. It is here that performance of the sector has been most criticized, with developing economies blaming foreign domination for faulty policies, while corporations counter with arguments centering around production costs and markets. Foreign companies are blamed on many counts: it is charged that they make little effort to increase the domestic components of machinery and equipment purchases; manage the environment poorly; establish enclaves of small numbers of highly paid industrial workers, which creates envy and stresses in the labor market; and that they delay job advancement in the professional and managerial ranks.
Countries such as Liberia, Bolivia, Chile, and Venezuela are cited as examples of economies with major mineral export sectors but which have gained negligible benefits from the development of their minerals. Part of the problem can, without doubt, be attributed to an inequitable split of returns in the past between the host country and exporting company, but it is also due to an inability of the host country to channel the foreign exchange earnings generated by the sector into growth-producing activity.
Domestic policies that encourage mineral resource development are also attacked for leading to a premature depletion of potential resources and for creating an imbalance in the economy. When the criticism is assessed and weighed against the benefits, development of the minerals sector may be viewed by some as a necessary evil benefiting mostly private interests in the developed economies. Such an attitude will tend to persist as long as developing countries provide weak management for their resources and economies. However, if it is recognized that development of the minerals industry could provide an additional force for economic growth, then the focus of endeavor could be directed to eliminating the problems associated with the sector.
Development of the minerals sector demands the input of capital and technical and managerial expertise, and the exploitation of markets. In some developing economies, state and private enterprises have attempted to operate without the help of companies specializing in these areas; unfortunately, their performance record has in general ranged from highly unsuccessful to moderately successful, and has been characterized by low expenditures on exploration and low rates of growth.
Yet the dominant sentiment today is the desire of sovereign states to be in control of their own economic, as well as political destiny. Foreign control of mineral resources is viewed as a particularly serious obstacle in the path to this goal. Policies for the sector accordingly tend to span the spectrum from developing mineral resources only slowly and in step with domestic demand, to developing for an export market but on a national “do-it-ourselves” basis, to experimentation with new approaches in attracting offshore capital and skills.
Against this background of national aspirations, the outlook for the MMCs, the classical vehicles of international minerals endeavor, is variously interpreted. One interpretation may be termed the conflict outlook whose basic premise is that conflict between the MMCs and individual states is inevitable. While individual governments are concerned foremost with factors bearing upon their national economies, particularly the maximization of national revenues, the MMCs develop their strategies in global terms to optimize corporate goals. Thus, what is viewed as a benefit by one side can equally be viewed as a cost by the other. Hence, since basic interests are in conflict, mutually acceptable objectives cannot be agreed upon. To illustrate: a company may invest in a particular country on the basis of a rate of return on investment which assures it an adequate return plus a premium for a considered risk (say, political). But such a strategy is in the long term self-defeating, since it is this very return which will eventually draw the charge of “foreign exploitation,” and lead to inevitable conflict.
These trends have forced “mineral seeking” countries and individual enterprises to undertake a radical reassessment of their approaches. In the developed economies efforts have been stepped up in seeking substitute commodities and in developing new recovery technologies to treat low-grade materials and to increase recycling. And, finally, new approaches to securing sources of supply are being developed which depart radically from the traditional pattern of total corporate control of the exploration, investment, and marketing functions.
In many developing economies a common approach is through a concession agreement between the state and the investor. Experience with this approach has led to a realization by the host government that initially, when no deposits have been discovered or when there is only limited knowledge of a deposit, the state’s “bargaining position” is weak vis-à-vis the potential investor. As a result there is a significant trend on the part of developing economies to spend their own scarce funds on mineral exploration in order to enhance their bargaining position. This is the initial setting of the stage for conflict. Subsequently, the points of conflict from the point of view of the host government generally include such familiar issues as intercorporate transfer pricing; inefficient exploitation; failure to process minerals in the host country; inadequate opportunities for nationals to acquire managerial skills; insufficient job creation owing to unduly advanced technology; insufficient reinvestment of profits into exploration and expansion; and overly conservative disclosure of ore reserves and resource potential. The corporation, for its part, will be faced with familiar problems—political risk, changing regulations and violation of agreements, the costs of labor disorders, and the cost of providing social overheads.
… or cooperation
In this difficult and highly sensitive situation moves are nevertheless being made toward lasting accommodation. If the primary causes of conflict are correctly identified—and the state is given control over factors it considers important while the MMC is relieved of the tensions related to protecting its investment stake—what do we have then? A totally new spectrum of potential ventures unfolds, opening the way for contractual arrangements relating to managerial and technical skills, commodity purchase contracts, equipment credits and, not least, new avenues of financing via national and international capital institutions. Certainly, the risks of conflict are not totally eliminated and new challenges are posed. Paramount is the challenge to the host country to honor its contractual obligations, but here the record of East European countries and of China can be pointed to as models. Optimism rests on the expectation that once the factors of conflict are removed, the binding agreement is drained of its political sensitivity; it is no longer necessary for politicians to demonstrate their sentiments of national independence by canceling contracts. In addition, the involvement of national and international corporations and banks in joint contracts establishes new disciplinary obligations. From the entrepreneurial side the challenge is how to mount a managerial team committed to the project; one way of ensuring good management would be to include contracts where remuneration is geared to performance.
The “accommodation” outlook is based on the premise that international development of mineral resources is possible without the need for foreign corporations to commit major funds to projects in developing economies. If such breakthroughs can be achieved, then the outlook for international mineral resource development is optimistic. Breakthroughs have been achieved in other sectors, such as Fiat licensing and management in the U. S. S. R. and construction of diesel locomotives in Argentina by General Motors with U. S. Export-Import Bank financing. In the minerals sector the breakthroughs are of relatively recent origin and are being closely watched. An example would be the Cerro Verde copper project in Peru which is being controlled by the State Mining Enterprise, brought into production under a management contract with a consortium of engineering firms, and financed with export credits.
Supply of minerals
The future is commonly divided into that which is more easy to visualize, say, to the end of the century, and that beyond which it is more difficult to comment on with any degree of certainty. What is certain is that classical orebodies will continue to be discovered—increasingly so in the less explored regions of the world—but the extent to which the developing economies share in these discoveries will depend considerably on the national policies they adopt for the minerals sector.
In the more distant future, however, there is greater apprehension about the availability of the minerals now in common use. Clearly, mineral output cannot keep on doubling indefinitely, at an ever accelerating rate, but this is scarcely necessary with the increasing emphasis on greater husbanding of the minerals in circulation. In coming decades the outlook is for a gradual leveling off in per capita mineral consumption in the developed economies owing to increased recycling and substitution by synthetics, as well as an eventual decrease in the ability of the population to absorb more goods per capita. At the same time, demand in the developing economies will grow steadily.
In response to scarcities brought about by physical or man-made obstacles, technological evolution will balance between a push toward substitution and a push toward more sophisticated recovery processes for extracting minerals from low-grade concentrations (e.g., by nuclear blasting) or from hitherto inaccessible areas on the ocean floor or under ice caps. In this context, any estimation of “world ore reserves” becomes a highly tentative exercise meaningful only for a relatively short period of time (and requiring very specific definitions of the economic and technological assumptions on which it is based).
An assessment of future trends is, however, of considerable importance to both developed and developing economies in the formulation of mineral policy. It is likely that, over the next few decades at least, the governments of industrial economies and MMCs will gradually move toward a desire for accommodation with LDCs in order to gain access to regions of mineral potential that can be developed relatively easily. On the other hand, the developing economies do not have an excessively strong bargaining hand, since scarcity is not a pressing problem for the bulk of the mineral commodities in world trade, and alternative sources of supply abound. Hence, mineral sectors are not likely to be developed unless this effort is made a specific objective of policy in LDCs.
Supply of capital
Foreign direct investment is likely to play a decreasing role in mineral development and will be able to operate only under increasing restrictions (for example, the Andean Pact “fade-out” formula). On the other hand, the economic cost of nationalization will probably be more carefully assessed as a result of the Chilean experience. Entrepreneurial initiative for launching mineral projects will tend to move away from the 150 or so traditional major companies to petroleum companies, industrial conglomerates, equipment suppliers, engineering companies, mineral trading firms, and even governments. However, the traditional MMC will still have an important role in initiating the formation of complex consortia and providing them with management expertise. Some of the MMCs, however, carry a considerable stigma of past exploitation and will have to work hard to improve their international image.
If direct corporate investment is to play a diminished role in the developing economies, how is capital for exploration to be channeled into these countries? The problem of finance is the most challenging issue currently facing international mineral development. To illustrate: how do mineral sectors in countries like Bolivia and Peru hope to grow and play significant roles when private exploration capital is negligible and state expenditures are in the order of US$l-3 million annually (in contrast to such areas of equivalent size as the Canadian provinces of British Columbia and Ontario where annual exploration expenditures total US$30 million in each). Looking at the total mineral exploration effort, a rough conclusion would be that the developing economies have the land area and the potential resources to justify expenditures of about US$200 million annually on exploration and delineation. However, at the present level of activity it is unlikely that the figure even approaches US$50 million. Fundamental breakthroughs will have to be made to encourage exploration in developing economies. Is an international exploration fund, as proposed by the United Nations, likely to succeed? How could corporate risk funds, the primary source of funding to date, be channeled so as to avoid conflict and ensure success? Or is this form of capital to be dried up? Suffice at this stage to pose the problem and indicate its magnitude.
The development of the minerals sector poses a particular challenge to international development organizations. Although likely to play an increasing role in project financing, their contribution will tend to remain only a minor part of total capital requirements. However, they can seek to bridge the gap between the sensitivities, aspirations, and weaknesses of the developing economies on the one hand, and the traditional commercial orientation of the entrepreneurial enterprises in the developed economies. Such a role would include acting as a catalyst by helping fund exploration “to prime the pump” of risk funds from consortia of companies, banks, and state agencies; providing assistance in negotiating agreements to minimize conflict; and helping the developing economies improve their mineral development institutions and project formulation. An important task for international agencies would be the operation of a central appraisal and information center on national mineral policies, which would minimize self-defeating competition between countries in granting excessive concessionary incentives.
The minerals sector poses some unique obstacles and challenges. But it may offer significant economic development impetus to many countries. Over the next six to eight years about 10 countries may commence production and another 10 are likely to join the ranks of the larger mineral producers. The challenge is not only to encourage the growth of the mineral sector in all of these countries but to assess the potential for mineral production of at least another 50.