CHAPTER 1 CREATING A POSITIVE INTERNATIONAL MINING INVESTMENT CLIMATE1
| Jurisdiction | United States |
(April 2003)
CREATING A POSITIVE INTERNATIONAL MINING INVESTMENT CLIMATE1
Director, Institute for Global Resources Policy and Management
Colorado School of Mines
Golden, Colorado
Director of Graduate Studies, Natural Resources and Environmental Law Program
University of Denver College of Law
Denver, Colorado
Mining Law and Investment in Latin America
Lima, April 28-30, 2003
Abstract
The 1990s saw a shift in exploration and mining investment by multinational mining companies into regions that were previously closed or considered as too risky. This came about as result of a ready pool of venture capital and nations changing their mineral policies, mining laws, and fiscal systems in order to achieve better efficiency and to attract investment. However, since 1999, many companies have pulled out of or reduced their efforts in nations where mineral sector reform was completed or well-advanced. This paper briefly examines factors that have influenced this pullback, and looks afresh at what it takes for nations to attract mineral investment.
About the Author
Professor James Otto is Director of Graduate Studies, Natural Resources and Environmental Law Program, University of Denver College of Law and Director of the Institute for Global Resources Policy and Management at the Colorado School of Mines. He has worked for multilateral agencies, the private sector and governments in over 35 nations providing assistance in national mineral policy, mining law, and mining sector fiscal system reform. He is the author or editor of the following books: The Regulation of Mineral Enterprises: A Global Perspective on Economics Law and Policy; The Taxation of Mineral Enterprises; Global Mining Taxation Comparative Study; Sustainable Development and the Future of Mineral Investment; Sustainable Development of Non-Renewable Resources Toward the 21st Century; Mineral Investment Conditions in Selected Countries of the Asia-Pacific Region; and Minerals Industry Policies for Asia and the Pacific, jmotto@mines.edu
1. INTRODUCTION — Necessary and Sufficient Conditions
Government policy-makers and regulators have an important role to play in determining whether mineral sector investment will take place in their nation. However, this role is diminishing as the mineral sector develops in this new century. There has been, over the past decade, a general leveling of the investment "playing field" which has resulted in lessening the impact that actions by a government will have on its
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ability to attract investment. In summary, there are certain issues that if dealt with adequately by a government may meet the conditions necessary, but which, in and of themselves, may not be sufficient to attract investment.
The 1990s saw a remarkable regulatory transformation in the developing economies. Nation after nation adopted a new mining code and amended their related laws in an effort to become globally more competitive. The reform process was driven by a realization that exploration and mining activities are not well suited to government-managed development and that to attract private sector investment, the regulatory environment must be conducive to investors' needs.
However, inherent in this massive reformation movement was a paradox. Initially, as a few nations changed their laws and policies to become more attractive, these nations were able to distinguish themselves from other nations who lagged in the reform process. As these lagging nations increasingly completed their reform efforts, regulatory environments began to more closely resemble one-another and the ability of one nation to distinguish its policy and regulatory advantages became more difficult. Thus, the reform movement of the 1990s to increase competitiveness may have achieved short-term objectives, but in the end, may not have had as much long-term effect as policymakers may have envisioned.
The setting of mineral sector government objectives is evolving and while in the past the emphasis centered on "control, equity, and tax" issues, other issues such as administrative decentralization, local community involvement, environmental management, sustainable development, integrated information systems, and product life-cycle regulation are increasingly gaining importance. Central to this policy debate is the priority that the nation places on the mineral sector and whether it seeks to gain investment growth in this sector or not.
If a country decides that mineral sector growth is desirable, and it has been argued by some, including academic economists and environmentalists among others, that such investment is neither beneficial nor desirable, then it is faced with three primary ways to expand the sector-international investment, local private sector investment and state investment. Past experience has caused many countries to eliminate or de-emphasize, at least for the near term, mining by state-owned enterprises and the emphasis in this paper is on private sector investment.
Except in a handful of countries (the mineral-led economies), it can be argued that the most important part of a nation's mineral industry is local-based. It extracts industrial minerals that are used primarily for domestic consumption. High transport costs of many industrial minerals imply that domestic producers have an edge over imports, and policies to expand this part of the sector may be substantially different than for export-oriented mining led by transnational corporations. While local investment is a key component of any nation's mineral sector, this paper will address only transnational mining investment.
Transnational exploration and mining companies have many choices when selecting where to expand. As the global economy has become closer linked, governments have tended to move toward more globally "homogeneous" regulatory and fiscal systems. Investment decision-making is sensitive to government mineral policy and its regulatory and administrative implementation, and countries that do not approach the global norm can expect to see relatively less investment than more mainstream countries.
This paper seeks to identify key factors that influence investment decision-making. It briefly looks at commodity and global market factors before focusing on country specific factors. In the next section, three key mineral groups are looked at with regards to investment potential.
2. GLOBAL INVESTMENT IN EXPLORATION AND MINING INVESTMENT: PAST AND FUTURE
There is no reliable source that accurately reports the aggregate sum of money spent globally on exploration and mining. This is due to the diverse nature of the mining industry which produces a wide array of minerals ranging from locally mined and consumed sand and gravel to multi-billion dollar
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vertically integrated aluminum complexes. No single organization collects investment data for all mineral commodities, and even within a single commodity group, such as the intensively studied gold industry, coverage is incomplete. Never-the-less, it is possible to identify some global trends. In this section, a quick look will be provided of the industrial and coal industries, and more in-depth look at the non-ferrous metal industry.
2.1 Industrial Minerals
The industrial minerals sector is not well reported or analyzed yet it may present the new millennium's largest mineral sector growth potential. Demand for industrial mineral and mineral products-such as sand, gravel, limestone, dimension stone-is growing in both developed and developing nations. In the future, this growth may far exceed growth rates for base and precious metals. Increased metals recycling, development of substitute materials, more efficient end-usage, concerns about toxicity and similar factors all may act as restraints that retard base metals production growth rates. Many of these restraints do not apply to industrial minerals, and as populations burgeon, demand for these commodities will inevitably grow.
The central focus of many governments in the modernization of their mining laws and fiscal systems during the last few decades has been the coal, ferrous, base and precious metals mining industries. The bulk of mining sector regulatory reforms have been tailored to these industries and often reforms that would enhance industrial mineral development have not been given a high priority. This may change in the future. Transnational industrial-mineral companies are increasingly looking to expand mining activities or sales of specialized equipment. The last century saw metal-mining companies acting as "first-in-the-door" investors in many countries, and it can be expected that internationally led industrial minerals investment will follow. Many factors favor future changes in the industrial minerals sector, particularly in developing nations. For example, as internal national transport systems are improved, smaller mines that serve a particular town or village may lose their economic edge over larger mines that enjoy the benefits that come from economies of scale and technology. An example of the international move by industrial-minerals companies is the aggressive expansion by Mexican cement producers to acquire, expand and modernize cement factories in the US, South America and beyond. Another would be the aggressive expansion of Italian building stone suppliers to acquire quarry stone for finishing in Italy.
2.2 Coal
Like industrial minerals, reliable data on worldwide coal investment is hard to come by. While hard numbers may not be easily available there is certainty that many nations-particularly industrialized nations-are debating the advisability of expanding coal mining and coal imports. The increasing availability of natural gas along with new electricity generating turbine technology has acted to decrease coal investment growth and can be expected...
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