Understanding Who Benefits from Gold Mining
The international development community has paid increasing attention in recent years to the potential for the mining industry to act as an engine for growth and poverty reduction. There is decreasing support for the view that a ‘resource curse’ is inevitable – albeit few would deny that resource dependency can create both macro-economic and governance challenges. At the “Investing in Mining Indaba” in Cape Town earlier this year, Sir Paul Collier, formerly Chief Economist at the World Bank, spoke about the mining industry “taking over” from development agencies. This prompts a new perspective, as to whether the pendulum has swung too far? Mining companies can have significant impact and capacity but they do not have the mandate or skills to be development ‘agencies’.
Mining can only optimise its contribution to development in the context of co-operative relationships with a range of actors including, crucially, host governments and communities and with a common commitment to creating shared value. That commitment needs to be underpinned by trust. Investors will not commit their capital to destinations they see as unreliable; governments and public opinion will be restive if they believe that mining companies are exploitative or getting an unfair share of benefits. Unfortunately, trust is currently low on both sides; often based on unrealistic expectations and a lack of understanding of the economics of the industry.
Reality and expectations: how far apart?
Two main factors account for these disappointed expectations. Firstly, many mines are relatively new and may only just be emerging from paying back on their investment undertaken over the previous 12 to 15 years. Thus, in many mining countries tax revenues, as disclosed in Extractive Industries Transparency Initiative (EITI) reports , have typically shown a significant uptick for 2010 onwards. Secondly, whilst eyes have been focussed on historically high commodity prices, the intense upward pressure on mining industry costs has gone largely unnoticed amongst external stakeholders. Mining revenues have looked solid but the cost of labour, mining services and energy, in particular, together with increased upfront costs for mine development, have taken a severe toll on margins.
In parallel, many investors have shown their dissatisfaction with the mining sector, alarmed by increased perceptions of political risk and uncertainty about tax regimes. Mining is a long-term business, where returns to investors, as to other stakeholders, need to be viewed in the context of both the mine cycle, including exploration, mine development, operation and closure, and the overall commodity cycle. Yet the equity performance of the mining sector shows investor discontent around returns from what is a risky, capital-intensive business. Thus, shareholder pressure has led to cost reductions and pressure for companies to focus on core assets, leading to cuts in exploration and capital expenditure on new mining projects.
Simply put, if the economics of a mining operation do not work, its development potential will be unfulfilled. Against this background, the World Gold Council has been working to better inform the debate around the economics of gold mining. In 2013, we released a Guidance Note on All-In Costs , putting forward new non-GAAP metrics that provide further transparency and consistency into the costs of gold mining. We also undertook a ground-breaking piece of research to examine how the value generated by gold mining is typically distributed. We asked our member companies – the world’s leading gold miners - to share their expenditure data and aggregated it by country and at a global level. The resulting report ‘Responsible Gold Mining and Value Distribution’  covers 96 operating mines together with a number of projects under development or in their decommissioning phase, in 28 countries. These operations collectively directly employed over 220,000 people in 2012.
What does evidence tell us?
The survey analysed US$55 billion of expenditure. Of this, US$35 billion was accounted for by payments to businesses, governments received almost US$8.5 billion in taxes and royalties and US$8.3 billion was paid to the workforce. Payments to providers of capital accounted for US$3.4 billion, less than half the amount paid out to either governments or employees. In total, around 80% of expenditures remained in the host country. In many of the countries covered, expenditure was greater than the value of gold sold, reflecting in part the high costs and cyclical nature of the industry.
Gold mining can make a very significant contribution to national and regional economies. This is particularly true for a number of developing countries where gold mining makes up a major aspect of the economy. For example, the report shows that the companies surveyed in this report contributed approximately 10% of total government revenues in Suriname, Guinea and the Kygrz Republic and the value of gold sales was equivalent to at least 25% of total exports in Ghana, Tanzania and Burkina Faso.
However, the value of the mining economy is greater than simply the expenditure of mining companies. Payments to suppliers and employees create a multiplier effect, leading to greater tax payments to the government and catalysing broader economic activity and the potential for economic diversification. The report provides the basis for a more holistic view of mining’s contribution.
Supply chain development should be supported by enabling regulations which recognise the need for competitiveness rather than creating rent seeking opportunities or enabling price fixing by a cartel of local suppliers. Successful local content strategies are one way in which the industry can break out of being an enclave and in which the benefits of mining can find their way to the population at large.
A study published by the World Gold Council in 2012, ‘The economic contribution of large-scale gold mining in Peru’ , showed the benefits of a pro-active approach by mining companies to developing local suppliers. Not only did the companies surveyed procure 88% of their goods and services within Peru; but a growing proportion of these suppliers are becoming exporters. In Ghana, the African Development Bank has noted the emergence of a range of component manufacturers, construction companies and high value advisory and professional services to support the growth of mining across West Africa.
In addition, the multipliers from today’s higher-skilled mining jobs can be considerable. In South Africa, mining is estimated to support 1.4 million direct, indirect and induced jobs; each of these jobs is believed to support around nine dependents. In Ghana one direct mining position is estimated to support 28 other livelihoods and in Peru 19.
Mining can also play an important developmental role in three other ways:
- First, in developing infrastructure where governments and companies are increasingly looking to create synergies. Gold mining, unlike bulk commodities, does not need dedicated railways or ports; but new gold mines often need electricity, water or airports which can be planned with other users in mind.
- Secondly, mining investment can help to stimulate governance reforms and capacity building initiatives. There is evidence, for example, that the work of the EITI is both improving the transparency and rigour of public sector accounting in some implementing countries. Moreover, mines take a close interest in the capabilities of local government, since without a capable partner to deliver public services it is very difficult to produce benign and sustainable local development outcomes.
- Thirdly, although social investment expenditure may be dwarfed by core business revenues; when such investments are well targeted, they can make a big impact on health and education provision in mining regions.
The Value Distribution study is the first of its type to look at how a whole industry’s benefits are shared across society. We make no claim that the methodology and definitions are perfect. But the figures paint a picture and should stimulate a better informed discussion around what a sustainable distribution of benefits is across the commodity cycle.
Beyond profit sharing: a collaborative approach
Responsible gold mining can contribute substantially to social and economic development but we need to be realistic about the contribution it can make. Collaborative efforts with governments, communities, and development agencies are needed to ensure sustained improvements in standards of living, to reduce poverty, and to provide access to better services and opportunities.
These collaborative efforts will differ by country and community, but they should be guided by fundamental principles, including treating all individuals with respect; communicating in a transparent manner; and working to create sustained value for all stakeholders.
Maximising the development potential of mining requires continued attention and discussion. The gold mining industry is keen to play its role, alongside governments, development agencies and local communities. We hope that by providing insights into the economic impact of gold mining and clarifying the realities of the mining life-cycle, this report will be an important step in advancing this dialogue.
Terry Heymann is Managing Director for Gold for Development at the World Gold Council.
This article was published in GREAT Insights Volume 3, Issue 5 (May 2014).