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Theft and rising security expenses are just two ways illicit mining costs the global resource business. Here’s a look at the problem and the steps mining firms are taking to deal with it.
Illegal mining continues to be a costly problem for mining companies around the world.
In Peru, for example, illegal mining may have surpassed the illegal drug trade in revenue, according to Elmer Cuba, associate director of Macroconsult, a Peruvian consulting firm.
In a May 2012 Business News Americas article, Cuba said the country’s illegal mining exports added up to at least $1.79 billion in 2011, topping illicit drug revenues, which he estimates to be in the neighborhood of $1.2 billion. “And the figures for mining do not include [the] Madre de Dios [region],” he said. According to Cuba, all gold mining in Madre de Dios, which accounted for 14 percent of Peru’s overall gold production in 2011, is illegal.
“Obviously, there’s no way to know if Mr. Cuba’s estimates are accurate or not,” writes Ry Frank on Seeking Alpha. “Crooks are not going to tell him what they are making, but if his figures are true, it points to a large and well-organized criminal enterprise. It also has some very bothersome implications for the mining industry and mining stocks.”
High resource prices, grinding poverty are key drivers of illegal mining
African countries, too, are facing an upsurge in illegal mining activity. That has a lot to do with today’s higher gold prices, according to Ben Aryee, chief executive of the Ghanian Minerals Commission. “[O]ne has to look at the trend in the price of gold to understand the genesis of this problem. The price is above 1,500 per ounce, so lands which were regarded as waste by miners suddenly become interesting because, though they mined out the gold in low grades, it could earn them a lot of money,” he said.
Indeed, artisanal miners — who use basic methods such as digging and panning — on AngloGold Ashanti’s (NYSE:AU) Mongbwalu property in the Democratic Republic of the Congo are thought to be bringing in as much as $50 a day, according to Reuters. That’s a significant sum when you consider the country’s low average annual per capita income, which the US Department of State pegs at just $210.
Canadian university professor Marcello Veiga spent time with artisanal miners in Brazil in the 1980s and saw firsthand how desperate their situations often are. “My impression was they were illegal guys, invaders, working without any care, but after working with them I came to understand that they’re poor. They don’t have a way to mine, any knowledge. They do it for survival,” Veiga told Mining.com in a 2010 article.
Rare earth elements are another trouble spot
The illegal mining problem stretches well beyond gold. In China, for example, authorities have been battling the growing problem of rare earth element (REE) smuggling for years. REEs are used in a range of technological applications, including hybrid cars, flat screen TVs, and mobile devices.
China dominates the global rare earth market: in 2011, the country accounted for 90 percent of the world’s total production. In addition, it has enacted an export quota of 30,000 tons of processed REEs a year (though the US, EU, and Japan recently filed a complaint about the quota with the WTO). However, last year, an estimated 20,000 tons of REEs were exported from the country outside legal channels. That hurts producers outside China because the additional illegal material puts downward pressure on rare earth prices.
In response, China has been cracking down on illegal rare earth exports. However, as Justin Pugsley writes on the Metal-Pages blog, smugglers are responding with some pretty clever ways of carrying off their loot. He explains, “[i]ndeed, rare earth smuggling takes on some [quite] imaginative twists, such as exporting pottery made out of clays deliberately enriched with rare earths, which can be extracted by the recipients once it is outside China. Given that this type of smuggling is very hard to detect, one wonders just how effective busy customs officials can be at detecting it.”
The cost of preventing illegal mining is rising
Illegal mining is costing the global industry in a number of ways. Most obviously, it deprives mining companies of the profits they would earn from the resources that illegal miners exploit. However, spending on tightened security, missions to rescue trapped and injured illegal miners, and other related costs are also taking a bite out of profits. In South Africa, for example, illegal mining is thought to be costing the industry a total of about 5 billion rand (roughly US$600 million) a year.
In February 2011, Harmony Gold Mining (NYSE:HMY,LSE:HRM) CEO Graham Briggs told Mining Weekly that his company has spent 150 million rand (or about US$18 million) over the previous two years to secure its mine shafts and keep illegal miners out of its operations in South Africa.
“The security measures we have implemented include the installation of double air locks at all shaft entrances, as well as the implementation of biometric and security card readers at all shafts,” said Briggs. “This means that only Harmony employees can access these shafts.”
But even these measures haven’t been enough to solve the problem. The company recently made headlines when it took the unusual step of banning food underground at its Phakisa mine. That’s aimed at stopping its workers from smuggling food to illegal miners deep in the mine shaft — who sometimes stay there for weeks or months on end.
In addition to theft, the presence of illegal miners jeopardizes the safety of company workers in the mine, not least because there have been reports of illegal miners blasting underground, creating dangerous rock slides.
“These guys are crazy,” Briggs told Reuters. “They will try and go down a vertical shaft with just a few bits of old rope.”
Illegal mining is less of a problem in politically stable countries
In the end, illegal mining is one type of political risk that investors face when they invest in mining companies that operate in unstable areas. That’s because governments in these regions are often unable — or unwilling — to combat the problem.
A good way to minimize that risk is to look for mining stocks that operate in countries that are politically stable, or companies whose mines are spread across many different geographical areas. That way, you’re less exposed if one of their operations runs into trouble.
Securities Disclosure: I, Chad Fraser, hold no positions in any of the companies mentioned in this article.