Coping with Success: PDAC Presenters Suggest Methods for Managing Boom-Cycle Issues

Almost 18,000 people converged on Toronto, Canada, in early March to attend the 75th International Convention, Trade Show and Investors Exchange sponsored by the Prospectors & Developers Association of Canada. With the current mining boom showing no signs of weakening, the prevailing attitude of attendees and speakers was upbeat—but as with any thriving enterprise, success can spawn problems that would be of little concern during mining’s periodic down cycles.
For example, at the convention’s keynote session Frontier Strategy Group Managing Director Alex Gorbansky discussed how to achieve, and maintain, success in the face of increased nationalistic tendencies. According to Gorbansky, today’s market environment has strong parallels to that of the 1970s, including high commodity prices, uncertainty about new sources of supply, global economic growth and mineral demand fueled by a new economic powerhouse—China (Japan was the major catalyst in the 70s), and a global resurgence in the desire of countries to gain greater control and economic benefits from their natural resources—an approach commonly described as “resource nationalism.”
Gorbansky emphasized that responding to resource nationalism is critical for industry growth and highlighted the upside opportunities created by the trend. “While traditionally seen as a downside risk, the cyclical nature of resource nationalism can provide companies and investors with unique upside opportunities for growth,” he explained. “Resource nationalism is not cause for despair, but rather, provides companies and investors that respond strategically and proactively with access to new reserves and opportunities to acquire assets not available to their competitors.
“The character and nature of resource nationalism varies significantly and successful firms will develop context-specific responses.” He described a framework highlighting four types of resource nationalism: State Domination, Balanced State Participation, Geopolitical Expediency, and Greater Economic Participation (see accompanying table).
He outlined three strategies that companies can employ to respond to resource nationalism: “New and creative partnerships that align economic and political incentives between foreign investors and host governments over the long-run, branding the company as a local national player versus a foreign entity, and social development programs that have clear and measurable impacts at the local and national levels.”
As an example of “incentive alignment,” Gorbansky pointed to Rio Tinto’s effort to gain a foothold in Russia. To accomplish this, Rio Tinto and Russian metals producer Norilsk created a joint venture exploration company called RioNor; Norilsk owns a 51% stake and Rio Tinto owns the minority share. The company is focused on exploration in the highly prospective regions of southern Siberia and the Far East Federal district.
The arrangement served to align the interests of both companies; i.e., no upfront financial commitment was made by either party and most issues concerning ownership of discovered assets were deferred. From Rio Tinto’s perspective, the JV represented a low-cost way for the company to gain its desired foothold; while for Norilsk and the Russian government, the JV provided capital and technical expertise to examine under-explored regions with high economic potential. Rio Tinto, explained Gorbansky, was willing to trade legal certainty for a limited up-front financial commitment because it realized that paper agreements were unlikely to be respected anyway.
As another example, BHP Billiton has successfully branded its South African operations as local, rather than foreign, said Gorbansky. “Foreign mining firms operating in South Africa have faced a number of challenges as black empowerment requirements and increased resource nationalism has threatened to erode already shrinking profits.” BHP Billiton is well-positioned to survive these challenges, he noted, by initiating efforts aimed at “localizing” its operations. The BHPB Development Trust funds scholarships, health programs and other highprofile projects that make the benefits of the company’s presence clear to a broad cross-section of the population. BHPB also has appointed South African executives to head its local subsidiaries giving these companies a local face. And, the company has created relationships with local companies to align their interests with BHPB’s; for example, BHPB’s energy- coal operations are the largest supplier of coal to South African utility Eskom.
Moving outside the mining sector, Gorbansky named Exxon Mobil as an example of a company that has effectively dealt with resource nationalism: “Exxon has successfully made Africa— where its operations account for more than 1 million barrels of crude oil production per day—a foundation of its growth, while avoiding the high-profile mishaps that have plagued Shell and others through strategic social development programs and communications strategies that clearly demonstrate Exxon’s positive economic and social contributions to the places where it operates.” Exxon, which has discovered more than 25% of its petroleum resources in Africa over the past eight years, also has been the most successful at fending off strong competition from Chinese firms in Angola, Nigeria and Chad, Gorbansky said.

Anvil Mining’s Dikulushi copper mine in the Congo will go underground later this year.
The $7-million project will initially use sublevel caving to produce 20,000 mt/y Cu and
1.8 million oz/y Ag. Photo: Anvil Mining Ltd.

Sharing the Wealth
Increased risk of adverse political events fueled by a nation’s perception of exploitation without adequate compensation can be a major issue during periods of strong metals markets, and in no place is this concern more evident than in the Democratic Republic of Congo. This central African nation is struggling to regain stability after years of political upheaval and civil war, and has made significant strides in that direction by implementing a new mining code in 2003 and installing a democratic government. During the PDAC conference a panel discussion involving four mining companies active in this area highlighted the level of local involvement needed to build the trust and cooperation necessary for successful long-term operations in the southern DRC/northern Zambia region.
The four companies—Anvil Mining Ltd., Equinox Minerals Ltd., Katanga Mining Ltd. and Tenke Mining Corp.—are at different stages of development in projects scattered along the Central African Copper Belt, a highly mineralized zone 400 km long and 50 km wide straddling the border of Zambia and DRC, estimated to contain more than 200 million mt of copper metal.
Perth, Australia-based Anvil Mining was an early entrant in this region, having commissioned the Dikulushi openpit mine in October 2002. According to Bill Turner, president and CEO, Dikulushi contains a high-grade resource base of 169,000 mt of contained Cu and the deposit is open at depth. Average grade is 7.2% Cu with 6.7 oz/t Ag, while concentrate grade is approximately 59% Cu and 1,700 g/t Ag. The surface mine was designed to produce 20,000 mt/y of Cu and 1.6 million oz/y Ag, at a total capital cost of about $17 million. Underground production at Dikulushi is slated to begin in the third quarter of 2007, with an estimated minimum production life of six years.
Anvil also has three other copper belt projects: Its Kulu mine, in operation since late 2005, is a joint venture with Gécamines to recover copper from 4.9 million mt of coarse rejects and tailings grading about 4.4% Cu. Under a lease agreement with Gécamines, it has developed the Kinsevere copper/cobalt project 27 km north of Lubumbashi, containing an estimated total resource of 1.6 million mt of Cu, and plans to commission the mine during the second quarter of 2007. It also is conducting an extensive exploration program under way on lands surrounding the closed Mutoshi copper mine.
According to Turner, Anvil is “strongly committed” to pursuing community engagement and improvement goals. Its 1,800-person African workforce is 95% Congolese. The company has engaged Washington, D.C.-based Pact and other international NGOs to design and implement a range of community development activities, and under the mining convention Anvil signed with the DRC government in 1998, earmarks 10% of its earnings— amounting to roughly $3 million in 2006, slightly more expected in 2007— for community development in the Dikulushi region. To date, Anvil has invested in a new school and teaching staff at Dikulushi, an upgraded medical center at Kilwa, new water service at Dikulushi and several other social initiatives.
London-based Katanga Mining is rehabilitating a mine complex near Kolwezi in the DRC, comprising the Kamoto underground mine and the openpit mines of Dikuluwe, Mashamba East and Mashamba West (together known as DIMA) and Musonoie-T17. Ore will be processed in the Kamoto concentrator and refined in the Luilu metallurgical plant. The mine site covers an area of more than 15,000 hectares.
Katanga Mining President and CEO Arthur Ditto said total reserves and resources at the company’s DRC properties now stand at 200 million mt ore. At an average copper grade of 3.29%, this equates to 6.58 million mt of Cu. Because exploration has not been carried since the early 1980s, there is significant potential for new discoveries.
The company plans a phased, $427- million rehabilitation project stretching over a period of four years. Once fully operational, production will be 150,000 mt/y of copper and 5,000 mt/y of cobalt. Total operational cost per pound of copper over the life of the project is predicted to be $0.22. Production from the $80.3-million underground mine project was scheduled to start in April 2007, with first copper produced in December. The Kamoto concentrator is being refurbished at a cost of $55.2 million to handle 7.5 million mt/y ore, which will be sufficient capacity for all production phases, and is scheduled for commissioning in July 2007. Concentrates from the mill will be delivered via pipeline to a similarly renovated metallurgical plant at Luilu that features separate copper and cobalt leach circuits, roasting facilities and electrowinning tankhouses, and a new tailings facility. This plant, when commissioned at an estimated capex cost of $150.1 million in September 2007, will be capable of producing 175,000 mt/y copper and 8,000 mt/y cobalt.

At Katanga Mining’s Kamoto project, the route for the concentrate delivery pipeline has
been cleared and work is under way to install pipes in anticipation of a September startup.
Photo: Kantanga Mining Ltd.

Ditto explained that the company anticipates contributing more than $2.18 billion in taxes, royalties, wages and other spending to the Congolese economy over its 20-year lease. The initial redevelopment of the mine is expected to create around 1,600 jobs. During the operational phase, up to 2,500 people will be directly employed, with double that number indirectly employed in the supply chain. There will also be a significant multiplier effect as increased consumer spending supports local businesses. Ditto said the company has worked to provide a steady potable water supply for the village of Luilu, and together with other mining companies in the area, has refurbished 130 km of roads in the area.
Tenke Mining is partnered with U.S. copper producer Phelps Dodge in development of the Tenke Fungurume project located in DRC (E&MJ, January/February 2007, p. 4), one of the world’s largest, highest grade undeveloped copper-cobalt deposits.
During mine operations, a special social development fund has been committed by the project whereby 0.3% of net sales revenue will provide annual funding to local and regional social development projects. This fund and its projects will be managed by a board of trustees with involvement by the operator, community leaders, local government authorities and specialist program advisors. Current social development programs are aimed at improving living conditions for the communities within the Tenke Fungurume mineral concessions. These programs are also being managed by Pact, which in turn supervises specialist NGO’s administering the projects.