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Myths and Reality about Mining

Lydian Armenia Sr Manager Sustainability Speaks About Myths and Reality in Mining. Article was initially published on AMCHAM website.

Myths and Reality about Mining 

Armen Stepanyan, Sr Manager Sustainability, Lydian Armenia CJSC, Doctor of Engineering in Geo-Ecology.

As an environmental management professional with 14 years of experience I know environmental issues of Armenia from A to Z. As a citizen of Armenia I share many of the concerns expressed by active citizens, including those concerns around but not limited to mining industry. However, I also know that mining can be done differently. I have seen dozens of well-managed, safe mines that bring economic prosperity to the communities in countries like the US, Sweden and elsewhere. I believe that Amulsar project can be such an example. I also believe that unless we learn to differentiate between myths and reality we will never be able to fix the reality. It is impossible to tackle real issues if we are busy fighting the myths. Today I want to talk about some of such myths. I want to focus on general myths about mining and skip for now specifics on Amulsar. Today I want to try to find an answer to the questions: can mining be done responsibly and can it bring economic benefits? Here are some of the myths I want to highlight.

  • Myth: Mining is done only in underdeveloped countries
Reality: Mining is present in more than 100 countries in the world, including in some countries of G8 leading economies. ICMM’s report of last year highlighted top 20 countries in terms of mining production value. The list includes G20 member countries like Australia, Argentina, USA, Canada, Brazil, Mexico and a number of other rapidly developing economies[i]. Mining is done in Spain, Norway, Sweden, Czech Republic and the list can go on.

  • Myth: Major mining companies look for poor countries to extract their deposits and small countries become the “natural resource supplement” of rich nations. 
Reality: In the vast majority of the developed countries the majority of mines are owned by companies, not by the states. Mining is a global industry with global mining companies from all over the world. Just a few examples: Brazilian mining company Vale has mining projects in Canada, and Australia. Polish KGHM Polska has mines in the US, Chile Canada. Swiss Glencor, registered (just like Lydian) in Jersey, Channel Islands, owns the largest Nickel deposit in Norway. Canadian Kinross owns the largest gold deposit in Russia. And Canadian Barrick holds deposits in the US, Australia and elsewhere[ii].
However, hardly any Canadian thinks they became “natural resource supplement” of Poland and Brazil or Norway can hardly be considered “colonized” by Swiss. Mining companies bring investments and what they look for is: good deposits, feasible projects, investment friendly countries, predictable jurisdictions. Thus they go anywhere this or some of this is provided- be it in developed or developing countries.

  • Myth: There is a “predator” interest of foreign mining companies in Armenia.
Reality: If you search for the list of 100 largest mining companies in the world it will be obvious that not even ONE of those companies  is present in Armenia.[iii] Out of Armenia’s 10 metal mines only one is run by a small international company and Lydian is the second, planning to invest.There is a fierce competition for investments among countries. According to Deloitte 2014 report, as global mining stocks go down, financiers are more confident in investing in countries with stable political and socio-economic dynamics. At the world’s largest mining conference in Canada, PDAC 66 governments had a booth at the conference, G8 leading economies among them, trying to attract investors.
This doesn’t mean that Armenia cannot attract investments. But certainly investments don’t just flow into the country at this point.  

  • Myth: Only underdeveloped countries export raw mining products.
Reality: Commodities are mostly sold in an open market for a market price, and no matter where they come from they sell within same price range. There is almost no mining company that extracts gold and then makes jewelry out of it at a factory next door. Jewelry companies, car or phone manufacturers buy gold, platinum or copper from an open market at a market price.  As for export of raw materials here are some facts: 20% of Canada’s export is mining products and China is Canada’s second largest export partner, after the US.[iv] Mining exports worth 23 bn USD constitute 10% of total exports of Sweden, with its 1st export partner being Germany that buys most of Sweden’s Iron Ore and Copper. Iron Ore alone constitutes 22% of Australia’s exports. Gold is another 6% and Australia’s largest export destination is China[v]. 

  • Myth: Armenia has a huge mining industry
Reality: Despite frequent mentioning by NGOs of 29 metal mines, in 2014 only 10 metal mines produced in Armenia. Out of 10 only 4-5 are relatively large contributors to country’s exports and the economy, which means that mining projects are not very large. For a comparison: just one copper mine in Chile-Escondida produced over 1 million tons of copper in 2013. In the same year all of Armenia’s copper production stood at 41.000 tones. One gold mine in Australia- Kalgoorli produces over 24,000 kg of gold annually. All of Armenia’s gold production stood at 2.896 kg in 2012[vi].
This of course doesn’t mean that we shouldn’t carefully consider the feasibility and impacts of each project. But the solution is not denying any new investment. The solution is assessing existing state of the industry and shaping a careful strategy on what kind of investments will optimize the industry, increase the economic and decrease the environmental impact.

  • Myth: In developed countries mines are always in the middle of nowhere
Reality: Armenia is certainly much smaller than Canada or Australia. But the volume of mining industry in these countries is also hundreds of times of that of Armenia. Just one province of Canada- Ontario has 52 producing mines with an annual production value of 9.8 bn dollars[vii]. While all of Armenia’s annual mining production was worth about 500 million in 2012. As for proximity of mines: Kiruna mine in Sweden- one of the largest Iron Ore producers in the world is adjacent to the town of Kiruna. Canadian Malartic gold mine in Quebec that produced 24.000 kg of gold in 2014 is literally adjacent to the town of Malartic.  The examples are many.
This doesn’t mean that the concerns around projects’ impact on the communities in Armenia are not legitimate. But the issues come down to the management of the projects (how they are run), to their design (how they are built), to the technology (how modern it is) and not to where they are. Even if a project is in the middle of a desert, it may negatively impact dozens kilometers around if it is not managed properly. Whereas a well managed modern mine can be safe for the surroundings even in a densely populated area.

  • Myth: Mining countries are poor. Mining can’t provide economic benefits.
Reality: Mining is the most important pillar of the economies of Canada, Australia and several dozen successful countries. In 2012 alone mining contributed 36 billion to Canada’s GDP[viii]. Mining is a crucial component of the economies of Brazil, Argentina, Chile and several dozen major economies. As for examples of positive dynamics in developing countries; in 1985 around 60% of Botswana’s population was poor. Today, due to investments in mining, this number has reduced to 19%[ix] and GDP per capita is over $7 thousand[x] - twice higher than that of Armenia. Of course there are also examples of countries with vast natural resources, unable to turn them into economic benefits for the country. I believe we can strive to make Armenia a success story.  

  • Myth: Mining companies take most of the economic benefits and the countries only get small amount in taxes. Armenia has very liberal mining taxation system.
Reality: According to ICMM report 50-65% of mining production value are operating and capital expenditures- most of which is spent inside the country. Taxes and other payments to the governments constitute additional 15-20% average worldwide. Salaries and wages- most of which again stays in the country, are another 10-20% average. Profit for shareholders thus is only around 15-20% average.[xi] Thus it is not true that mining companies get the lion’s share. Especially in Greenfield projects like Amulsar.
As for taxes and royalties; Armenian mining taxation is not “too liberal” by any means. At least what the law implies is comparable with other countries. In mining industry in Armenia there are additional taxes (royalties). Roughly: 4% on revenue and 12,5% on Earnings Before Interest and Tax (EBIT). Corporate Tax rate is 20%. If we roughly combine all taxes in mining, depending on the project and metal prices- profits may be taxed from 40-50%. This is approximately double of corporate tax on other businesses.

The simplified model will look like this:
  • 4% Royalty on Revenue
  • 12.5% Royalty on EBIT
  • 20% of Corporate Income Tax 
If we compare Armenian Mineral taxation with British Columbia, one of the largest mining regions in Canada, for instance, we will see a similar or even more liberal approach:
  • Royalty of 2%,
  • 13% of EBIT
  • Corporate Income Tax of 10-16%.[xii]
So taxes Armenian mining companies are required to pay are absolutely comparable with other countries. Amulsar project, for example will be paying around $480 million in taxes and royalties in 11 years of operation, according to a preliminary study.

The mining industry issues in Armenia are undoubtedly dire. But the debate cannot be around whether we need mining or not. If many developed countries all over the world rely on mining for economic benefits, we need mining too. The economy needs investments and mining is one of the main industries that can provide it. The debate should be around how to make mining more efficient, how to modernize it, how to ensure environmental safety and how to make sure Armenia joins the club of successful countries. We all strive to see a stronger country and better off economy. Certainly we in Lydian Armenia believe that it is possible and Amulsar project can be an important step towards that goal.