Mine Economics,
Management, and Law
Michael G. Nelson
INTRODUCTION
Michael G. Nelson, Department Chair, Mining Engineering, College of Mines & Earth Sciences, University of Utah, Salt Lake City, Utah, USA
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MINE ECONOMICS
terms of impurities and other properties, and standard expressions for quality are less common.
In all cases, the entire makeup of the deposit must be considered. The presence of certain impurities may render valueless
an otherwise attractive deposit. For example, a limestone deposit
that contains too much silica may not be suitable for the manufacture of cement. In other cases, the presence of an otherwise
valuable constituent may lead to complications in the ore processing. For example, a goldsilver ore that has too high a silver
content may require more expensive methods for recovery of the
precious metals from the leach solution. Thus the characterization of a deposit must be carried out by a diverse team, whose
members thoroughly understand geology, mining, mineral processing, metallurgy, and chemistry.
Besides characterizing the quality of the deposit, the
evaluation will also include an analysis of the legal status of
the mineral holdings. This will include determination of who
owns the mineral or mining rights, who owns or controls the
surface rights, who controls access to the property, and who
owns the required water rights. The legal definitions of these
rights vary widely among countries and even among states or
provinces within some countries.
In many cases, the evaluation or characterization of a
deposit will include a preliminary assessment of the feasibility
of mining that deposit. That assessment will focus particularly
on any characteristics of the deposit (and its locality) that may
be problematic. Examples include deposits
resources and reserves (SME 2007). The U.S. guide and U.K.
revisions were both based on the 1989 JORC Code.
In the collapse of the Bre-X project in Indonesia
(Danielson and Whyte 1997), private and institutional investors suffered huge losses when it was revealed that exploration
results had been incorrectly reported. After that, international
standards took on increasing importance (Cawood 2004). The
SME Guide for Reporting Exploration Information, Mineral
Resources, and Mineral Reserves was updated in 1999 when
the reporting of mineral resources and reserves was required
to be made by a competent person, as defined therein (SME
2007). The SME Guide was then recommended for use by
SME members. However, the U.S. Securities and Exchange
Commission (SEC) did not recognize resources, as defined
in the SME Guide and other documents, in its evaluation of
proposed mining projects (Kral 2003). When SME became a
recognized overseas professional organization, it instituted its
registered member category in 2006. Those who qualify can
obtain this membership upgrade through SME. Applicants
must first meet strict educational and professional standards
and undergo a vetting process by the Societys Admissions
Committee (Gleason 2007).
In an effort to resolve the differences between the SME
Guide and the SEC rules and regulations for 2007, a revised
version of the SME Guide was issued, which included
improved definition of the term mineral resources and its
subdivisions (measured, indicated, and inferred mineral
resources), and clarification of the technical, economic, legal,
and permitting requirements that must be satisfied before a
reserve can be declared. A section was added defining the
commodity prices that can be used for reserve estimation and
reporting, and how price sensitivity should be measured during periods of low prices. Documentation requirements were
clarified, including the requirement for a Mineral Reserves
Declaration Report. The role of the competent person was
reemphasized. However, the position of the SEC with respect
to public reporting remains that stated in Industry Guide 7 as
interpreted by SEC staff (SEC 2007). Consequently, at any
given time, some key aspects of the 2007 SME Guide may be
inconsistent with SEC requirements. The SME document, The
Guide for Reporting Exploration Results, Mineral Resources,
and Mineral Reserves (SME 2007) is available at the SME
Web site.
When a big financial scandal like that of Bre-X is exposed,
the details of the how the property was incorrectly valued
are closely scrutinized. In contrast, companies and individuals are understandably reluctant to publicly discuss projects
that were undertaken in good faith but fail nonetheless (SME
1998). Thus, it is difficult to assess the role of incorrect property valuations in those failures. Guarnera (1997) sums up the
effect of geological risk in recent projects as follows: No
single feature has caused so many mining projects to fail as
have reserves not being what were originally estimated by
the mining company. A few examples of projects which have
had notable reserve problems are:Hayden HillCoveMcCoy[and] Grouse Creek.
A brief discussion of these projects is instructive.
The McCoy property in Nevada (United States) was
acquired in 1986, and the nearby Cove prospect was discovered in 1987. By 1988, the owner reported proven and probable mineable reserves at Cove of 65.3 t (metric tons) of gold
and 3 kt of silver, with drill-indicated possible mineralization
of 83.9 t of gold and 4.5 kt of silver (Emmons and Coyle 1988).
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Probable
Error, %
Rough order-of-magnitude
3545
2535
15
1525
27
1020
Definitive
40
515
Type of Study
describes the scheme used by Bateman Engineering for defining types of feasibility studies, as shown in Table5.1-1.
Although not specified in the scheme of Table5.1-1, the
steps needed for permitting and reclamation should also be
considered, and are often included, in the various stages of a
feasibility study.
It is important to remember that any feasibility study is
only as good as the information used to prepare it. Although
this may seem obvious, many errors can lead to inaccuracies
in a study. Gypton (2002) reviewed 60 projects and found
only 15 came in under budget. Of the 45 over budget, 35 were
more than 15% over. Of all the projects, 25 were within the
15% criteria. Similarly, Bertisen and Davis (2007) reviewed
63 mining and smelting projects completed over four decades
and found that as-built capital costs averaged 25% higher than
estimates at the bankable feasibility study stage. About half
of the projects had as-built capital costs outside the expected
15% of the feasibility study capital cost estimate, and cost
overruns of 100% or more occurred in roughly 1 of 13 projects.
What could lead to such errors? Vancas (2003) gives a list
of project pitfalls:
Being forced into unrealistic deadlines
Not defining the scope of the project clearly at the beginning of the project
Allowing changes of the scope without documenting them
or determining their impact to the schedule, resources,
and project budget
Getting senior managements attention too late for them
to help
Inability to say no (even when obvious that what is
being requested is impossible)
Not establishing communication channels from the
beginning of the project
Not establishing a control mechanism to track and monitor the project
Deserting control mechanisms when the project starts
getting into management by crisis
Continually reorganizing the project team
Committing to arbitrary dates with no real basis for setting those dates
Building up staff too quickly when work is not ready
and/or disbanding support staff too quickly
Not having a person in charge of the project with responsibility, accountability, and authority
Not freezing the specifications and other baseline definitions
To this list could be added the too-common errors of confusing precision with accuracy and not understanding the inherent risks associated with mineral resources, particularly at the
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Prefeasibility Study
Feasibility Study
Contractors
Pricing
Owners costs
Historic estimate
Environmental compliance
Escalation
Not considered
Working capital
Accuracy
50%
25%
15%
Contingency
25%
15%
Prefeasibility Study
Feasibility Study
Basis
Order-of-magnitude estimate
Operating quantities
General
Detailed estimates
Unit costs
Accuracy
35%
25%
15%
Contingency
25%
15%
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MINE MANAGEMENT
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U.S. coal
0.25
U.S. metal/nonmetal
0.14
Australia coal
0.04
Australia metalliferous
0.07
MINING LAW
Right to Mine
Unless the lands containing a mineral deposit are purchased in
fee simple, the right to mine begins with permission from the
property owner to enter the property. If this right is granted by
means of a lease, then the lessor may require evidence that a
social license to mine can be obtained.
In most jurisdictions, the right to mine requires one or
more permits from government agencies. In some cases, the
mining permit may be secured with relative ease, but mining
cannot begin until several environmental and other permits
are also in place. In some jurisdictions, the permitting process
may seem opaque and difficult, especially to outsiders.
The right to mine may be forfeited if a company violates
any of the laws to which it is subject. In some cases, this forfeiture may be a direct result of government actions; in other
cases, it may be the de facto result of large fines or other penalties. In the worst case, a national government may confiscate
or nationalize the property, mining claims, equipment, and all
other assets of a mining company.
Taxes, Leasing Fees, and Royalties
Taxes and fees paid by a mining operation can be complicated.
In many cases, a mining operation may be taxed by several entities. For example, a mine in the United States may include lands
where ownership is divided among the federal and state governments and private holders. That mine could well be required to
pay leasing or claim fees to the federal and state governments,
corporate income taxes to the federal and state governments,
severance taxes or royalties to the state government, real property taxes to the county government, and royalties to the private
landholder. Some government agencies require the payment of
lease fees and royalties in advance, and this may significantly
increase the capital investment required to place a property in
operation. During the feasibility analysis, it is important to consider the likely tax and royalty liabilities for a project.
When taxes, fees, and royalties are set by government
agencies, they may be subject to change at short notice. In
some countries, laws may be changed with little or no regard
for existing contracts and agreements, and these changes can
suddenly and drastically alter the economic viability of a project. For example, although ex post facto protection is taken for
granted in the United States and many other countries, this is
not the case everywhere, and the local situation should always
be carefully investigated.
Employment, Work Conditions, and Compensation
Laws may specify wage rates and required benefits packages
in a given location; limit work hours; determine the conditions
for operation of labor unions; or specify the makeup of the
work force in terms of ethnic or gender diversity, percentage
of local or native residents to be employed, and so forth. Other
laws may include provisions to protect the safety and health
of workers, including required personal protective equipment,
safe working conditions, safety requirements for equipment
and machinery, and compensation for workers injured or made
ill by working conditions.
Environmental Protection
Detailed discussion of environmental assessments, environmental impacts, and other environmental issues may be found
in Part 16 of this handbook. This chapter discusses only general considerations.
Environmental laws cover many areas. They usually govern the use and contamination of surface and groundwater, the
discharge and storage of solid waste (including dust, waste
rock, and tailings) or domestic waste (garbage), the disposal
of radioactive and other hazardous materials, and the control
of gaseous emissions from equipment and processes. In most
locations these laws also cover the protection of endangered
and/or protected species or ecosystems (including parks,
forests, rivers, and lakes) and the protection of viewsheds
(including the night sky). Entities protected under environmental laws may be widely distributed in space and timefor
example, a caribou herd or a salmon fishery.
It is important for mining companies and mining engineers
to be aware of some of the land-use planning concepts under
which lands may be designated under a certain usage category
and thus rendered unsuitable for mining. Unsuitability may be
afforded to areas with natural hazards, renewable resources,
fragile ecosystems, historic sites, and for which reclamation
is technically or fiscally not feasible. This land-use concept is
also called legal sterilization of lands. Mine designers who are
unaware of the designation concept and its application in environmental protection laws may find their pet projects stalled
when they least expect it.
Environmental laws usually govern the restoration or
reclamation of sites and features disturbed or altered by mining activities. Reclamation requirements may be specific and
detailed, and extend far into the future, representing a liability
that is difficult to quantify. Many government agencies require
the posting of a bond to guarantee compliance with reclamation requirements. In some circumstances (when risk cannot
be adequately quantified), bonding companies are unwilling to
issue a bond. In such cases, the mining company is required to
post the full amount required. In the worst case (usually for a
smaller company), this will effectively halt the project; in the
best case, it will increase the upfront capital cost of the project.
Cultural and Social Issues
Laws relating to cultural and social issues may require protection of archaeological or historic heritage sites, protection
of cultural heritage sites, and control of traffic from material
haulage or employee travel. They may also regulate the construction of employee housing; specify the steps to be taken
when local residents are relocated to accommodate mining
operations; and prescribe compensation for property, water,
subsidence, and access rights. Some local jurisdictions may
require or request a mining company to make investment in
local infrastructure as part of a mine development program.
Cultural and social issues are difficult to quantify, and
laws regarding them can be subject to widely varying interpretations. Organizations opposed to a mining project often
use these issues as the basis for objecting to the project, even
after the required permits have been issued.
Mining Law in a Global Business Climate
It is often said that gold is where you find it. Mining companies have historically operated in diverse global locations, and
that is still the case. Companies must be prepared to conduct
exploration, development, and production almost anywhere
in the world. Although the technical requirements for these
activities will differ in various locations, much greater differences will be found in the legal, political, and cultural requirements. Thus, it is important for a company to have employees
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who are well trained and experienced in the laws and practices
of each country in which the company operates.
Almost all companies now state clearly their intention to
operate in full compliance with all applicable laws and regulations. In almost all cases, mining companies are also committed to operating in compliance with the highest and best
environmental standards, often those of the ISO or a similar
organization, even if the local laws are less stringent.
Mining companies must be fully aware of all laws that
apply to their operations. This will, of course, include local
laws, but laws of the companys home country may also apply.
For example, the U.S. Foreign Corrupt Practices Act of 1977
sets forth standards for accounting transparency and prohibits
bribery of foreign officials (U.S. Department of Justice 2004).
It applies to any U.S. or foreign corporation that has a class
of securities registered or that is required to file reports under
the Securities Exchange Act of 1934; to any individual who is
a citizen, national, or resident of the United States; and to any
corporation and other business entity organized under the laws
of the United States or having its principal place of business
in the United States.
Estimating Legal and Political Risk
The preceding discussion of mining law has alluded to
instances when changes in political regime or local laws and
regulations can seriously affect the viability of a development
project or mining operation. The assessment and quantification of legal and political risk is one of the biggest challenges
for a mining company, which must rely on its experience,
internal expertise, and the advice of qualified consultants.
An annual survey of mineral development potential is conducted by the Fraser Institute of Vancouver, British Columbia,
Canada (McMahon and Cervantes 2009). In 2008, 658 mining and exploration professionals responded to the survey,
which calculates the policy potential index and the current
mineral potential index. The policy potential index measures
the effects on mineral exploration of government policies,
including uncertainty over the administration, interpretation,
and enforcement of existing regulations; environmental regulations; regulatory duplication and inconsistencies; taxation;
native land claims and protected areas; infrastructure; socioeconomic agreements; political stability; labor issues; geological database; and security.
The current mineral potential index is based on whether
or not a jurisdictions mineral potential under the current policy environment encourages or discourages exploration. There
is considerable overlap with the policy potential index, probably because good policy will encourage exploration, which in
turn will increase the known mineral potential.
These indices provide a useful assessment of the risks
associated with mineral exploration in the areas included
in the survey: 7 states in Australia, 12 provinces in Canada,
14states in the United States, and in 34 other countries. The
Fraser Institute survey also includes comments made by
respondents, which provide valuable insights based on their
experiences. Because some of these comments illustrate how
the legal and regulatory climate in a country can affect exploration projects, they are reproduced here to emphasize those
effects. Because this handbook will be a reference for many
years, and because political conditions in many locations can
change unexpectedly, the names of countries and political
leaders are not given.
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