(PDF) Small-Scale Mining: A Review of the Issues

________

________ WTP75

WORLD BANK TECHNICAL PAPER NUMBER 75 November

1987

INDUSTRY AND FINANCE SERIES

Small-Scale

Mining

A Review of the Issues

Richard

Noetstaller

HD

9506

N63

1987

c.2

Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized

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No. 28. Technical Assistance and Aid Agency Staff: Alternative Techniques for Greater

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Small-Scale

Mining

A Review of the Issues

- ii -

Industry and

Finance Series

Volume 23

This series

is produced by the Industry Department

of the

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series will include

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* Volume 3. Industrial Restructuring: Issues and Experiences in

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* Volume 9. Guidelines for Calculating Financial and Economic

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Volume

10. A Framework for Export

Policy and Administration:

Lessons

from the East Asian Experience (also in Spanish)

Volume 11. Fertilizer

Producer Pricing in

Developing Countries: Issues

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Volume 12. Iron Ore: Global Prospects for the Industry, 1985-95

Volume 13. Tax Policy and Tax Reform in Semi-Industrial Countries

Volume 14. Interest Rate Policies

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1970-82

Volume 15. Mobilizing

Small Scale Savings: Approaches, Costs, and

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Volume

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* Volume 20. World

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* Published as World Bank Technical Papers.

WORLD BANK TECHNICAL PAPER NUMBER 75 -

INDUSTRY AND FINANCE SERIES

Small-Scale Mining

A Review of the Issues

Richard

Noetstaller

SECTORAL LIBRARY

INTERNATIONAL BANK

FOR

RECONSTRUCTION AND DEVELOPMENT

JAN

21 1988

The World Bank

Washington, D.C.

The Intemational Bank for Reconstruction

and Development/THE WORLD BANK

1818 H Street, N.W

Washington, D.C. 20433, U.S.A.

Manufactured in the United States of America

First printing November 1987

Technical Papers are not formal publications of the World Bank, and are circulated

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Richard Noetstaller is head of the Mining Division of AUSTROPLAN, Vienna, and

a consultant to the World Bank.

Library of Congress Cataloging-in-Publication Data

Noetstaller, Richard, 1941-

Small-scale mining : a review of the issues / Richard Noetstaller.

p. cm. -- (World Bank technical paper, ISSN 0253-7494 ; no.

75. Industry and finance series: v. 23)

Bibliography: p.

ISBN 0-8213-0980-3

1. Mining engineering. I. Title. II. Series: World Bank

technical paper no. 75. III. Series: Industry and finance series

; v. 23.

TN145.N64 1987

622--dc 19 87-29581

CIP

ABSTRACT

The paper addresses the principal issues generally associated with

small-scale mining in less developed economies and summarizes constraints and

barriers that adversely affect SSM establishment and self-reliant growth in this

country group. It examines conditions and circumstances under which small- and

medium-scale mining is economically justified or desirable as opposed to large-

scale operations and identifies options for promotional action in support of this

segment of the extractive sector.

Due to the absence of scale-effects, small mines are, ceteris

paribus, high cost producers that require favorable geological conditions, high-

grade mineralizations or an infrastructurally isolated local market to remain

competitive vis-a-vis large operations. Key size-related attributes making the

SSM-operations particularly attractive for the lower-income developing countries

include low investment costs, short implementation periods combined with the

creation of above average employment opportunities for low-skilled labor, fre-

quently in rural areas. In addition, small mines permit the extraction of numerous,

otherwise unexploitable small rrilneral deposits.

The paper concludes that in most LDC's specific promotional

initiatives will be required to strengthen the SSM-segment. The introduction of a

size-neutral policy environment together with extensive technical and financial

assistance provided by multinational lending or development institutions to be

channeled through competent national intermediaries and local commerical banks,

are key elements in programs designed to accelerate small-scale mining

development in LDC's.

- vi -

GLOSSARY OF ABBREVIATIONS

BAMIN = Banco Minero de Bolivia

CADETAF = Centrale d'Achat et de Developpement de la Region

Miniere du Tafilalet et de Figuig

CFM = Consejo de Fomento Minero

COMIBOL = Corporacion Minera de Bolivia

CRM = Consejo de Recursos Minerales

ENAMI = Empresa Nacional de Mineria

FONEM = Fondo Nacional de Exploracion Minera

GDP = Gross Domestic Product

LSM = Large-Scale Mine

MLI = Multinational Lending Institution

MSM -Medium-Scale Mine

Mt -million tonnes

Mt/y = million tonnes per year

n.a. = Data not available

NGO -Non-Government Organization

SMM = Small and Medium-Scale Mines

SSE = Small-Scale Enterprise

SSM = Small-Scale Mine

st -short tons

tpd = tonnes per day

tpy -tonnes per year

UNRFNRE = United Nations Revolving Fund for Natural

Resource Exploration

U.S.A. = United States of America

U.S.B.M. (USBM) = U.S. Bureau of Mines

U.S.$ = United States Dollars

VSSM = Very Small-Scale Mine

- vii -

TABLE OF CONTENTS

SUMMARY

****..***......................**..****************** ix

I. INTRODUCTION ................. 1........................... 1

II. DEFINITION AND SIGNIFICANCE .............................. 3

A. Concepts and Definitions ........... a.......... 3

B. Share of Small-Scale Mining .......................... 6

C. Contribution to National Objectives .................. 7

III. CHARACTERISTICS AND IMPLICATIONS ......................... 9

A. Peculiarities of Commodity Subgroups 9................ 9

B. Attributes and Issues ..... .. .. .. . .

.... ...... o.o.o.o.

.. .... o 11

Deposit Utilization and Wastage .................... 11

Exploration and Risk .... ........................... 12

Employment and Social Impact ....................... 13

Health

and Safety ........ s.o.o ...... 0 .... ...... 14

Environmental

Concerns .. .... .... ...... o.o.o. ...... ... ... 15

Technology and Efficiency ........................... 15

Entrepreneurship and Business Development .......... 16

C. Constraints and Barriers ................. ............ 17

Mining Tradition and Training ............ ....

o o 17

Dependence on Infrastructure 0. ...................... 17

Processing and Marketing ... ................................ 18

Investment and Finance .............................. 20

Management and Organizational Structure ............ 22

Institutional

and Policy Framework ................... 24

IV. CORRECTIVE AND STRENGTHENING OPTIONS ... oo..............o. 26

A. General Considerations .o.o. .* . . ....

... ...

..... ...

.... ... .. . . . 26

B. Experiences and Approaches ........................... 26

C. Policy and Institutional Measures ...... .............. 29

Fiscal Regime ............................................... 29

Mining Legislation ...... o o.... ..........o*............. 30

Institutions and Executing Agencies ................ 31

Do Assistance Options ................. ... .............. 33

Financial Assistance .o.

. . . . . ... .... .... .o.o..o

. ...

o..o. .......33

Non-Financial Assistance .... * ........... ........... 34

E. Operational and Organizational Measures .... ......... .36

Optimum Mine Size .. ... .. *..... ................... 36

Appropriate Technology ............................. 37

Mining and Business Practices .... 00.................. 38

Organizational Options . ............................ 39

- viii -

V. CONDITIONS OF ECONOMIC JUSTIFICATION ....................... 42

A. Basic Economic Aspects .................................

42

B. Target Eligibility Profile ............................. 42

Geological Factors ....... ....... *................ 42

Marketing Factors .........

*****..*............ 43

VI. PROMOTIONAL APPROACH .. .....................

*-se........ 46

A. Role and Promotional Initiatives of Multinational

Lending Institutions .................................

46

B. Profile of Policy Guidelines ........................... 48

ANNEXES

Annex A Share and Estimated Value of Small Mine Production ..... 50

Annex B Developing Countries with Important Recently or

Currently Active Small-Scale Mining Segment ......... 54

Annex C Selected Countries with Important Direct Mining

Sector Contribution ... .............................s 56

Annex D Summary Profile of Commodity Subgroup Typification ..... 57

Annex E Effect of Processing and Upgrading .....................

59

Annex F Policy and Institutional Profiles of Ten Developing

Countries ..............

000*00*

.............

0o0so ..............

0 61

Annex G Fundamental Relationship between Capital-Labor-Cost

Ratio and Mine Size .............

sees ..................

71

Annex H Fundamental Relationship between Capital-Labor-Cost

Ratio and Degree of Mechanization ....... a*.* .... 72

REFERENCES **...................... 73

- ix -

SUMMARY

1. Small-scale

mineral

properties

represent

a segment

of the

extractive

sector

with

a high

potential

to create

beneficial

effects

in the

less

advanced

economies. Major

arguments

in favor

of small-scale

mine

(SSM)-development

are

the

utilization

of otherwise

unexploitable

small

mineralizations,

high

absorptive

capacity

of low-skilled

labor

in rural

areas,

efficient

use

of scarce

capital,

modest

infrastructural

requirements,

opportunities

for

indigeneous

entrepreneurial

development,

conservation

of scarce

high-skilled

manpower,

low

investment

costs

and

short

implementation

periods.

2. In

view

of the

absence

of scale-effects,

small

mines

are,

in

general

however,

high

cost

producers. In a competitive

market

they

can,

therefore,

only

succeed

if they

enjoy

cost-reducing,

comparative

advantages,

sufficiently

strong

to compensate

for

the

under-utilized

scale-effects.

In

metal

mining,

producing

commodities

for

export

markets,

small

mines

are

viable

only

if they

extract

considerably

higher

grade

ore

than

their

large-scale

competitors. Ease

of access,

mining

and

processing

may provide

further

comparative

advantages

to small

operations. For SSM's

extracting

low-value,

high-volume

commodities

such

as

coal

and

industrial

minerals,

proximity

to consumers

together

with

infrastructural

isolation

of

local

markets

provides

the

necessary

comparative

advantage

vis-a-vis

low-cost,

large-scale

producers. A significant

comparative

advantage

moreover,

lies

in the low

labor

costs

of

developing

countries,

provided

appropriate

technologies

are

employed. Moreover,

the

higher

the

capital-labor-cost

ratio,

the

higher

the

comparative

advantage

of

small

labor-intensive

operations.

Low-income

developing

countries,

therefore,

present

particularly

favorable

targets

for

SSM-activities.

3. Apart

from

their

inability

to benefit

from

scale-effects,

small

operations

are

usually

confronted

with

constraints

and

barriers

which

prevent

or retard

their

spontaneous

development

and

self-reliant

growth.

Constraints

frequently

identified

include

a policy

environment

favoring

large-scale

investment

and

discriminating

against

small

enterprises,

an

institutional

framework

inadequate

to support

the

small-scale

segment,

regulations

and

circumstances

that

exclude

small

operations

from

institutionalized

finance

and

lack

of appropriate

marketing

facilities.

The inherent

qualities

of SSM's

and

their

beneficial

impact

on developing

economies

together

with

the

existence

of specific

constraints

discriminating

against

them,

provide

the

fundamental

justification

for

SSM-promotion

and

outside

intervention.

A number

of key

options

have

been

identified

which,

if

combined

in sufficient

quantity

and

quality,

will

result

in

an adequate

promotional

strategy

for the

target

segment.

4. An essential

policy

recommendation

is to

minimize

the

application

to the

target

segment

of tax

duty

regimes

that

directly

increase

costs,

e.g.

production

taxes,

export

taxes

and

royalties,

a measure

which

is

justified

due to its

positive

effect

on increasing

the

domestic

natural

x -

resource endowment. To the

extent that

taxation appears

necessary,

only

reasonably dimensioned

profit taxes

should be levied,

to be applied in

combination with

adequate depletion

allowances. Tax

holidays are not

considered favorable

due to their potential

of temporarily

inducing

highgrading

practices. Similarly, depreciation

allowances for

mining

equipment should

be granted cautiously

in order not to jeopardize the

choice of the appropriate technology. Conversely,

all expenses for

evaluative and operational

exploration

must be made

fully tax-deductible.

5. Licensing

and registration

procedures required

to obtain

exploration

or mining rights have

to be simple, rapid

and inexpensive.

Free

access to public

land and grant of rights

to first applicant

are

powerful

instruments to

enhance interest in SSM-activities.

Free

transferability of concessions to parties

meeting eligibility

criteria is

desirable, while guaranteed

entitlement

to be granted mining

rights once a

prospect

is found viable

is an essential

precondition. Regulations

regarding minimum

concession area,

duration and annual

work program are

considered

important. An appropriate definition

of environmental,

health

and safety standards

and documentation

requirements is also a necessity,

in order to assure

adherence to minimum

standards without

creating unduly

strong barriers

to entry.

6. Institutional

assistance

is one of the

most critical

elements

in

a promotional strategy. It is important

that institutions

which assume the

responsibility

for assistance

in the target segment,

are completely

autonomous,

compact,

competent

and efficient. To reach

this goal,

it must be assured

that agencies

are staffed with highly

qualified and

motivated personnel

by offering attractive

salaries and

adequate fringe

benefits for extended

field assignments. Institutions,

furthermore, have

to act through regional

offices in SSM-districts,

equipped

with field

laboratories

and ore collecting stations,

where appropriate. In its

relationship

with the target

sector, emphasis must

clearly be on the

guiding

and enabling

function of the agency,

rather than

on the controlling

function.

7. In the absence

of private companies

providing these

services, the

installation

and operation

of mobile or regional

concentrators

in metal

mining districts

has to be taken

over by public

agencies. Treatment

charges

should reflect

the full costs

of these services. Additional

functions of these

agencies could include

the provision

of technical

assistance

from property evaluation

through

mine planning and operation,

product

marketing,

and to a lesser

extent, financial

assistance.

8. Financial assistance

should preferably

be provided through

local

commercial banks, which

frequently have

a large branch network

with branch

offices close

to mining districts

and greater lending

and collecting

experience

with small borrowers

than public institutions. Incentives

to

increase

commercial bank involvement

include

the introduction

of

risk-sharing

schemes and

larger spreads during

initial years

while

- xi -

confidence is still lacking, as well as rediscounting arrangements with the

central bank based on the assistance of an apex institution with

specialized experience

in SSM projects. Concessionary interest rates for

the SSM-segment, except temporarily for promotional purposes, should be

avoided since experience shows that these may lead to a misdirection of

funds or to less productive use of capital. Exceedingly high interest

rates are equally undesirable because of their negative effect on resource

utilization. Positiye, real interest rates close to those prevailing on

the money markets and reflecting the cost of lending appear adequate.

9. Repayment conditions of loans should be set in strict accordance

with the cash-flow generating capacity of the project, and lengthy grace

periods are usually not necessary in view of the short development period

of SSM-projects. Lending institutions should be encouraged to accept

demonstrated reserves and physical assets as collateral. This will require

improved documentation which can only

be prepared by SSM's with extensive

external assistance. The installation of a national exploration fund is

appropriate under

specific circumstances, particularly in countries where

large metal mining districts with a high potential for SSM-exploitation

are

known to exist, and where exploration has been limited in the past.

10. The provision of extensive technical assistance aimed at

introducing sound mining and business practices in SSM-districts appears to

be equally important. The most appropriate method is the execution of

on-the-job-training

programs in existing MSM or LSM-operations. In the

absence of suitable

training mines, the establishment of a demonstration

mine by the responsible agency, operating under representative conditions,

appears to be the only other option. The acquisition of sound

mining and

business practices is an essential precondition for self-sustaining

development and growth of the target segment, particularly in places where

mining

tradition is weak.

11. Equally important is the provision of basic infrastructural

facilities to the SSM-operators including

access roads, power

supplies and

process water. These could be provided at no cost (e.g. roads)

or reduced

rates (e.g. power

and process water) where

specific circumstances,

including considerations

of regional development

and employment,

justify

such measures. In metal

mining districts, marketing

assistance in the form

of installation

and operation of ore

collecting stations, transport

facilities and concentrators

by a government

agency may be required

if

adequate private facilities

are not available. In such cases, an attempt

should be made to encourage

private companies

or miners' cooperatives

to

take over such plants

after initial operating

periods have confirmed

their

viability. Assistance

should furthermore be concentrated primarily

on very

small-scale mines

(VSSM's) and SSM's, which

require it most, rather

than on

medium-scale mines (MSM's).

-xii -

12. Other

possible

incentives

suitable

to encourage

SSM-development

comprise

purchase

agreements

with

public

or private

institutions,

the

assurance

of fair

and attractive

prices

for mineral

products

and,

where

necessary,

the admission

of competitive

commodity

purchasing

through

licensed

buyers. The opportunity

of renting

mining

equipment

for limited

periods

of time

and equipment

leasing

arrangements

may

also prove

to

be

highly beneficial,

particularly

in cases where

credit

for equipment

purchases cannot be obtained at reasonable terms. Combined packages

comprising purchase agreements associated with the provision of working

capital and rental equipment are highly attractive arrangements for small

producers.

13. Where ore reserves and geological conditions permit, growth of

mine size

should be encouraged to avoid the smallest, highest-cost

operations

and

to enhance

benefits

resulting

from

scale-effects.

Capacity

increases,

however,

have

to be planned

carefully

and

implemented

cautiously

to exclude

undesirable

losses

of the inherent

beneficial

effects

of the

target

segment. In economies

with

a hith

capital-labor-cost-ratio,

such

as

in lower-income

developing

countries,

the

average

mine-size

should

be kept

smaller

than

in countries

where capital-labor-cost

ratios

are lower. In

the MSM-segment,

further capacity

increases

usually will

not result

in an

additional

overall

net

benefit

so that

growth-promoting

measures

should

be

concentrated

on the

lower

end of the target

segment.

14. The

choice

of technology

is a particularly

delicate

matter

since

potential

beneficial

effects

associated

with SSM-activities

are

highly

the use

of the

appropriate

technology.

Here again

the

prevailing

capital-labor-cost

ratio

is the critical

quantity. The rule

to

be applied

is that

high

values of the capital-labor-cost

ratio favor

the

use of a mining

technique with

a lower

degree of

mechanization,

as do

smaller

mine sizes,

and

vice versa. The

use of a capital-intensive

technology

in small

mining

is economically

incorrect

and

results

in the

loss

of the potential

benefits

of the

target

segment.

15. Both management

and

organizational

structures

have to be adjusted

to the size

of the enterprise. Full size SSM's

and MSM's

have to

have a

formal

organization

with a one- to two-level

management

organization

and a

departmentalized

structure,

while the

smaller

mines

will usually

have

to be

owner-managed

with

a simple

organizational

structure. Private

companies

are

the preferable

form of

ownership

in small-scale

mining. Of particular

importance appears

to be the

introduction

of adequate

bookkeeping

and

accounting

procedures

in the

target

segment.

16. For

VSSM and

smaller

SSM-operations,

the formation

of miners'

associations

and cooperatives

is the only possibility

of partially

capturing

scale-effects.

In the

absence of other options

available

to

strengthen

the position

of the

small operator,

such

formations

should be

encouraged. While

their usefulness

is disputed,

evidence exists that they

can

operate

successfully

provided

that they

are established

in a voluntary

effort

of individual small

miners, rather than

on the initiative

of

-xiii -

authorities

and that they

limit their

role to providing

certain services

to

their

members

at cost,

rather

than

to

attempt

operating

mines

on a

collective

basis. Functions

of cooperative

organizations

should

primarily

include

maintaining

ore collecting

stations,

assaying

facilities

and

concentrators,

equipment

rental

and

the provision

of operating

supplies

at

cost,

to the extent that

such services

cannot be obtained

from other

organizations at lower cost.

17. Multinational

lending

institutions

(MLI)

can play an essential

role in the

process

of promoting

and stimulating

activities

in the

SSM-segment. In view

of the

repeatedly

demonstrated,

favorable

economic

impact

of SSM-activities,

MLI's

should

continue to expand their

involvement

in supporting

the sector. Low-income developing

countries apparently

offer

the best

targets. Promotional

initiatives

should

be extended

to industrial

minerals

and coal produced

for

local markets,

as these

commodities

create

substantial

domestic

linkages

and carry

relatively

low risks.

18. In the promotional

approach,

MLI's

should

continue

to initiate

policy

adjustments

in target

countries

aimed at creating

an economic

environment

conducive

to SSM-growth

and to expand the

capabilities

of

institutions

acting as executing

agencies. In cases

where severe

distortions

discriminating

against

SSM's

have been identified,

the

effectiveness

of MLI loans

should be

made conditional

upon the

initiation

of adequate

policy

reforms. Increasing

emphasis should

be placed

on

channeling

funds

through commercial

lending

institutions

and on expanding

non-financial

assistance,

particularly

on introducing

sound

mining

and

business

practices through

on-the-job-training

programs in existing mines.

The use of appropriate

technologies

and further domestic

processing should

be

encouraged

in an effort

to enhance

economic

benefits. Where

project

conditions

are not favorable,

a staged

implementation

approach

should

be

followed,

rather

than excluding

a target from

promotional

initiatives

a

priori.

I. INTRODUCTION

1.01 In recognition

of the

essential

role of natural

resources

in

economic

development,

the

mining

sector

has traditionally

attracted

considerable

interest

both

on a

national

and international

level. In this

context

the small-scale

mining

sector

has recently

received

increasing

attention

as a promising

goal

for intensified

developmental

efforts. While

this was

motivated

by empirical

evidence

that

small

enterprises

contribute

significantly

to economic

progress

and

have

considerable

potential

for

development,

di4erse

opinions

exist

regarding

promotional

approaches

to and

economic

justification

of small-scale

mining.

1.02 Responding

to this situation,

this

Small-Scale

Mining

Review

was

initiated. The paper's

objectives

are (i)

to identify

and

evaluate

development

constraints

and issues

of this

target

sector

and

to recommend

strategic

actions

for their

solution,

(ii)

to evaluate

approaches,

policies

and strategies

governments

and private

organizations

have

followed

dealing

with

this

segment

of the

mining

industry

and to derive

and

formulate

policy

recommendations

to serve as

guidelines

for future

Bank

operations,

and

(iii)

to

define

circumstances

under

which

small-

and

medium-scale

mining

is

economically

justified

and to

make recommendations

as to the

Bank's

role

and approach

to support

the

sector.

1.03 The

review

has been

carried

out

as a desk

study,

based

on an

assessment

and

interpretation

of the

relevant

professional

literature

published

within

the past

15 years

as

well

as the

documentation

of

Multinational

Institutions'

(MLI)

lending

experience

to small

enterprises

in general

and the

small-

and

medium-scale

mining

sector

in particular. In

addition,

the elaboration

has

been

greatly

assisted

by two recent

papers

on

the subject

that provided

both

fundamental

insights

into

the problem

and

valuable

direction

in

addressing

it. 1/,2/

1.04 While

an extensive

and valuable

volume

of literature

exists

on

the

subject,

one

major

problem

has been

the lack

of coherent

quantitative

and statistical

material

aggravated

by the poor

comparability

of data

resulting

from the

absence

of

a common,

universally

applied

definition

of

the terms

small-

and

medium-scale

mining. The large

number

of issues

to be

addressed,

the

heterogeneity

of

mineral

commodities

combined

with

the

uniqueness

of individual

mineral

deposits

and

the great

differences

between

nations,

have

further

added

to the complexity

of the

subject. This led to

the necessity

to treat

the subject

on a comparatively

high aggregate

analytical

level

and to frequently

rely

on judgement

in the

evaluation

and

interpretation

of issues,

the

selection

of options

and

the

drawing

of

meaningful

conclusions.

1.05 In Section

II, an attempt

is

made

to arrive

at a broadly

applicable

working

definition

of scale

segments

for the

purpose

of this

study. It also

examines

the

contribution

of the

small-scale

mining

segment

to socio-economic

development

and its

share

within

the

industry. Section

III

explores

the

characteristics

and implications

of small-scale

mining

-2-

while

Section

IV seeks

to

provide

solutions

appropriate

to strengthen

the

sector. Section

V identifies

conditions

and

circumstances

under

which

small-

and

medium-scale

mining

is economically

justified

or superior

and

includes

a delineation

of the

principal

characteristics

of potential

target

areas. In Section

VI

options

for

the promotion

of the

sector

are

investigated

and

an approach

for assistance

by MLI's

is

developed.

-3-

II. DEFINITION AND SIGNIFICANCE

A. Concepts and Definitions

2.01 In spite of the frequent

use of scale concepts, a universally

accepted consensus regarding the definition of the terms small-scale and

medium-scale

mining in quantitative units does not exist. This

is

attributable to the fact, that a number of factors

can basically be

employed for demarcation purposes, each apparently

particularly suitable in

a specific

situation. Generally, definitions

are based on one or more of

the following criteria which exhibit distinct variances as a result of the

scale

of operation, as indicated:

Generally Observed Quality for

Criterion SSM LSM

Mine output in tpy small large

Number of persons employed

per unit of output large small

Gross

annual income of firm low high

Degree of mechanization or

capitalization low high

Labor productivity low high

Size of mining concession or lease small large

Size of reserves small/unknown large/well known

Continuity or intermittence

of operation frequently intermittent continuous

2.02 For reasons discussed in paragraph 2.03, mine output is the only

broadly

applicable and universally acceptable

measure for the delineation

of scale

of operation in the mining industry. To allow for the wide

variations in the content of the valuable mineral components in in-situ

ore, both between individual commodities and deposits, mine output has to

be measured in terms of run-of-mine

(r.o.m.) ore. Of this output, varying

but generally very small

proportions represent the mineral to

be extracted

through the following processing

stages. Since it is general

practice to

report mine production in tons per year, mine output in tpy r.o.m. ore will

be employed

as the main criterion for the definition

of scale segments.

2.03 It is obvious that a small number of employees may be equally

indicative

of a highly mechanized,

large-scale open-pit operation

or a

small underground mine using traditional or intermediate technology,

resulting in different levels of labor productivity. Even if measured per

unit output, the number of persons

employed is strongly variable

in

accordance with the type of operation and the geological features of the

deposit. Gross annual

income largely depends on the

unit value of the

commodity produced which varies widely within the industry. The size of

-4-

the mining

lease

required

to

permit

a

desired

scale

of operation

is

influenced

by geological

characteristics,

such

as the

shape

and

type

of the

mineralization,

while

the

size

of reserves

is dependent,

inter

alia,

upon

ore

grade. Continuity

or intermittence

of operation,

finally,

may

be

caused

by factors

other

than

seasonal

employment

in other

sectors

of the

economy,

e.g.

climatic

aspects

or market

forces. As

a result,

these

criteria

are

suitable

only

as

additional

indicators

and

for

orientation

purposes

in the

demarcation

process.

2.04 In

an attempt

to arrive

at a quantitative

delineation

of scale

segments,

it is

appropriate

to examine

the

economic

consequences

of scale

variations. Ample

evidence

exists

that

the

mining

sector

is characterized

by substantial

economies

of scale.

3/,4/ This

means

that,

ceteris

paribus,

larger

scale

mines

produce

at lower

unit

costs

than

smaller

operations. In

this

context,

the

term

"ceteris

paribus"

refers

primarily

to comparable

geological

conditions

and mining

technology. Theoretical

considerations

supported

by comparative

observations

suggest

that

the

unit

cost

disadvantage

of small

operations

becomes

extremely

severe

in the

lowest

size

segment

that

corresponds

to approximately

10-20%

of the

production

capacity

at which

the minimum

cost

level

can

be attained. From

the

same

relationship

it appears

that

under

comparable

operating

conditions

there

is

little

difference

in the

unit

cost

between

medium-

and large-scale

mines

and even

between

the

lower

and

the

upper

segment

of the

medium-scale

operations.

2.05 A further

narrowing

down

of quantitative

demarcation

lines

is

complicated

by the

fact

that

the

long-range

average-cost

curve,

reflecting

the effects

of economy

of scale,

is

different

for

individual

commodities

and

types

of operation. For typical

large-volume

minerals

extracted

in

open-pits,

e.g.

iron

ore

and

coal,

the threshold

capacity

at which the

minimum

unit

cost

level

is reached,

is higher

than

for

a typical

low

volume

mineral

extracted

in underground

operations. This

appears

to be the

main

reason

why

a generally

accepted,

single,

quantitative

segment

demarcation

has not

been

put

forward

and

may

not be

practical. A brief

review

of

statistical

data

on the

global

distribution

of

Western

World

non-fuel

mine

sizes

serves

to illustrate

the situation.

2.06 Annual

surveys

of the

number

of producing

mines

in different

size