MINERAL VALUE CHAIN AND LOCAL CONTENT What is mineral value chain? represents the stages and processes that a minerals project will go through to produce mineral products Each stage represents a value-add on the previous the framework describes the steps from the extraction of natural resources, to their processing and sale, all the way through to the ultimate use of the revenues. Mineral value chain Prospect Exploration establish feasibility Mine Processi ng market and sell seeking any potential or evidence for occurrence of minerals It involves geological mapping, geophysical and geochemical techniques and satellite imagery It gives you with minimal data Exploration the process of finding ore or mineral deposits in commercially viable concentrations risk of failure is great and the cost is high; Prices of minerals and exchange rates are changing Exploration takes place several years Area where exploration is taking place- greenfield or brownfield Greenfield-where exploration has never taken place Brownfield-area that was already explored upon Exploration is valued at cost; valued at market price (full amount charged, including operating surplus) Exploration Activities involved; -Geological mapping -mineral/ore characterization -Pitting and trenching -Drilling -Reserve estimation -Prefeasibility study This is the one that trigger investments in mining as it gives you sufficient data enough to make a decision to go on or to abandon the mine Exploration Companies holding exploration licences with high potential but limited funding may be seeking investment partners to progress projects At each stage of the exploration process exploration companies will provide progress reports to their boards and shareholders. They may also seek to secure additional funding from the financial market to conduct further exploration activities an evaluation of a proposed mining project to determine whether the mineral resource can be mined economically Typically, a full feasibility study is the basis for capital appropriation and provides the budget figures for the project Continuation of pre-feasibility study that is undertaken once a mineral has been identified Calculations on; -Cost estimate for operating and capital -Market estimates; commodity price and currency exchange rate -Cash flow study; an appropriate discount rate should be agreed by all concerned and used to calculate the NPV -Risk and sensitivity analysis; risk and sensitivity analysis are commonly used to assess the upside and downside potential of the project. Environmental conditions Number of reserves Activities involved ; -Surface stripping -Drill and blast -Crushing -Ore transportation to the mill 2 types; Underground mining and surface mining Surface mining- mining that delve into rock to extract deposits of minerals that are close to the surface Underground mining------extracting deeper in the ground Effects -deforestation and loss of biodiversity -health effects: lead –mental retardation in children Processing crushing and separating ore into valuable substances or waste by any of a variety of techniques OR beneficiating or liberating valuable minerals from their ores Ore dressing/ beneficiation determining demand, deciding on its price, and selecting distribution channels for minerals It also includes developing and implementing a promotional strategy Featured by volatility in short run and long run Most market reports/analysis are sold Monitoring value chain Done by the government Monitoring framework at each stage Facilitate movement of minerals within and outside the country Access to data and country wide reports LOCAL CONTENT POLICY Definition A policy, whereby governments insist that firms doing business in the particular country use goods and services that are locally manufactured or supplied, is usually aimed at boosting the economic viability and competitiveness of indigenous businesses to the benefit of the country itself, and all of its citizens. Why local content policy? Are major coal, oil and gas discoveries a blessing or curse? Norway’s case demonstrates the huge benefits of oil and gas finds To some extent, Botswana’s case shows important blessings from mineral resources wealth However, other African countries’ experiences show how a curse natural resources wealth can be In previous eras, Foreign Direct Investment (FDI) was seen as an end in itself, rather than a means for promoting economic development However, FDI does not always produce more positive outcomes than negative ones. In fact, the examples of Angola and Nigeria, as well as Tanzania’s own experience with its mining sector, show the difficulty of achieving development from natural resources alone Since the mid-2000s African countries, including Angola and Nigeria, have put in place local content policies (LCPs) to maximize the benefits from resource extraction At the global level-following the economic crisis of 2008, the implementation of local content policies experienced an upward trend, as political leaders sought to grapple with the consequences of the crisis by channeling business to domestic firms, creating more jobs and enhancing the benefits from resource endowments 2 Views of local content Opponents -distort trade (incompatible with WTO measures ;treating one another as nationals) -discourage FDI (the requirements harmful to local investment climate) -creates inefficiency -corruption Argument: it strengthen competitiveness of domestic players over foreign players Proponents -may support local income generation - productivity improvements and - industrial restructuring - Correct market failure - Integrate in global economic network Argument: most advanced countries (including the USA and Germany), while in the early stages of economic development, massively employed local content measures to promote industrial development Objectives of local content policies Facilitate increased use of competitive national goods and services Expand the commercial co-operation between national and foreign companies Strengthen/enhance the sophistication of national financial markets by floating shares in upstream and midstream companies To avoid the natural resource curse Transformation and visibility of local businesses into world class companies, which can then export their newly acquired competencies Significant conservation of foreign exchange reserves Development of linkage industries which will support natural resource sector e.g. steel sector Instruments of local content policy Ownership requirements ie. Restriction on foreign ownership (mostly to 50%) Tariffs measures e.g tariffs on imported inputs grants, Loans from state-owned banks Necessary conditions for success 1.Clear, unambiguous policies; 2. The right institutions; 3. Absorptive capacity in local industry; 4. MNC willingness/ability to outsource. Benefits of local content policy? Create opportunities for individual citizens to invest in upstream, midstream and downstream development. Enhance the development of national technical and commercial skills. Promote development and poverty reduction by: -Providing jobs and opportunities for local businesses; - Facilitating technology transfer; and -Building local knowledge and skills that are critical for development. Challenges of LCP’s Rise in prices of goods that the LCP targets>increase of prices of production costs> this inturn leads to incompetitiveness with exports in non-targeted sectors falling Limited local content capability-Local entrepreneurs are not competitive in price/quality/technical competence- Most local firms lack experience, financial track record and the quality systems required • Access to capital equipment • Reluctance by investors to assist local content companies • Perception that local content participation is based on commissions, not as a value-adding activity Challenges of LCP’s • Breaking into the global supply chain is difficult • International companies have identified business and management practices as the main challenge • Financing Challenges – Limited local funding capacity – Short tenors relative to requirements – High cost of local borrowing – Limited access to international financing there are corruption risks related to local content, in particular in procurement, as experiences show that it has tended to benefit political elites, if not managed transparently. Way forward? need for appropriate government support friendly investment climate, availability of financial resources and the implication of the relevant stakeholders such as the private sector enterprises and the civil society to ensure their commitment to the implementation of the policy. THE END
