Gold Mining : At What Price?
by Patrick Schein
08/05/2012 at 10:57
A recent article on the Swiss village of Medel, which voted against approving a exploration license to tap a gold deposit in the Grisons mountains estimated at 25 tonnes with a market value of some 1,3 billion dollars at current prices, led me to reflect on the real end value of mining for yellow metal and, more generally, on the contribution made by the gold industry to the development of our planet.
The choice between prosperity and quality of life split the population. On one side, there were those in favor of gold mining (one-third of voters), led by the village mayor – interestingly, the recently retired head of a major international audit firm -, who were convinced of the economic benefits for the aging population. On the other, there were those against the plan (two-thirds of voters), who placed the protection of their surrounding environment above all other considerations and who did not want to see an influx of workers from outside their region disturb the quiet idyll of their village of 435 Romansh-speaking inhabitants.
But the real issue at stake here is what actual value gold mining brings. Gold has one particularity that other metals do not: it is easy to get hold of because it is of little use for industry (12% of existing stocks), is locked away in central bank vaults (17% of stocks) and, above all, because it is owned by individuals in the form of jewelry (50% of global stocks) or as an investment (19%). All told, these stocks represent 60 times the volume of gold extracted from mines in 2011, i.e. more than enough to meet the small needs of industry for many years to come.
Whether held in jewelry or as an investment, gold is not a staple commodity. It is not indispensable for our development. While the world would continue to function without gold, you simply cannot transport electricity without copper, build cars without steel or manufacture aircraft without aluminum!
In short, even in those few instances where gold is required, there is no justification for gold mining if it does not contribute to the sustainable and equitable development of our society.
So what motivated the decision of the inhabitants of this small village in the Grisons mountains? Almost certainly, the fact that the negative side effects outweighed the benefits: not only do industrial mining operations cause significant environmental damage (the cost of which is always borne by the population of the producing country), but the value of their actual contribution to society is very limited. Unlike oft decried artisanal mining operations, the mining industry employs little in the way of local labor. Take the example of Newmont Mining which produced over 180 tonnes of gold in 2011 (6.5% of world production) with a market value of over US$10 billion, but only employed 43,000 people.
Moreover, the value created is not shared equitably. In its most recent annual survey, the GFMS gave details of the average cost of producing one ounce of gold in 2011, i.e. when the average annual sales price stood at US$1,572. According to the figures published, the cash cost amounted to US$854 (and even dropped as low as US$590 in South America) and, out of this total cost, mining taxes paid to the states accounted for US$46 and wage costs for US$227. In other words, for every kilo of gold produced worldwide, an average of 29 grams was paid to the producing state in the form of royalties and 144 grams to employees in the mining industry, with 457 grams representing the profit of the mining groups.
Even though certain mining giants have been built up by the financial sector as champions of sustainable development – Newmont is a component stock in the Dow Jones Sustainability World Index (click here) -, their impact on the environment is nothing short of devastating. For every kilo of gold extracted in 2011, the aforecited group emitted 935 kilograms of sulphur dioxide, 28 grams of mercury and 27 tonnes of greenhouse gases (GHG), as well as consuming 2.4 million liters of water and 75 kilograms of tires (click here).
Given this environmental footprint – which is not offset – and the way in which the value created is shared between stakeholders, why would anyone want to have their mountains dug up? In light of these numbers, it is easier to understand why the Swiss villagers vetoed the plan, since it is they and their children who would end up paying the price for mining a metal that is not needed for the development of our planet. As it is a non-renewable resource and since the gold deposit is not ready to disappear, it makes more sense to wait until it can be mined under better conditions …
In my view, there are two prerequisites for ensuring that gold mining is acceptable and promotes truly sustainable development:
1- Minimize and offset any the impact on the environment, i.e. assign a monetary value to the impact and pay this amount to the community, producing country or environmental fund. This compensation for the ecological impact must be over and above mining royalties already paid, which are abnormally low.
2- Share out the value created in a more equitable manner.
The day when we see gold mining have a significant net impact at a local, regional and national level, and when the costs incurred (environmental and production, including the amortization of investments) and value created are divided fairly between the different stakeholders (shareholders, employees, local population), then we will be able to call for a “yes” vote since gold will then be considered as having a genuine value for sustainable development.
Patrick SCHEIN
Gold trader & refiner
