COMMENTARY — Mining reform and the role of small miners

The World Bank’s recent study of mining in Latin America has concluded that the open-sector policies and open economies currently in place have succeeded in comparison with the nationalistic policies that were in effect during a good part of the past forty years.

There are clear examples of prosperity resulting from foreign investment in local enterprises; indeed, this would seem to be a “win-win” combination.

The open environment of the 1950s and 1960s, along with the high demand for metals in the post-war years, facilitated the birth of a native mining sub-sector in Latin America. Then came the reforms of the late 1960s and early 1970s, which had a highly nationalistic overtone. This shift resulted in self-imposed constraints on the growth of mining in the region — constraints which were made worse by the scarcity of skilled, modern management and the fact that the industry is capital-intensive. Indeed, these constraints were such that small mining companies often felt trapped in a vicious circle:

Small-scale miners have no economies of scale, so they are more susceptible to financial difficulties than are larger operations. If they are undercapitalized, they try to increase volume, but they lack the managerial experience and skills to accomplish this. They therefore try to save money on exploration. But a small company might borrow money and invest it in a larger plant, only to discover that it has insufficient reserves with high financial charges. This underscores the fact that the small company has no economies of scale, and the circle starts all over again.

The only way to escape the circle is through modern, managerial reform. The goals of management should be to:

* remove self-imposed restraints;

* modify equipment; and

* protect the local environment.

By adopting such a managerial approach, small mining companies will have a better chance of encouraging investors to provide fresh capital, thereby sustaining growth in the industry. The end result will be an increase in the availability of non-subsidized, market-based credit, and in the availability of modern technology.

— Felix Remy is a senior industrial mining specialist with The World Bank. This commentary is from a presentation made at the recent “Investing in the Americas” conference held in Miami, Fla.