Saturday, March 23, 2013

A New Business Model for Indonesian Mining

Indonesia is endowed with some of the world’s richest mineral, energy and metal reserves including coal, copper, gold, nickel and tin. The state revenues from the exploitation of these resources are close to 35 percent and mining already contributes 12 percent to GDP.

However, most of the operations follow a traditional mining model: these require water, leave huge volumes of waste, consume lots of energy and the trickle down effect for the community is minimal when the mine is operating and non-existent after closure. There is hardly any social capital built up nor do new industries emerge in parallel to the extractive industries resulting in a high economic, environmental and social closure cost.

The Blue Economy methodology has been applied to mining operations in Africa and Latin America. A new business model emerges that addresses the key issues mining companies and governments have been incapable of remediating. As long as a mine is focusing on its core business moving rocks and earth to export ores, then it will be difficult to improve the competitiveness of these companies and the livelihood of the people. If however, the business model shifts from this narrow focus to a broader view, then a portfolio of opportunities emerge — opportunities that not even hard-nosed entrepreneurs could spot.

Imagine the largest gold mine in Colombia, located within the national forest, surrounded by active volcanoes in an earthquake zone. Even the best engineers will admit that securing water supply to the processing plant, creating a tailing dam and building a rock refuse deposit are challenges that require experts to go beyond the obvious. With a proven 35 million ounces deposit, it is still worth the effort even though it will be a costly one. When the Blue Economy methodology is applied, mining engineers were surprised by the pragmatic approach that is summarized as “do more from what you have.”

Today, this mine is emerging as potentially the largest bamboo reforestation project in modern history in Latin America. Bamboo — and its symbiotic plants — not only regenerate water, they filter water. Mining companies carry large land masses on their balance sheet, which are hardly valued since the extraction of ore depletes the resource, and is therefore ending up as an insignificant amount on the asset side. Worse, potential liabilities from mining including closure costs depress any positive value the holdings may have.

However, if the mines make the land available for large scale regeneration of forests, which at the same time replenish top soil, then a large volume of renewable fibers are available. An agreement with one of the world’s leading pulp buyers converts this investment to bring biodiversity back, ensure abundant supply of water for both the community and the industrial operations, and creates a new industry: pulp for paper.

The rock refuse is crushed. If there is something mining companies know how to do then it is crushing rocks. The Colombian mine proposes that rocks are blended with lime stone from a local quarry and recycled plastics to produce tree-free paper. In other words, a mining operation is strengthening the country’s supply of paper, both produced with pulp from bamboo, and from existing products on the local market. Actually, this strategy stimulates demand for recycled plastics by offering a premium price for post-consumer waste generating not only products and value, but also the much needed jobs beyond the typical $5/day wages that often dominate the labor market in and around mining projects.

And this is only the beginning. The tailing dam can be eliminated, all process waste is dewatered, and the solids are used as construction materials, once more blended with cement that now competes head-on with asphalt for road construction.

A well-planned strategy for this mining operation could therefore become an engine of the local economy, generating four times more jobs, introducing products based on renewable resources that emerge from the land made available to the mining company.

Now this is not about the community and jobs only. The new business model for mining reduces capital expenses dramatically. A tailing dam is a lifelong liability that weighs heavily on the valuation of the company and is discounted by shareholders into the share price. This new approach is more than cutting costs, it is about generating more revenues and clustering with companies that one has never worked with before. That translates into brand equity, and higher market valuation.

The new mining model is now a catalyst of the future of the economy: cement, paper, plastics recycling, are as intertwined with mining as is top soil regeneration, biodiversity, removal of exotic species and providing water as a commons. While this is not the mining model in practice today, economists, government and financiers realize that this approach would have a positive effect on the competitiveness of the company, the risks for investors, the revenues for the state and the building of communities while converting mining operations from an excavation to a surgery.

The government could even consider providing tax incentives so that the mining companies are motivated to plan this clustered approach and secure that the impact lasts long beyond their concessions.

Time has come for Indonesia to look beyond giving concessions for mining. The Colombian government, which has been under great pressure from civil society to restrict mining and exert greater controls, has been impressed by the opportunity to shift the business model.

Now if we can take this Blue Economy approach to sectors as diverse as mining and marine resources, what would be the impact if it is now applied to agriculture and industry? A nation with incredible natural wealth and a young population like Indonesia would have a future that without a doubt catapults it into the top-10 nations of the world, while offering a future for its growing population. That is economic development that responds to the needs of the people.

Gunter Pauli has implemented over 100 Blue Economy projects worldwide over the past two decades.

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