Managing partner at denkstatt Bulgaria
It is best if the profits of mining conglomerates are invested into new extraction projects
“The collapse of foreign investments is total” according to the chamber of commerce. Similar titles have been sweeping the media landscape like avalanches during the last days, but we encounter them on a yearly basis – we complain that there are no investments in our economy, especially in the heavy industry sector. Forget about the factories that assemble all sorts of things for a moment and try to remember when was the last time someone created an industrial complex for processing the raw materials we produce. I can only recall the “Astra bioplant” biodiesel refinery near Ruse, which was built with the help of subsidies, and the “AES Galabovo” power plant that replaced the two Kozloduy nuclear reactors that were shut down as a cost of entry into the EU (which we will be paying off for a long time to come). All of the remaining investments have been channeled into existing operations that survived after the 90’s.
On the other hand, I regularly encounter the claim that the mining business is “pillaging” our country by making exorbitant profits from the extraction and export of our resources. This belief is so widespread that it is used as a universal means of winning votes during elections, and virtually every politician uses it at one point or another during their career.
For a decade now the global market prices for copper have been high enough to allow the large Bulgarian mining companies such as “Ellatzite Med”, “Asarel-Medet” and “DPM Chelopech” to make significant profits. In 2017 alone they generated about 250 million levs in profits – the total sum for the decade is very high. So it is worth considering what exactly we want mining companies to do with their profits in a country where private property is protected and can’t be simply confiscated.
Of course, the profits in question are only possible due to the large initial investments, a large part of which end up back into the extraction process where the increased efficiency, unique know-how and tireless labor of miners turn those investments into more profits. But this isn’t the theme of the text.
The question I pose is: What is the most sustainable investment of this money from the point of view of the long-term wellbeing of the Bulgarian economy and society?
I see the following seven options:
1.To distribute large dividends
This already happens. For some this means buying expensive cars, yachts, villas, caviar and champagne. For most people “Ellatzite Med” and “Asarel-Medet”, for example, have over 4000 small shareholders – the money they receive from their shares equals, and in some cases comes out to more than their salaries or pensions. However, the distribution of large parts of the profit is not a good working strategy for capital-intensive industries because it erodes their ability to compete, and no one would do it if they had their own survival and best interest in mind.
2. To increase their concessionary fees
This is the most commonly accepted position of the Bulgarian people and the dream of politicians and the administration. What prevents this from happening are the privatization contracts and the simple fact that mines in Bulgaria are taxed at a higher level than the world average, and if their regulatory expenses were to increase, many of them could go bankrupt from the slightest market changes. This is especially true when we consider the fact that our ore deposits are poor compared to other countries. Another important point to consider is that more money going into the pockets of the administration and/or politicians does not mean that the people will benefit in any way. In fact, we can be certain that particular individuals will be the sole beneficiaries at the expense of increased teacher salaries or the rehabilitation of old contaminated sites.
3. To give the money for corporate social responsibility initiatives
Companies can give away more of their profits to various causes – for homeless children, sports clubs and events, dancing ensembles, theatres, schools, kitchens for the poor, environmental protection projects and many other things you can surely imagine. This is fine, but they already do this – mining companies are among the most charitable in the country. Practically everything in the “Srednogorie” region happens with their support. Dundee Precious Metals even supports the national team for rhythmic gymnastics. There is nothing bad about this, but in the long term there is a risk of creating very warped relations where particular people come to expect monetary support for free, without providing any sort of return.
4. To invest their money into the wellbeing of the municipalities where they operate
They can help to finance infrastructure projects in the municipalities where they work – creating and maintaining roadways, bridges, gasification pipes, water mains and sewers, snow ploughing, hospitals, etc. This is something that mining companies already do with their own equipment and workers. In addition, it’s important to remember that 50% of the concessionary fees they pay stay in the municipalities. Mayors use this money to attract additional funding and are able to invest in whatever projects they choose. This is why Chelopech, Chavdar and Panagyurishte are always among the top 10 richest, financially stable and well governed municipalities in the country. There simply isn’t much more value that can be added using these means.
5. To create other businesses
They can invest their money into developing other businesses – hospitals, tourism and hotels, agriculture, hunting lodges, explosive chemicals, transport, construction and others. “Ellatzite Med” and “Asarel-Medet” are classical examples – they do all of the above. There is a serious issue with this approach: do the managers of the mining companies know enough about other business sectors to be successful in their ventures so as to not lose their money? They know how to find, extract and process – this is how they can best add value and it would be wise to stick to it. I don’t think that this approach is viable in the long-term.
6. To invest in foreign projects
They can invest in mining or metallurgical projects in foreign countries. They already do this because money doesn’t sit still – when something here gets in their way, they look for other investment destinations. What benefits do the Bulgarian people see from this approach? Are new jobs created, tax revenues collected or any of the other mentioned benefits gained? Not really. I don’t like these investments because they lead to other people reaping the benefits from the extraction of our resources.
7. To invest in finding new deposts and developing new projects in Bulgaria that can continue providing us with the benefits outlined above
Bingo! This is what they are doing, or trying to do. Dundee Precious Metals is investing their profits from the Chelopech mine into the future of Krumovgrad – this is actually the only significant unsubsidized investment into the heavy industry sector in decades. In Chelopech, the company continues to find and prove the existence of new deposits. Asarel-Medet is investing into the expansion of Breznik, Tran, and many other sites. This is the only way for their money to stay here and continue working for our economy.
Sustainable development is an integral part of the mining business because its competitiveness and ability to provide all of the benefits mentioned above in the long-term depend on two main factors: low production costs and long-term stock supply. The first applies to all businesses and I already commented on it. The second point, however, is very important but unfortunately our society doesn’t understand it and more frequently tries to block companies in their attempts to invest their profits in our country.
Practice shows that mines start operating with 10-20-year proven deposits at a particular rate of exploitation. Over time they invest in prospecting efforts that lead to serious extensions of the mines’ lifespans in 90% of cases. For example, the copper processing plant “Medet” opened in 1964 with a yearly mining rate of 8 million tons of ore. After 1984 its rate of extraction began to decline leading to its 1994 shutdown. This leads us to the following key questions:
What would be the fate of the company, the Panagyurishte region and thousands of families if the company had not invested in prospecting, researching and developing the Asarel deposit?
Would the largest exporter in our economy, Aurubis Bulgaria (formerly MDK Pirdop), have been successfully privatized?
The answer is simple: we would be poorer because the “industrial heart” of Bulgaria would not be beating.
The Asarel mine has been operational since 1976. No one at that time would have believed that it would still be operational in 2018 and with an annual yield of 13 million tons of ore. Today Asarel Medet owns several additional sites and sees as least another 35 years of operations ahead of them – in other words they have increased the natural capital of the company and that of society as well. They have achieved this because they invested their profits in the right place – securing the future of the company, the municipality and the country. This is why investments directed at prospecting and developing new sites in Bulgaria are the highest form of corporate social responsibility on part of the mining companies, and if their “absurdly high” profits are invested in this way we can only be thankful.
This is exactly what we should want and expect from them!
This article was published in Capital.