Saturday, April 27, 2013

Historical and Modern Government Responses to Artisanal and Small Scale Gold Mining


Modified from: Telmer K. and Persaud A. (2013) Historical and Modern Government Responses to Artisanal and Small Scale Gold Mining. Rocky Mountain Mineral Law Foundation (RMMLF) and the International Bar Association, Special Institute on International Mining and Oil & Gas Law, Development, and Investment, Cartagena, Colombia, April 22-24, 2013.

Summary
Artisanal and Small Scale Gold Mining (ASGM) is an industry that has existed for millennia. But the most important periods (simply by production volume) are the two phases: (1) the 19th century gold rushes - roughly 1849 to 1929 (80 years), and (2) the modern ongoing gold rush – roughly 1970 to present with a big kick in 1980, (40 years and continuing). The earlier phase primarily took place in English or former English colonies described as “liberal democracies”[1] (US, Canada, Australia, New Zealand, and South Africa) and played a key role in the economic development and the evolution of governance systems in these countries. The modern gold rush is occurring more broadly geographically – in at least 70 countries – and in developing countries with a more diverse political history than those that were involved in the 19th century rush, but that have in common high rates of rural poverty.

A key similarity and driver behind ASGM for both the historical and modern context is the opportunity for relatively high incomes and conditions that allow laymen to directly participate in acquiring a share of the wealth – contrary to many rural agricultural opportunities. A key difference is how governments have responded. Government response to the earlier phase was characterized by support, provision of services, encouragement, and the development of laws and law enforcement mechanisms to protect and grow the sector towards “good behavior” congruent with the development of those emerging societies. Re-investment in the mining sector to support modernization and diversification was also a hallmark of the 19th century gold rushes. To a significant degree, the past behavior of those countries towards their historical informal mining sectors has led them to become the current leaders in the formal modern mining sector (referred to as the Large Scale Mining industry or LSM).

Government response towards the modern phase of ASGM has been dominantly characterized by marginalization, criminalization, and the attempted application of laws dominantly borrowed from the modern industrialized mining sector – laws that evolved out of the earlier gold rushes but that do not now easily support the development of the modern ASGM sector. The recognition that the modern ASGM sector will be a permanent feature of the modern mining industry for the foreseeable future and its important role in economic development is now firm[2]. It is recognized as a tremendous domestic development opportunity. However, today government response is still largely falling behind on actively developing the ASGM sector in a clear and robust manner. An indicator of this is the paucity of LSM-ASM collaborations. The lack of collaboration is not a technical one but often driven by complex legalities that leave the parties in a state of paralysis with respect to the rate of change possible to address key barriers. At this point in time we are 40 years into the modern gold rush. If it lasts 80 years like the 19th century rush, that leaves 40 years to have at least as good  an outcome. If that is to happen, legal reform will play a big role in providing the access to capital and technological upgrades that can create a small scale gold sector that can comply with modern mining and environmental codes and due diligence initiatives.

Introduction
Gold production over the last 6000 years has been between 157,000 and 180,000 tonnes with about 80% of that remaining in existence and the balance lost in the sea[3],[4]. But 90% of all gold is estimated to have been produced since the California Gold rush in 1949 – the last 160 years. This was accomplished in 4 sub-cycles with 2001 theorized to be the year of peak gold production at 2,600 tonnes, according to a Hubert Style production cycle[5]. Analyses of the shape of the 4th and current sub-cycle predict 1,600 tonnes production in 2018 or 780 tonnes in 2026 for this 4th sub-cycle. Future smaller sub-cycles could occur but the total possible cumulative production is predicted to be between 230,000 and 280,000 tonnes, unless another supergiant goldfield like the Witwatersrand of South Africa is discovered4. However,, the role of ASGM has never been exclusively considered. They have existed before and will exist after most industrial mine sites. For example, many Latin American countries have communities that have been mining gold for 100 years, and with more modern approaches for 25 years, but a medium scale modern industrial mine may have a life expectancy of just 10 years in the same concession. So ASGM precedes and will outlast LSM in a significant number of concessions globally. This puts forth reasonable suspicion that an an unappreciated and poorly understood part of the earth’s gold endowment is the ASGM endowment. In some cases, ASGM can exploit deposits of just 100g per year – roughly $5000/y – still a fortune for many in the rural economies of the developing world.
“The numbers say that the last gold mine will be an artisanal gold mine”
Artisanal and Small-scale Gold Mining (ASGM) involves mineral extraction using manual labor and rudimentary tools. It requires low investment and little infrastructure. It may be a full time occupation, seasonal, or may provide a supplementary income. It can be a coping mechanism when other livelihoods fail or a preferential livelihood which surpasses other opportunities. Activities may fluctuate with commodity prices with high prices making mining more rewarding. Relative to developed world incomes, and incomes of the middle class in developing countries, incomes in ASGM are moderate to low for most individuals, but for those individuals, incomes are relatively high compared to alternatives. Frequently five times the value of alternatives. This is a transformative level of income growth according to Hans Rosling’s Dollar Street[6]
ASGM is a not simply a low capital method of mining but also an important gold supply chain and secondary economy. It is a gold-based socio-economic system that includes miners, security (police, military, and sometimes mafia), retail merchants, health providers, gold shops, gold refiners, financiers, claim holders, and many other service providers. Conservatively, the secondary economy around ASGM communities is five times the value of the gold produced. Globally, this amounts to about 100 billion dollars in 2012. The community that surrounds ASGM typically becomes increasingly entrenched, more sophisticated and grows in size and diversity over time, to include locals, foreigners, a multitude of institutes and businesses, national, regional, and local government officials, and others. An ASGM community can be formal, informal, legal, illegal, and extra-legal – a term used by Hernando de Soto[7] (The Mystery of Capital) in his discussion of informal economies where people cannot access capital because of missing information (he calls it dead capital) – essentially a lack of legal status or extra-legal.

While Gold mining in the developed world has shifted towards Large-Scale Mining (LSM) since the 1930s (the last 80 years), the industry and its champions was founded on the previous 80 years of Artisanal Mining from 1849 to 1929 in what Fetherling[8] calls the liberal democracies of the time (Canada, U.S., Australia, New Zealand, South Africa – with some caveats and an explanation of what happened in South Africa). In other words the modern mining industry was essentially launched by ASGM. How this “Early Modern Phase” – the 19th century gold rushes – effectively transitioned into a formalized, legal gold mining sector and how that compares to the “modern phase” of gold mining is an important question.

Modern ASGM
Modern ASGM essentially began once the gold standard was eliminated by President Nixon in 1971 and the price of gold skyrocketed from $35/oz to $800/oz in 8 years, peaking in early 1980 (see Figure 1). The initiation of the modern ASGM sector is perhaps marked by, and best exemplified by, the site of Serra Pelada (the naked Hill) in Brazil where perhaps 100,000 of the rural poor left their jobs on sugar cane plantations and worked square meter plots in a vast pit serviced by wooden ladders – it could be called a ground zero for the modern gold rush. 

Figure 1: Serra Pelada. Brazil, 1980
This cohort of miners then participated in leading the wave of artisanal gold mining in other parts of Brazil and in other countries in the Amazon basin over the next decades and until today. Serra Pelada was described as chaos but can also be viewed as a remarkable feat of rapid community self-organization in the absence of any significant government presence. Since then the modern ASGM sector has not stopped. Even through the relatively low gold prices in the 1990s, ASGM continued to flourish and is now, in part due to the elevated prices of gold that have been present since the 1970s and part due to the recent increase in gold price that occurred throughout the first decade of the 21st century. It is in an expansion phase and is providing a better opportunity for upward mobility than many alternatives in the developed world. More people are mining gold today than at any time in History. How this opportunity and its wealth are seized or squandered varies, and is another aspect that is shared with the 19th century gold rushes. How to make the best out of the artisanal gold sector’s opportunities is a priority area of focus for a growing number of intervention programs.  History provide us with some useful lessons.

Despite some of its significant negative impacts, ASGM is recognized as an extremely important rural livelihood[9],[10]. In gold alone, it is estimated that ASM employs 10 to 15 million people worldwide, and indirectly supports more than 100 million people. Conservative estimates suggest that artisanal and small-scale gold mining (ASGM) accounts for ~ 15% of the world’s gold production or about 400 tonnes per annum[11] however a recent estimate puts it as high as 25% of annual production[12]. Using 15% and 400 tonnes, the value of annual ASGM production for 2012 at the average price of $1670 USD/ozt is around US$ 21 billion. Because gold is so easy to valuate, the price obtained by miners in remote areas is rarely below 70% of the international spot price and often greater than 80%. ASGM therefore injects roughly 17 billion dollars directly into rural communities annually and this equates to about 100 billion when the secondary economy is considered. Due to demographic trends, continued growth in ASGM is likely.


ASGM injects roughly 20 billion dollars directly and 100 billion total into rural communities annually

Modern ASGM is often carried out informally or illegally and frequently occurs in association with activities such as tax evasion and smuggling, and sometimes can involve serious conflict[13]. There are a range of negative social and environmental impacts associated with ASGM including migration, family abandonment, substance abuse, sex trade, child labor, uncontrolled use of explosives, water pollution, deforestation, and uncontrolled and highly polluting mercury use. One of the key negative aspects of ASGM attracting international attention is the uncontrolled use of toxic mercury. Mercury amalgamation is currently the most commonly used method to extract gold in ASGM for a variety of reasons: it is a cheap, easy, quick, relatively effective recovery method which can be used by a single person in sites where there is little technology or infrastructure, capital investment is minimal compared to other methods and start up time can be days rather than years. Mercury is usually very easily purchased and is relatively cheap (around 0.1% of revenue from the gold produced); and miners often do not know about the health effects, alternatives, nor have the capital to invest in them.

ASGM is now recognized as the single largest source of anthropogenic mercury released to the environment in the world surpassing coal[14]. UNEP (2013 Global Mercury Assessment) estimates that ASGM released roughly 1,600 tonnes of mercury to the environment in 2012, with 45% of that going directly to the atmosphere and the remainder entering local waterways and soils where it may be later released or cause persistent contamination for centuries. The different ways in which mercury is used leads to a variety of intensities of mercury use per unit of gold produced. One mercury intensive worst practice is called whole ore amalgamation where 100% of the ore mined is brought into contact with mercury.  Another is when mercury contaminated materials are subsequently treated with cyanide – this is done to extract more gold but also re-mobilizes the mercury in more toxic forms into the environment. The text of the Minamata Convention on Mercury, which was adopted by delegates from over 140 countries on January 19, 2013, recognizes these as worst practices.

This Convention aims to have significant impacts on the availability, trade, use and discharge of mercury worldwide. The Convention calls for the preparation and implementation of National Action Plans (NAP) (Article 7) and outlines the mandatory and recommended measures that a NAP must contain (Appendix on ASGM). One recommended measure to reduce and where feasible eliminate mercury is to formalize ASGM through access to training, credit and cleaner technologies. This is included in the treaty because it is recognized that without alternative practices, the instrument could criminalize miners forcing them to buy mercury in illegal markets and leaving them even more vulnerable to criminal networks that control parts of the mercury and gold trade.

The same unintended consequences are recognized by the proponents of those parts of the Dodd Frank Act (Section 1502) that requires guarantees that minerals exported from the DRC are not funding armed conflict, and the Due Diligence Guidance developed and adopted by the OECD[15] for tin, tantalum, tungsten, and gold produced in areas of conflict or “high risk”. The definition of “high risk” used by the OECD is currently being finalized by the Geneva Academy but the working definition that has been used in 2012 places most ASGM communities in the world in a situation where adequate due diligence will be required in order for them to participate in the formal gold supply chain. Somewhat obviously, they are the least able to comply setting up either the largest formalization process in gold in centuries or a growing black market or other impacts.

Although this is by no means an exhaustive description, it is clear artisanal and small scale gold mining in the modern world, although it is practiced in the field in almost the same manner as it was historically, has become vastly more complicated beyond the field level (downstream). A comparison of the outcomes of the 19th century gold rush and the trajectory of the current one, suggest that in order to have at least as good an outcome (or an even better one), there will need to be innovation, assistance, and a continuing change of policy from governments and the private sector in order for artisanal miners to use the wealth they generate for development as it was used in the 19th century rushes.

Historical ASGM
The 19th century gold rushes began essentially with the California rush in 1849, and continued until 1929 with ups and downs in the U.S., Canada, Australia, New Zealand, and South Africa. By the late 19th century there was already a pattern in all of these countries, of Artisanal and Small-Scale miners grouping into larger companies[16]. The gradual shift into larger, organized groups of miners and eventual industrialization came both as a response to organizational and technological necessity and government policies. In Australia in the late 1800’s for example, the need to pool resources in order to purchase modern equipment led to increased levels of organization and industrialization and this was paralleled by higher licensing fees.[17]

To varying degree legal reforms surrounding the ASGM sector in the 19th century both followed and drove its development, organization, and growth. The first comprehensive mining law passed in the U.S. in 1866 favoured larger groupings of miners or corporations,[18] and by doing so implicitly nudged the sector and individual miners towards formalization and growth. However, the miners were already, to a large degree, organized, and were formalized within an informal framework that they were running. The reason that the 1866 General Mining Law in the U.S. was successful was that even though it supported industrialization and larger groupings of miners, it was also designed to support and strengthen the extra legal arrangements and contracts that were already in place and had been negotiated over the last 20 or so years by informal ASGM miners.[19]

In order to drive investment and industrialization of the mining sector, the government needed to create a uniform set of rules and clear legal assurances to capitalists, but any statute needed also to take into account the extra legal contracts already formed by miners for it to be functional and respected. In 1861, in the case of Gore V. Breyer a Justice of the California Supreme Court upheld the legitimacy of ASGM miner’s extra legal arrangements.[20]

Past V. Present
In comparing the 19th century gold rushes to those of today one obvious difference is that they occurred when there was little to no industrial gold mining in the “new world” whereas present day ASGM is occurring alongside a very well developed industrial gold sector which has mature governance systems, ones that may have grown out of the historical gold rushes but that are now distant from those roots and employed for very different circumstances and conditions. Elements like massive capital investment, lengthy negotiations, highly educated personnel and long time-scales to bring mines from discovery to production are the norm for the modern industrial gold mining sector. These modern systems are simply not feasible for ASGM which has little access to capital and a great need to generate income on a very immediate basis. But developed countries have not looked to the roots of their domestic mining acitivities as much as they have the strict governance regimes of the developing countries.  Essentially the developing countries have tried to leapfrog the development context that occurred during the 19th century and this has unintentionally caused a significant barrier for ASGM to evolve capacities and systems that would allow them to easily be a formal part of the modern mining sector.

Mining codes for countries such as Senegal, Mali, Burkina Faso, Ghana, and others, do now include adaptations to include ASGM but in most cases these did not naturally grow out of the small scale sector but rather have been inserted as remedial measures to make up for the gaps that are recognized. No attempts were made in 19th century rushes to limit the scale of the mining, rather the opposite, it was encouraged and capital brought in to upscale and industrialize it and this happened in concert with the increased regulation, formalization, and governance.

Therefore the current dilemma is to increase regulation, formalization, and governance without limiting the development opportunity but also with limitations on the scope of sector that recognizes new criteria like ecosystem integrity.

Canada, circa 1890

Brazil, circa 1990
Both then and now governments are encouraging ASGM miners to organize into larger groups and formalize, but the difference lies in the steps being taken to make this happen. Governments of the 19th century quickly recognized that hard-handed approaches and top down bureaucratic requirements were not functional for the hundreds of thousands of extra legal ASGM miners[21]. They therefore took the steps to incorporate pre-existing extra legal arrangements and contracts into formal legal code, while at the same time provided important services to support the formalization and development of the sector. Infrastructure was developed such as railways, and police were often deployed to ensure the safety and security of miners (water rationing, adequate supplies). In New Zealand the government played the role of ensuring that service providers, such as supply trains, were not extorting miners.[22] These essentially were expansionist policies to grow a more equitable and sustainable sector. 

In the 19th century ASGM, the government experimented with different ways of gaining from gold mining, as much as possible without hampering the rights and inherent individual economic liberalism that the activity represented. In order to control the sector, in places like Australia, licensing fees were put into place, which quickly became a common source of conflict between miners and governments. Duties and royalties also were a way for government to benefit from and control the mining, but it took various attempts and many miner upheavals for governments to find the right balance.[23] Taxes on gold in Canada were not introduced until 1897, starting at 20% of all gold produced. This rate was quickly reduced to 10% with a $5000 dollar exemption as a result of protest and a rapid growth in the informal supply chain.[24] At the Klondike it was believed that only 1 in every 10 ounces were being declared officially due to high royalty fees on production.[25] Today, in a country like Burkina Faso, it is estimated that 1 in every 45 ounces are declared officially, for much the same reasons. Various solutions were attempted, one approach was a tax at the point of export rather than at the point of production (Ibid.,62), a policy designed to assist miners in the field while limiting capital flight. However, this was also recognized as only partially successful at best and ultimately these policies evolved towards those in practice today in countries like Canada – a free market for gold, negotiated royalties, corporate taxes, and increased tax revenues for governments from the secondary economy that surrounds mining. In the context of ASM if this model is applied, tax revenues would predominantly come from the last category – the secondary economy.

Governments of the 19th century, aware that the only way of mitigating losses would be formalization, took the necessary steps to make that happen. In large part, this meant reducing or eliminating the bureaucratic impediments to licensing and formalization. By 1899 in the Klondike for example, steps were taken to reduce corruption and preferential treatment surrounding the filing of claims in the office of the recorder[26]. The formalization processes for ASGM miners today in many developing countries have largely failed to learn from this past experience. In Senegal for example, the fee to register an artisanal concession costs approximately $3000 USD - a price far out of the reach of most ASGM miners in Senegal. The costs to legally buy or sell gold in Burkina Faso can be more than $20, 000 USD[27].

An idea of the complexity of formalizing an informal mining operation can be at least partially understood by looking at other sectors where similar investigations of informal economies have been undertaken. In the Philippines, for example, the procedure to formalize urban property (an informal shack in an urban slum) takes 168 steps and between 16-25 years.[28] Currently, in the departmento of Arequipa, Peru, it is estimated that if half of registered ASGM miners (which are a smaller subset of the real total) were to go forward with the recommended procedures to formalize, the government would require three years to process them. Few are willing or capable of waiting that long. 

Lurking Paradox
While the 19th century governments were able to recognize the importance of the sector for economic growth and diversification and subsequently evolve and develop the ASGM sector into a thriving, formalized, industrial sector by involving the miners and their innovations in policy reform, the modern phase has been dominantly paralyzed by a top down approach that attempts to impose a foreign system of strict mining codes on the ASGM sector without recognizing the value of the functional system that already exists within the sector. This is not surprising with the ASGM superimposed on what is viewed as a more desirable highly formalized and developed LSM sector. It is difficult for governments in developing countries to recognize the value of the ASGM sector when it is mostly informal, undocumented, shrouded and poorly understood, and therefore in stark contrast to the LSM sector. Governments may look to the successful Western economies as examples, and see large scale industrialization as a key to development. It is undoubtedly a part of it. However, it is worth reflecting upon that the industrialized mining sectors of Western economies today were a gradual outgrowth of a thriving ASGM sector in the past.

When technological capacities, legal conditions including environmental rules and due diligence requirements, are considered, one possible logical pathway for the evolution of the ASGM sector will be to register and improve productivity with cheap high efficiency gravimetric systems – chemical free – combined with a tailings collection and processing system, one that is more centralized so that it can meet the very high environmental standards of cyanide use – like the LSM sector. A so called “win win” situation. The legal process however needs to work on policy that would allow this type of synergy to occur by lowering barriers for LSM-ASM cooperation to occur. Peaceful collaboration with the ASGM community should lower a company’s risk register. The IFC published a tool to evaluate the net present value of a sustainability investment and showed it to be profitable on short time scales[29].



[1] Featherling D. (1988) The Gold Crusades, A Social History of Gold Rushes 1849-1929. MacMillan, Toronto, pp. 250.
[2] ICMM, World Bank, International Finance Comission (2010) Working Together; How large-scale mining can engage with artisanal and small-scale miners.
[3] George M.W. (2007) Minerals Yearbook Gold; pp. 31; minerals.usgs.gov/minerals/pubs/commodity/gold/myb1-2007-gold.pdf
[4] Frimmel H.E. (2008) Earth's continental crustal gold endowment. Earth and Planetary Science Letters, vol. 267, pp. 45-55.
[5] Müller J., and Frimmel H.E. (2010) Numerical Analysis of Historic Gold Production Cycles and Implications for Future Sub-Cycles. The Open Geology Journal, v 4, p. 29-34
[7] De Soto, H. (2000) The Mystery of Capital, Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books, New York.
[8] Featherling D. (1988) The Gold Crusades, A Social History of Gold Rushes 1849-1929. MacMillan, Toronto, pp. 250.
[9] OECD Supplement on Gold (2013) Suggested measures to create economic and development opportunities for artisanal and small-scale miners
[10] ICMM, World Bank, International Finance Comission (2010) Working Together; How large-scale mining can engage with artisanal and small-scale miners.
[11] www.mercurywatch.org
[12] Buxton, A. 2013. Responding to the challenge of artisanal and small-scale mining, how can
knowledge networks help? IIED, London.
[13] Federal Register, Securities and Exchange Commission, Conflict Minerals: Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1502 of U.S. Dodd Frank Act requires U.S. listed companies to
disclose whether they use “conflict minerals” (tin, tungsten, tantalum and gold) and whether these minerals originate in the Democratic Republic of the Congo or an adjoining country. The section is intended to address the concern conflict minerals originating in the Democratic Republic of the Congo and adjoining countries (together called ‘DRC countries’) is helping to finance violent conflict.
[14] UNEP (2013) Global Mercury Assessment 2013; Sources, Emissions, Releases, and Environmental Transport. Division of Technology, Industry and Economics (DTIE), Chemicals Branch, Geneva, Switzerland, January, 2013.
[16] Fetherling, Douglas. The Gold Crusades: A Social History of Gold Rushes, 1849-1929. Toronto: University of Toronto, 1997. 4
[17] Ibid., 62
[18] Ibid., 160
[19] Soto, Hernando De. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic, 2000. 146
[20] Ibid., 144
[21] Fetherling, Douglas. The Gold Crusades: A Social History of Gold Rushes, 1849-1929. Toronto: University of Toronto, 1997, 158
[22] Ibid., 79
[23] Ibid., 62
[24] Ibid., 157
[25] Ibid., 8
[26] Ibid., 154
[27] Artisanal Gold Council, 2012
[28] Soto, Hernando De. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic, 2000. 22
[29] Nyhan Jones, V., Lukic J., Bhalla A., and Tapiero D. (2011) Measuring returns on community investments in