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Finance strategies

These new investment strategies are linked to new finance policies. Mining and industrial enterprises used to finance their mining investments through the ploughing back of profits or recourse to the financial market. Until the early 1960s, the financing of mining investments was based in a proportion of 70% on internal funds with the remainder from borrowing, usually on the bond market. During the 1970s the proportion was reversed, and borrowing, especially in the form of bank credits, accounted for the main part of investment financing. Table 6.1, for example, illustrates the share of credit in some of the most important mining projects of the recent period in the Third World:

Table 6.1 Credit shares in Third World mining projects (%)

Samarco Mineracao (Brazil) 80
Falconbridge Dominicana (Dominican Republic) 73
Bougainville (Papua New Guinea) 72
Cuajone (Peru) 63
Tenke-Fungurume (Zaire) 64
Boke (Guinea) 87

Source: Internal documents of firms.

The growing recourse to borrowing means an increased reliance on bank credits and commercial loans rather than on the issuing of bonds. This new financial policy on the part of the mining and industrial enterprises is particularly visible in Africa. Thus, for example, the investment programme embarked upon by the Belgian Union Minière for the Gecamines company in Zaire, is half funded by external bank credit, largely from the World Bank. In spite of loans amounting to $200 million, this programme has not been implemented due to the world copper industry crisis. The Guelbs project in Mauritania is financed mainly by Arab and European bank credits and by loans from the French Caisse Centrale de Cooperation. A third of the Mount Klahoyo project is financed by funds brought by the foreign investors involved and two-thirds by commercial and bank credits.

The growing recourse to bank and commercial credit is sometimes explained by a supposed decrease in the profit of mining enterprises, but this is questionable. It is true that for the mining enterprises of developed countries the ratio of indebtedness to internal funds has increased markedly in the recent period, for example, in a sample of ten US mining companies, it increased from 9% in 1965 to more than 64% in 1975. This evolution does not, however, necessarily reflect a deterioration of these companies' profit position. The growing recourse to bank credit for investment financing is not specific to the mining industry but can be observed for all sectors of the capitalist economies today. It stems both from new behaviour on the part of enterprises in a context of strong inflation, and the growing involvement of bank capital in industry. It has been estimated that the average profit rate of the mining groups decreased from 14% to 8% between 1966 and 1972, but according to the Financial Times the general profit rate for all enterprises was about 6% in 1972 in the USA and in Japan. According to other sources, for the period 1969-73, the profit rates of the mining firms which were classified among the top 200 US enterprises were much higher than those of the non-mining companies; the profits usually made by mining enterprises in Third World countries were still higher. According to the US Bureau of Mines, the average return of US firms' foreign mining investments was around 10-15%, but in South America it was more than 25% during the 1950s and 1960s. Lastly, most of the mining groups have resisted the crisis of the 1970s much better than the steel enterprises, for example. It was only during the early 1980s that big mining concerns like Amax, International Nickel, Rio Tinto Zinc, Kennecott and Anaconda and the big aluminium firms began to run deficits; even then, half of the 20 biggest Western mining enterprises did not run any deficit.

The growing recourse to borrowing in the mining sector has, in fact, been largely determined by the increase in production scales and the corresponding financial requirements. The average size of investment projects exceeds, in most cases, the financial capacity of the investors. In the early 1970s, the amount of an average mining investment already reached several hundred million dollars. Projects such as those for copper in Bougainville (Papua New Guinea), or Cuajone (Peru) for iron ore in Carajas (Brazil), for bauxite in Boke (Guinea) and for uranium in Rossing (Namibia) are giants by comparison with the usual sizes in the past. Moreover, the value of equipment increased with inflation until the early 1980s. For example, the price index for mining equipment increased by 70% between 1969 and 1976; and finally, the reduction in the metal content of the ores made extraction more costly. It is true that the Third World fields are usually of a higher grade but the difference can easily be compensated for by the higher overhead costs.

For all these reasons, mining investment has become highly capital intensive and, on average, the value of the equipment necessary for metal production is equivalent to three or four yearly turnovers, while the ratio of fixed capital investment to sales is 1:1 in the manufacturing industry. Between 1970 and 1977, the average capital cost for each ton of production capacity, in developed countries, rose from $420 to $1,200 for steel, from $2,500 to $6,000 for copper and from $1,100 to $3,500 for bauxite. Investment costs have increased even more in the Third World. The investment required for an iron mine of 10 to 15 million tons capacity varies between $300 million and $800 million for the African projects, while for copper, the required financing for a capacity of 150,000 tons of metal is about one billion dollars.

Borrowing means, of course, an involvement of developed countries' big banks in mining investment. Bank credit is usually granted on the condition that the profitability of the investment project must be guaranteed by the big mining or industrial enterprises of the West and Japan. Such a guarantee is obviously given only if these enterprises are directly or indirectly managing the project. The big banks have adduced the supposedly higher risk of Third World mining investments to impose upon local states very stringent loan conditions and the direct involvement of Western enterprises in the project's management. Several studies have shown that the loss rate is higher for domestic than for international loans. Thus, for example, between 1961 and 1971, the six biggest US banks lost 0.06% on their foreign loans but 0.18% on their domestic ones.

Likewise, the main Western financing agencies very often request mining transnationals' guarantee to finance the building of the necessary infrastructural facilities. Thus the World Bank and the IDA loans for financing the infrastructures of the Boke bauxite project were guaranteed by the aluminium 'majors' directly involved in the project. They guaranteed to commit themselves to pay for the infrastructural costs in excess of the loans and to ensure the debt service in case of default by the company running the mine. By contrast, the Zambian state holding company Zimco was refused access to the international capital market. It has been granted some loans, but for only small amounts and under very strict conditions.

The big Western banks' growing intervention in mining financing in Africa and the Third World in general is paralleled by a growing involvement of the Western states in the development of mining production. This involvement can be seen in the mechanisms set up to guarantee Western private mining investments in the Third World, and even more in the commitment of the national agencies for export credits, such as the Eximbank in the USA, the French Bank for Foreign Trade, the Kreditanstalt in West Germany and the ECGD in Britain. Export credits are granted by these state agencies to finance the export of mining equipment to the Third World. These credits represent, as we have seen, a large part of the financing of mining investments. For example, British export credits represented $41 million out of a total external financing of $71 million for the recent expansion of the Zambian mine of Chambisi.

Investment financing in Africa, therefore, involves three main operators, the big mining and industrial enterprises, the big Western banks and the governments of the advanced capitalist countries. Each category has its own strategy, that is, its own aims and means. The mining groups seek to control the African mineral sector and to reap the exceptionally high benefits and rents that accrue due to higher grade ores and the underpricing of land and labour. The industrial enterprises are mainly interested in a backward integration which enhances their competitiveness on the international markets. Big banks from the US, Europe and Japan are seeking profitable investments for the funds they centralize and which have increased with the Euro-dollar market. As for the governments of developed countries, they are concerned with the security of their mineral supplies as well as with the opening of external outlets for their equipment industries.

All these operators agree, however, on the central objective of the control of the development of the African mineral sector, and this common objective helps to explain why co-operation has become so important between the enterprises, the banks and the governments within the framework of a partnership between the main capitalist centres of the world. Such cooperation, which is particularly visible in the financing of mining investment in Africa, is facilitated, in many cases, by the close financial or structural links between the big mining and industrial concerns and the big banks, notably in the USA, France and Japan. But it is mainly based on insurance mechanisms which rest on the economic, financial, political and military power of the Western states.

The big enterprises that command the mining investment guarantee the bank loans which, in turn, guarantee the financial credibility of the investors. At the same time, the investments of the enterprises and the loans of the banks are guaranteed by their respective states. And, as the last guarantee is given by the state, co-operation between firms and banks of different advanced countries means co-operation between the main Western states, in view of the control of mining development in Africa.

The declining trend of Western groups' mining investments in the Third World which can be observed from the mid-1970s must be interpreted within the context of these new financing strategies.

First, as a share of total foreign investments, the mining investments of advanced capitalist countries declined. In 1980, mining assets represented 3% of US foreign investments against 6% in 1970, and the same trend is true for the other developed countries. Even for Japan, which had more mining investments in relation to its total foreign assets, its relative share dropped from one-third to one-fifth between 1950 and 1973.

In addition, this mining investment is located less and less in the Third World. In 1950, almost two-thirds of US foreign mining investments were located in the Third World, but in 1977 the proportion was only one-third, although this reduction was also due to nationalizations. In 1968, 11% of the British mining investment flows abroad went to the Third World, but ten years later the proportion was only 6% For all Western mining enterprises, the share of the investment flows directed towards Third World fields was 20% in 1970 but only 6% in 1978, with a yearly amount of $7 to $8 billion (1977) during that period, according to a study made by M. Radetzki: "Has political risk scared mineral investment away from the deposits in developing countries?" (World Development, Vol. 10, 1982). Thus, some $1.5 billion were invested in the Third World in 1970 against less than $500 million in 1977.

This reduction in mining investments, particularly in the Third World, is often seen as the Western groups' orderly withdrawal from producing countries which have become hostile and too demanding. Whether it is a tactical move, intended to exert pressure on the mining countries following nationalizations and the setting up of producers' associations, or a strategic one remains an open question. But, in all cases, it is analysed as a true disengagement of the Western and Japanese mining enterprises. Such a withdrawal is, however, in fact real only for the productive space now controlled by the state firms, especially in South America, the Caribbean and Asia, for copper and iron ore and, to a lesser extent, for bauxite. Real and not simply formal nationalizations, and the development of public investments, took away a good part of the Western enterprises' control of the Third World's mining production. Such, for example, is the case for iron ore in Brazil, Venezuela and India, and for copper in Peru and Chile. Nevertheless, Western and Japanese groups' control of mining capacity in the Third World remains quite important and greatly exceeds the amount of their capital shares in local mining concerns.

The reduction at the level of direct investments actually means that for a given amount of invested capital, the Western and Japanese enterprises are controlling a larger production capacity than ever before. In other words, the apparent withdrawal corresponds at least in part to the adoption of new strategies for control and financing. The reduction of Western groups' mining investments in the Third World does not mean a reduction of the mining investment in general in this area. The yearly surveys on mining investment programmes, conducted by the Engineering and Mining Journal, give, for 1960, a total expenditure of $4 billion dollars for the non-socialist world, of which 53% was in the Third World; and for 1980, $75 billion, of which 61% was in the Third World. Thus, the reduced mining investments of Western enterprises in the Third World was accompanied by an increase in the latter's relative share in total mining investment.

The strategies applied in the recent period by the Western and Japanese operators are clearly a reaction against the Third World's claim to greater control over its natural resources. These strategies are, of course, developed on the world scale but Africa appears as a privileged space for their implementation, because of the mineral resources located there, especially uranium, but also because of the desire of the big Western enterprises to substitute African mineral supplies for those from other parts of the Third World.

Finally, Africa holds a special position in the strategies of European operators and particularly of the European states. The Lome Agreements between the EEC and the ACP (African, Caribbean and Pacific) countries strongly emphasized mining activity in Africa. The Second Lome Convention includes a special procedure for minerals, Sysmin, which reflects the concern of the EEC countries about their ore supplies. The objectives of Sysmin have been clearly defined in an official document of the EEC:

The measures considered should be compatible with the natural sovereignty of the ACP countries over their mineral resources ... the security of the mining investment will represent one element among others like the maintaining of production and export capacities, the financial support for prospecting and extraction, etc. ... the greater involvement of the authorities in mining development should be limited to stimulating private European capital and should not interfere with the traditional role of mining companies.

The Lome convention thus expressed the claim of European mining enterprises to greater access to the ACP fields and to greater security for their investments, as well as European governments' concern over their mineral supplies. Several procedures are included to stimulate mining investment as well as credit facilities. Sysmin is not like Stabex, an automatic mechanism to compensate for the export losses of the producing countries; it is a kind of insurance scheme which aims to maintain the export and production capacity in case of difficulties beyond the control of the ACP countries, whether these are of a political, technical or economic nature. Seven minerals are covered by this scheme, including copper, bauxite and iron ore, but they must be exported in raw or semi-finished form. Zambia and Zaire have benefited more than other countries from the credits granted within the Lome Convention, but such credits are still by no means sufficient to cover the financial needs of the copper industry. Moreover, EEC credit to Zaire was linked to the government's adoption of a new fiscal regime, while the IMP and the World Bank were imposing adjustment measures as a precondition for a $500 million loan to the state copper firm Gecamines.

The Lome convention is a good example of the joint strategy between enterprises, banks and governments that was discussed earlier.

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