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Familiar-sounding Australian report reveals exaggerated benefits and under-estimated costs of mining

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Two Australian research organizations recently released a review of the economic assessments of Australian coal projects and found that the proponent-generated reviews greatly overstated the benefits and understated the costs of the projects. The economic assessments were used to add social importance to the projects and overshadow serious environmental concerns while pushing the projects towards approval.

While we don’t have the benefit of such an analysis in Canada (yet?) our experience at MiningWatch shows that many of the problems identified in the Australian report occur here too. We have also found other gaps in the application of a net benefit test, some of which I’ll mention below.

Net economic benefits

The authors of the report make a strong case for suspicion around general statements about the economic value of a “billion-dollar mine”. One reason for concern is the need to parse out how much of the value of a project may go to foreign owners or shareholders outside the area of focus for an economic assessment. This is a serious issue in Canada as we are seeing an increasing percentage of mining profits accruing to foreign owned companies. An analysis by Erin Weir an economist with the United Steel Workers determined that from 2001 to 2009 the share of mining profits going to foreign-owned companies increased from 27.7 per cent to 75.6 per cent!

Thought not addressed in the Australian report, an important part of the net benefit equation should also be subsidies and direct expenses of governments. The costs of roads and power lines, electrical price subsidies, and administration and oversight costs should be calculated along with other costs and benefits. From our experience this is rarely done but when it is can dramatically shift the net benefits of a project.

Payment of royalties and taxes is always included as part of the benefits in proponents’ promotion of a mining project. When such statements are made, however, the calculation of the payments are often based on a hypothetical tax rate, rather than on a comparison of actual taxes paid in the sector. The mining industry benefits from a number of tax benefits that effectively reduce taxes and any royalties based on profits -- sometimes to zero -- despite the extraction of millions of dollars of minerals. This reality is revealed in the technical economic feasibility studies which often calculate profits and net present value of a project before taxes.

Employment

Jobs, and well-paying ones at that, are an important benefit of mining -- but we should be as accurate as possible about the total effect of projects on the labour market when assessing the true benefits of a given project. In Australia, as here in Canada, the job numbers offered by project proponents fail to take into account the limits of the existing labour market and use exaggerated multiplier effects to increase the apparent impact of a project.

Economist Marvin Shaffer has been raising these questions about Taseko’s proposed Prosperity and now “New Prosperity” gold and copper project in B.C. Shaffer, who is working with MiningWatch to review the second environmental impact statement has helped us understand that the creation of job in one location does not necessarily mean a net increase of one job in the labour market, as this would require an unlimited supply of skilled labour, which is in fact in shortage according to the industry. Despite efforts to portray the project as a boon to local employment, Taseko disclosed in the details of their first EIS that most of the jobs would go to people from outside the local area as the local population, and especially the local unemployed population, lacked the skills needed to work in the mine.

Of course there is also the practice of hiring temporary foreign workers for mining jobs. An issue which "hit the fan" late last year with the Murray River coal project in BC, a project of HD Mining International. This has been pretty common in the Alberta tar sands but is a new and problematic development for the mining sector.  HD's project descriptions for the BC Environmetnal Assessment Office  failed to mention the use of temporary foreign workers and only gives the total number of direct and indirect jobs. HD's submission to the Canadian Environmental Assessment Agency filed after the controversy broke, does describe the use of temporary foreign workers. It provides justifications that have been largely de-bunked by the unions and media that have examined the company's application to program.

Costs to other industries

In Australia, as in Canada, there is an ongoing debate about the “Resource Curse” and “Dutch Disease” where the expansion of the export-driven natural resources sector has negative impacts on other sectors of the economy. The Australian authors point to two ways that resource projects have a negative effect on other sectors -- wage inflation and exchange rates.

While increased wages in the mining sector can be a good thing to those employed by the mines, it makes it difficult for other sectors to compete or even be able to find workers to fill positions. The project cites an economic impact statement for a coal mine that acknowledged an impact of eliminating 3,000 jobs elsewhere as workers would be drawn out of other parts of the labour market. Competition for wages can be a real issue in small communities as experienced by the town of Baker Lake, Nunavut, which has had a heck of a time maintaining its municipal workforce given the competition for work at the nearby Meadowbank Gold Mine.

The question of non-renewable resource extraction and exchange rates has been covered by others. Given its relative economic weight, the oil sector has been more a focus than coal or other types of mining in Canada. The Australian report authors, however, make the point that individual projects shouldn’t be excluded from analysis of impacts on exchange rate as it is the sum of their contribution to economic variables that matters, and the same could be said for distinct sectors within an economy. While Canada may be increasingly defined as a petro-state, to a certain degree it is also increasingly becoming a uranium, potash, gold, nickel, and iron-ore state.

Health costs

Coal mining, transportation, and combustion can have major health implications, the costs of which can outweigh economic benefits of exploiting the coal, according to reports cited by the authors. Their review found that coal mining assessments often included health impacts or related issues but that were rarely dealt with in detail. The assessments also assumed that projects would always meet existing regulations -- and that existing regulations would be adequate to ensure the protection of human health.

Several Canadian examples come to mind when considering the Australian analysis. Residents of Keno City, Yukon have been profoundly disappointed by the Yukon Environmental and Socio-economic Assessment Board’s review of Alexco’s operations in their area. The company chose to put what was called a temporary mill next to the town, but that mill has now grown to be a district mill with plans of operating for decades. The project is causing dust and noise, disrupting the town’s small population and threatening their investments in a tourism economy. Residents argue that a full assessment of these impacts has not been done.

It remains to be seen what Polish mining giant KGHM will conclude about health impacts for its proposed Ajax copper mine as it has not yet filed its final environmental impact statement. But residents of neighbouring Kamloops are very concerned about impacts to their airshed. The city already has air quality advisories for particulate matter, while the mine would double the amount of diesel consumed in the area of the town and add further particulate from blasting and managing ore and waste rock, as well as from the dry-stack tailings facility -- all of which are upwind and adjacent to town. Will the potential health impacts of this be rigorously integrated into the assessment, including the economics of increased health care costs?

Kamloops residents have reason for concern, despite regulations and assurances from the company. Last fall we received a complaint about dust and noise from the Unimin nephaline syenite mine near Peterborough in the Kawartha Lakes region, known more for cottages and canoe routes than mining operations. In response to residents’ complaints, the Peterborough County Health Unit investigated and issued a health advisory warning people who experienced respiratory symptoms not to go outside and to use air filters or air conditioners. Attempts by the company to reduce the dust were not successful, but they continued to operate. We have recently learned that exceedences in air quality were found 2 km from the mine site but the mine has been allowed to continue operating by averaging the pollution levels over 24 hours!

Understated impacts on the environment

In Australian coal projects, as elsewhere, direct impacts to local ecosystems are deemed to be “offset” by the rehabilitation or recreation of habitats in another location. Such efforts may bring environmental benefits but should not be used to justify destruction of unique, sensitive, or critical ecosystems and ecosystem functions.

The Australian report correctly points to the tremendous uncertainty in achieving full ecological replacement for the complete loss of ecosystems. Within the context of an economic valuation, the authors argue that this uncertainty should be integrated into the analysis and provide an estimate of what would be lost in economic terms depending on the outcome of the offset program.

We have been involved in the offset aspect of environmental approvals through fish habitat compensation proposals -- in particular when natural water bodies are proposed for use as “tailings impoundment areas”. Part of the rationale for the destruction of lakes and streams is that equivalent fish habitat will be created elsewhere. We and others have found numerous problems with these plans, including: relatively temporary improvements to fish habitat compensating for permanent losses in habitat; under-estimation of productivity of fish habitat in the to-be-destroyed habitat; loss of unique populations without adequate documentation or efforts to preserve unique genetic stocks; lack of attention to non-fish habitat values; focus on single species habitat; compensation for species other than those affected; questionable efforts to improve productivity in areas that may already be at their carrying capacity; poor consideration of the impacts to existing habitats being “improved” for fish habitat; and the long-term viability of created or rehabilitated habitats. These issues have been front and centre in both the rejected Prosperity Gold-Copper Project and the approved Long Harbour Nickel Processing Facility.

Greenhouse gas emissions

Extraction of coal will obviously contribute to the release of greenhouse gas emissions (and other air pollutants) and the largest part of this contribution occurs when the coal is actually burnt. The implications of coal mining in the assessments reviewed for the report showed these contributions were downplayed because it was assumed that were the coal not mined in Australia it would be supplied from somewhere else. This ignores the impact of additional supply on the price and hence demand for the coal.

At MiningWatch we have not tackled the issues of coal burning but we do have concerns about how greenhouse gas emissions are considered in the context of project assessments. The standard practice is to compare a single project’s emissions to a regional and national total, thus indicating the relatively small share of that project. What the assessments don’t do, and should, is compare the intensity of emissions relative to other mines and other sectors to give a relative indication of the carbon intensity of the project.

Costs of greenhouse gas contributions are seldom included in the cost-benefit analyses. In his economic review of the Prosperity Project, Marvin Shaffer determined the cost to offset the projects greenhouse gases were at least $2.6-million per year during operation. While it is not a huge amount, nor is it a trifle, and should be considered in a robust economic analysis of this or any major project.

What’s to be done?

Greater focus on these issues may shift practices in project assessment to be more inclusive and rigorous in the analysis of costs and benefits, however, as assessments are proponent driven this may be an unrealistic expectation, at least in the short term.

Tighter language in legislation and assessment guidelines/terms of reference would be a big help but that will take a degree of political will that likely doesn’t exist in Canada at present. Where good requirements exist but are not being implemented, legal challenges may be required.

The issues raised by the Australian report certainly highlight the need for rigorous independent scrutiny of claims made in project assessments, something that MiningWatch makes an effort to do on key projects. Public demand for open and participatory review processes is crucial to stem the disturbing trend in restricting participation in the review of major projects, such as those being conducted by the National Energy Board.

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