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Mineral Industry Economics > Quiz 2: Chap 3 and 4 > Flashcards

Quiz 2: Chap 3 and 4 Flashcards

1
Q

Outline the 9 sections of Chapter 3. (Chapter 3)

A
  1. Concept and problem description
  2. Breakeven and marginal cut-off grades
  3. Grade-tonnage curves
  4. Balancing cut-off grade
  5. Cut-off grade optimization
  6. Loss, dilution, and recovery
  7. Net smelter return
  8. Multi-metal deposits
  9. Production rates and capacity installation
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2
Q

In the literature, this topic appears different names such as. Name 2. (Chapter 3)

A
  1. Ore – waste discrimination
  2. Determination of block destination or route
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3
Q

What are the 2 different cut-off grades?(Chapter 3)

A
  1. Break-even cut-off grade
  2. Marginal cut-off grade
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4
Q

What are the 2 possible destinations for a produced block?(Chapter 3)

A

Waste dump and Mineral processing plant

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5
Q

What are the 2 parts of the cut-off decision considering each block? (Chapter 3)

A
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6
Q

Name all of the 6 possible destinations of a block. (Chapter 3)

A
  1. Waste dump
  2. Sub-grade pile
  3. Marginal grade pile
  4. Low-grade processing
  5. High-grade processing
  6. High-grade stockpile
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7
Q

Describe a block that ends up at the : Waste dump (Chapter 3)

A

A block, which does not contain any metal, is sent to this destination

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8
Q

Describe a block that ends up at the : Sub-grade pile (Chapter 3)

A

A block, which contains a small amount of metal, but this is not profitable under current economic conditions (in some cases this is a part of the waste dump/ or not separate from the waste dump)

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9
Q

Describe a block that ends up at the : Marginal grade pile (Chapter 3)

A

A block, which contains a certain quantity of metal, but this quantity may not be enough for making profit; its profit is close to zero.

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10
Q

Describe a block that ends up at the : Low-grade processing (Chapter 3)

A

A block, which contains some certain amount of metal (or block belongs to a rock type) and it will result in a small profit.

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11
Q

Describe a block that ends up at the : High-grade processing (Chapter 3)

A

A block, which contains a high quantity of metal (or block belongs to another rock type) and it will result in a high profit after processing.

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12
Q

Describe a block that ends up at the : High-grade stockpile (Chapter 3)

A

A block, which contains a high quantity of metal but since high grade process’s capacity is exceeded, it is sent to a stockpile to be used in near future. Note that there will be a cost associated with waiting time in stockpile as well as stockpiling costs.

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13
Q

Breakeven cut-off grade (also called ____ cut-off grade) is associated with which problem. (Chapter 3)

A

mine If the problem is to decide if a block will be produced or left on the ground (i.e., the inclusion of the block to production block)

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14
Q

marginal cut-off grade (also called ____ cut-off grade) is associated with which problem. (Chapter 3)

A

mill If the problem is a scheduling problem (i.e., a block will be produced in any case) – marginal cut-off grade (also called mill cut-off grade).

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15
Q

Name the 4 nature of the operations.(Chapter 3)

A
  1. mining only;
  2. mining and mineral processing;
  3. mining, mineral processing, and net smelter return agreement;
  4. mining, mineral processing, and metallurgy
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16
Q

Name 3 other factors affecting cut-off grade calculation. (Chapter 3)

A
  1. Type of costs (e.g., opportunity cost, fixed cost, etc.)
  2. Inclusion of loss and dilution makes a difference.
  3. The number of destinations (waste and processing streams) makes difference.
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17
Q

The costs used in cut-off calculation includes the
following elements for Mining cost: …. (Chapter 3)

A

Mining cost: Drilling, blasting, loading, and hauling

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18
Q

The costs used in cut-off calculation includes the
following elements for Mineral processing costs: …. (Chapter 3)

A

Mineral processing costs: Crushing, stockpiling, grinding, screening, classification, filtering and concentration

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19
Q

The costs used in cut-off calculation includes the
following elements for Metallurgical costs: …. (Chapter 3)

A

Metallurgical costs: Smelting, refining, sales costs, roasting, packaging, freight, and insurance,

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20
Q

When considering Calculations related to the cut-off grade what are the 3 options for a parcel? (Chapter 3)

A

There are three options, (1) whether produce or not (2) if produced, sent to waste dump (to access to more valuable areas), (3) if produced, sent to mineral processing

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21
Q

To what metallurgical costs are applied to? (Chapter 3)

A

metallurgical cost are applied to the output of metallurgical process [ $/ metal tonne ]

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22
Q

What is the Breakeven cut-off grade? (Chapter 3)

A

Breakeven cut-off grade is the grade wherein the revenue obtained from the sale of the metal within the ore blocks is equal to the extraction costs of the blocks.

Where: Extraction costs are all costs that are required to recover metal (mining and mineral processing costs)

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23
Q

What is the revenue formula for the sale of gold within one tonne ore material ? (Chapter 3)

A

R = (𝑝𝑟𝑖𝑐𝑒 − 𝑚𝑒𝑡𝑎𝑙𝑙𝑢𝑟𝑔𝑖𝑐𝑎𝑙 𝑐𝑜𝑠𝑡) ∗ 𝑔𝑟𝑎𝑑𝑒 ∗ 𝑝𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑟𝑒𝑐𝑜𝑣𝑒𝑟

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24
Q

What is the production cost formula of gold within one tonne ore material? (Chapter 3)

A

PC = 𝑚𝑖𝑛𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 + 𝑚𝑖𝑛𝑒𝑟𝑎𝑙 𝑝𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝑐𝑜𝑠t

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25
Q

When is the breakeven cutoff grade achieved?(Chapter 3)

A

Breakeven cut-off grade is the grade wherein the revenue is equal to production cost.

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26
Q

What is the 𝑏𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑐𝑢𝑡 − 𝑜𝑓𝑓 𝑔𝑟𝑎𝑑e formula? (Chapter 3)

A
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27
Q

What is the marginal revenue formula? Give 2 Forms.(Chapter 3)

A
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28
Q

What is the marginal cost formula? Give 2 Forms.(Chapter 3)

A
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29
Q

What is the marginal cutoff-grade formula for ore and waste, if there is only one mineral processing stream? (Chapter 3)

A
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30
Q

What is the marginal cutoff-grade formula between processing streams, if If there are more than one mineral processing stream (e.g., heap leaching and flotation) (Chapter 3)

A
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31
Q

Give every weight equivalent in kg: (Chapter 3)
1 tonne (metric ton) = _____ kg
1 ton (short ton) = ______ kg
1 long ton = _______ kg

A

1 tonne (metric ton) = 1,000 kg
1 ton (short ton) = 907.18474 kg
1 long ton = 1,016.05 kg

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32
Q

What is the main difficulty in determining a breakeven cut-off grade. (Chapter 3)

A

The main difficulty in determining a breakeven cut-off grade is to decide which costs should be incorporated into the calculation.

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33
Q

What is a sunk cost? (Chapter 3)

A

A sunk cost refers to past costs that cannot be recovered. The money associated with sunk costs has already been spent. Sunk costs are not incorporated into cut-off grade decisions

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34
Q

What is a residual cost?(Chapter 3)

A

A residual cost refers to the future costs, which are incorporated into the future production decisions. Only residual costs are included in the calculation of breakeven cut-off grade.

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35
Q

Draw the curve between:
T(x) is tonnage of material above cut-off grade x
m(x) is average grade of material above cut-off grade x
(Chapter 3)

A

.

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36
Q

Fill : As seen from the cut-off grade-tonnage curve, if the cut-off grade is changed, ore tonnage will _______.
However, if the operation has a constant processing capacity, the variation in ore tonnage (processing
input) associated with cut-off grades should be considered. One reasonable choice is to increase
processing plant life if the cut-off grade ________. On the other hand, One reasonable choice is to decrease
processing plant life if the cut-off grade ________.(Chapter 3)

A

As seen from the cut-off grade-tonnage curve, if the cut-off grade is changed, ore tonnage will change.
However, if the operation has a constant processing capacity, the variation in ore tonnage (processing
input) associated with cut-off grades should be considered. One reasonable choice is to increase processing plant life if the cut-off grade decreases. On the other hand, One reasonable choice is to decrease processing plant life if the cut-off grade increases.

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37
Q

Name an aspect that the grade tonnage curves ignore? Why is it important to consider it? (Chapter 3)

A

Grade tonnage curves also ignore accessibility. This constraint significantly affects relationship between
cut-off grade and processing capacity.

For a given cut-off grade, over- or under-capacity problems may occur. Therefore, in addition to the
maximization of profit, cut-off grades should satisfy the processing capacity to a certain extent.

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38
Q

Since cut-off grades and capacities are not determined simultaneously, marginal cut-off may not be compatible with capacities. In other words, a cut-off grade is the function of: (Name 2) (Chapter 3)

A
  1. economic parameters (breakeven grade, marginal cut-off, static cut-off)
  2. capacities (cut-off grade based on capacities)
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39
Q

Complete: We need to find a balance between capacity and cut-off grade. Otherwise, ….. (Chapter 3)

A

We need to find a balance between capacity and cut-off grade. Otherwise, opportunity or additional costs occur due to idle or over capacity in ore production.

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40
Q

Each process has its own capacity, and a selected cut-off grade affects downstream capacities that can result in 2 types of problems. (Chapter 3)

A
  1. idle problems.
  2. over-capacity problems.
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41
Q

Describe the solution and issues related to solving the Overcapacity problems. (Chapter 3)

A

Overcapacity problems may be solved through stockpiling, but it causes stockpiling costs and possible problems such as oxidation of ore or internal combustion.

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42
Q

Describe the idle capacity problems.(Chapter 3)

A

Idle capacity causes capacity utilization problems that have an opportunity cost.

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43
Q

Give the profit function in 2 forms and list all 11 variable for the second form. (Chapter 3)

A
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44
Q

Give the Cut-off optimization - Mathematical formulation(Chapter 3)

A
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45
Q

When the price increases, there will be a positive impact on revenues (positive impact).
However,
If the cut-off grade is lowered, What could happen?

A
  1. If the mining and processing capacities do not change, the metal quantity produced per given time will reduce
  2. Since, grade decreases mine life increases. If ore tonnage increases, but processing capacity remains the same. Then a stockpile is required and the processing plant’s life extends.
  3. The trade-off between additional mine life and lowering metal quantity per given time is determined by the discount rate.

If discount rate high, the revenue from extension of the mine life will be lost when turned into an NVP.

If discount rate low, the additional revenue from extension of the mine life can be meaningful.

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46
Q

When the price increases, there will be a positive impact on revenues (positive impact).
However,
If the cut-off grade is increased, What could happen?

A
  1. If the mining and processing capacities do not change, the metal quantity produced per given time will reduce
  2. Since, ore quantity decreases, mine life shortens.
  3. There is a trade-off between disadvantage obtained by shortening mine life and increasing
    metal quantity per year determined by the discount rate.

If discount rate high, the disadvantage obtained by shortening life will disappear to
some extent because the contribution of the shortening years to NPV would be very low.

If discount rate low, the disadvantage obtained by shortening life will be furthered
because the contribution of the shortening years to NPV would be lost

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47
Q

What are the 7 main parameters affecting cut-off decision Increase/Decrease

A
  1. How much does the price increase?
  2. What are the initial mining and processing capacities?
  3. When price increases, will capacities increase or will mine life change?
  4. When the cut-off grade is changed, what are the new average grades and tonnages?
  5. What homogeneity level of ore within deposit qualitatively and quantitatively?
  6. What is the discount rate used in this project?
  7. What is the future expectation of the price?
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48
Q

What can be said about mining loss?(Chapter 3)

A

Some ore is mixed with waste and disposed to waste dump. This could be up to 10-30% of total ore tonnage.

Losses is an inevitable phenomenon and can be minimized by selection of production method, equipment sizing, and drilling and blasting design.

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49
Q

Explain with a drawing the difference between loss and dilution.(Chapter 3)

A
50
Q

Describe dilution and draw Mining block with different types of dilutions.(Chapter 3)

A

Dilution is the contamination of ore with waste material. Similar to losses, some waste is mixed up with
ore and sent to mineral processing.

Dilution is also related to equipment selectivity and blasting (e.g., flying rock).

51
Q

Draw processing recovery schematic and give processing recovery formula.(Chapter 3)

A
52
Q

What is the net smelter return.(Chapter 3)

A

If mining company, which has mining and mineral processing only, works with a separate metallurgy company, there is a specific agreement between the mining and the metallurgy company.

The metallurgy company charges its costs to the mining company and takes some value of metal refined.

Depending on Smelter contract conditions, refining charges, marketing charges and concentrate transportation costs effects can be combined

53
Q

Describe the Net Smelter Return factor and give its formula.(Chapter 3)

A

Smelter contract conditions, refining charges, marketing charges and concentrate transportation costs effects can be combined and expressed with the Net Smelter Return factor.

54
Q

The net smelter return is a function of what ? Give Typical values for : (Chapter 3)

Copper – %
Lead – %
Tin – %
Zinc – %

A

The net smelter return is a function of price.
Copper – 70 %
Lead – 65 %
Tin – 85 %
Zinc – 50 %

55
Q

What is the full Cut-off grade for NSR including mine recovery and dilution, and processing recovery + waste contains metal(Chapter 3)

A
56
Q

When several marketable commodities are present in the mineralization, the cut-off grade is a function of what?(Chapter 3)

A

The cut-off grade is a function of the total value (f.o.b.)* of all these contained products.

Under “F.O.B.” or “free on board,” the goods are placed on board the ship by the seller at a port of shipment named in the sales agreement

57
Q

What does C.I.F mean?(Chapter 3)

A

“C.I.F.”– meaning “cost, insurance, and freight”–is C. & F. with the additional requirement that the seller procure transport insurance against the risk of loss or
damage to goods. The seller must contract with the insurer and pay the insurance premium.

58
Q

What does F.O.T mean?(Chapter 3)

A

. F.O.T.” means “free on truck.” It refers to goods being carried by truck and should only be used when the goods are carried by truck.

59
Q

Explain the Price - Cost relation(Chapter 3)

A
  • Given that price widely fluctuates in markets,
    cut-off grade also changes.
  • Since there is a strong correlation between price (e.g., gold price) and cost (e.g., oil price in terms of diesel consumption), if price changes, cost will also change.
  • Therefore, there is no answer how to react to price changes. This also depends on what extent price change and discount rate.
60
Q

Explain the Cost – recovery relation (Chapter 3)

A
  • Grade varies throughout orebody
  • As grade changes, cost and recovery also change.
  • If one aims to kept the cost constant, recovery will vary.
  • If one aims to keep the recovery constant,
    processing cost will vary.
61
Q

Given that the mineral sector plays an essential role in economic development because of export revenue, wages, employment creation, value-added* potential, and government income, we need to seek the answers to the following questions:…. Name 9 questions.

A
  1. When should mineral reserves be exploited?
  2. How do mineral prices evolve?
  3. How can the needs of future generations be considered?
  4. What is the optimal extraction path of commodities?
  5. How do the findings of resource economists assist in mining stakeholders?
  6. What is the relationship between mineral endowment and economic development?
  7. How can resource-based growth be managed?
  8. Are mineral resources a curse or blessing?
  9. What strategy should be followed to avoid from the Dutch Disease?
62
Q

Summarize and give the takeaway lesson for Case 1 - Oil.

A

In the early 2000s, oil would have been depleted. This view was developed under oil shock in the 70s and underestimated the role of the development of new exploration technologies.

The roles of discoveries and new technologies should not be ignored.

63
Q

Summarize and give the takeaway lesson for Case 2 – Australian iron ore.

A

In 1939, the Australian government imposed an embargo on iron ore exports to prevent the early exhaustion of national reserves. Removing restrictions motivates new exploration campaigns because of
exporting opportunities.

Lesson: Large market and exporting opportunities will be incentives to produce more. Thus, they invest in exploration, innovation, and new technologies.

64
Q

Summarize and give the takeaway lesson for Case 3 – Canadian uranium.

A
  • In 1974, the Canadian government introduced a policy requiring uranium-producing companies to accumulate reserves sufficient to cover 30 years of national requirement for existing and planned nuclear installations.

For electricity generation, the nuclear option is not favorable anymore.

However, Canadian nuclear plans have been substantially scaled-down as the other countries are. However, this policy prevented Canada from benefiting from the extraordinary uranium boom in the late 70s.

  1. New technologies and regulations may make the resource irrelevant if you do not produce it today. The future is uncertain.
  2. Good marketing and export opportunities could have motivated the companies to invest in exploration. These opportunities could have led to new deposit discoveries.
  3. This would also strengthen technological progress and innovation.
  4. National institutions could have established, and knowledge accumulation on mining could have secured.
65
Q

Summarize and give the 2 takeaway lessons for Case 4 – Chilean copper.

A

The Chilean government wanted the deferral of the Escondida copper mine in 1991.

It was expected that when Escondida had started the operation, copper price would have fallen 10%, from 80 c/pound to 72 c/pound. The extraction cost in Escondida would be 50 c/pound.

As seen capacity expansion caused $66M loss

  1. This calculation can be acceptable in the short term. Since the price will decrease, copper would be a cheap substitute for many industries. Eventually, copper prices will rise again in the long term.

Lesson: Short-term and long-term elasticity will be different.

  1. Increased supply will give monopoly power to Chile in such a way as to control price. As a result, Chile would have had more room for speculation.

Lesson: Price setting power will be lost.

66
Q

Summarize and give the takeaway lesson for Case 5 – Sweden iron.

A

Sweden obtained a huge benefit (net social benefit) by exploiting its iron ore resources from the early 1900s until the 1950s. Since the mines were close to the steel-making plants in Central Europe, they were important.

Over time, thanks to new transportation technologies, the European steelmakers could import the iron ore from the other continents because iron ore mines in Australia and Brazil were operated by cheap open-pit
method.

If Sweden had deferred production, this country would have lost the benefit from iron ore mining. Furthermore, they would have deferred current social
development.

Lessons:

In addition to mining and exploration technologies, technologies in the related industries (e.g., transportation, digital, and computer) should be
monitored.

If the production is deferred, economic development is deferred cumulatively.

67
Q

Summarize and give the takeaway lesson for Case 6 – OPEC.

A

Cartels aim to sell their product (e.g., oil) at a high price and with less production. However, from the experience, such an activity could be successful only in the short term. Eventually cartel collapses, the prices sharply decrease and stay low for a long time.
Cartel behavior creates incentives for the other countries/corporates for exploration efforts or substitutes.

Lesson: Cartel power is not sustainable in the long term.

68
Q

Why is the difference between renewable and nonrenewable resources is not very important?

A

If you exceed the regeneration rate* of a renewable resource, it can extinct (e.g., some fishes, forests).
Nonrenewable resources never run out from the world. They can be available at a cost through recycling.

69
Q

In general, early exploitation is preferable unless what? and why?

A

Early exploitation is preferable unless there is an
unequivocally rising price trend. The present value of today’s income is more valuable than the net
present value earned later.

Because income obtained by mining exploitation speeds economic progress, there is a social net benefit in exploiting the mineral resources as soon as possible.

70
Q

What does Hotelling’s rule states?

A

Hotelling rule states that, in a competitive market, the price of a depletable resource must increase at the same rate as the discount rate.

71
Q

What is Hotelling’s rule Formal Definition?

A

In an environment of profit-maximizing firms using
unchanging technology to exploit a natural resource from a known, finite, and uniform stock, the value of a unit of the unexploited resource rises at the rate of interest.

72
Q

What does Hotelling’s rule says essentially?

A

This rule supported the deferral because the present value of income earned would not change. The project would not lose value by waiting.

73
Q

In the context of the Hotelling’s rule, why were Many mining operations delayed. Name 2.

A
  1. the necessities of future generations
  2. political advantage in future due to having a strategic resource
74
Q

What are the 6 Hotelling’s rule assumtions?

A
  1. Unchanging technology
  2. Finite and known reserve (no new large discovery)
  3. Uniform deposit
  4. Increasing costs
  5. Unlimited production without capacity limitation
  6. There are no uncertainties on size, grade and reserve of orebody
75
Q

Name the 4 types of technological changes in mining.

A
  1. Production technologies
  2. Exploration technologies
  3. Transportation technologies
  4. Health and safety technologies
76
Q

“As mineral production progresses, entropic degradation increases” What does entropic degradation mean?

A

Entropic degradation is the deterioration of environment, working conditions, slopes and openings over time, leading to additional cost.

77
Q

Destroy Hotelling via Technological Improvements .

A
  1. New production technologies reduce costs and increase productivity
  2. Cost reduction effect through technological improvement compensates cost increase through operational degradation.
  3. The effect of technological innovation on price is significant.
78
Q

Why is the mining industry seen in the lack of innovation? 1st explanation name 4.

A
  1. A mine has a limited life compered to a plant based on conversion process (e.g., cement, paper, and refineries).
  2. The price in process industries is more stable than mining commodities.
  3. Each mine is cost-specific. Therefore, production costs of mining widely fluctuate in mining industries. However, the production costs of process industries fluctuate less.
  4. Mining costs are steeper cost curves, and process industries are flatter cost curve.
79
Q

Destroy Hotelling via New discoveries.

A

Thanks to new exploration technologies, major discoveries were made.

To hold Hotelling’s rule, the marginal cost of discovery should not change. Otherwise, commodity prices will not increase with interest rate proportionally

Known resources/reserves usually grow over time. In many mines, resources/reserves increase as the operation goes deeper.

80
Q

Destroy Hotelling via Uniform deposit.

A

The material does not have a uniform quality throughout the deposit. Therefore, mineral rent received per unit varies. Quality uniformity is an unrepresentative assumption.

81
Q

Destroy Hotelling via Increasing costs due to degradation effect

A

As the resource is extracted, the costs increase. Since the production goes deeper.

Since mining firms start the production in the lowest-cost area first. There will be quality ranking in production, from high quality to low quality.

In this case, the price increase should be more than the discount rate to offset the adverse effect of degradation effect.

To hold the Hotelling rule, the loss gained by resource degradation should be offset by the advantage obtained by innovation.

82
Q

As the resource is extracted, the costs increase. Why?

A

Since the production goes deeper:

Stresses and heat increase underground mines. Thus, support and cooling costs increase.

Distances increase, and slope stability decreases over time. Thus, fuel, maintenance, and ground control costs increase.

83
Q

As degradation effect increases over time, what happens? (Relate to exhaustionS)

A

we will never experience with physical exhaustion of a resource because mineral rent will not sustain profitable operation in a time point. Economic exhaustion will occur when cost of further extraction
becomes higher than the market is willing to pay.

84
Q

Destroy Hotelling via Unlimited production without capacity limitation

A

The capacity is still a constraint which affects the price path.

Ore supply is frequently ceased by various restrictions associated with environmental, safety, legal concerns, disasters, and low prices.

If demand exceeds the supply constrained by capacities, price will increase.

85
Q

Destroy Hotelling via Not fully known deposit

A

The information regarding the quality and quantity of a deposit is obtained through sparse data from drillholes.

Using this information, orebody is estimated qualitatively and quantitatively.

There are always differences between estimation and reality.

86
Q

The argument that mineral resources should be left under ground has two versions. Give version 1.

A

A think tank- asserted that the resources should be
used in such a way as to consider to sustain living standard of humankind in the distant future.

This is not important effect on the policy makers.

87
Q

The argument that mineral resources should be left under ground has two versions. Give version 2 + 2 parts.

A
  1. The countries reaching a mature stage of industrialization restricted mineral production for their citizens’ future requirements.
  2. Emerging or developing countries concerned about the productions of foreign companies. They sometimes deferred the production until national institutions regarding mineral production would be established.
88
Q

Regarding the The argument that mineral resources should be left under ground 2nd version. Discuss (2).

A
  1. Deferral policy based on nationalist view has a misunderstanding on reserve concept. In mining, exploitation is also seen as exploration. As mining progresses, new reserves are often added. The deferral will delay the discovery of new reserves.
  2. The production may also help to train local engineers and bring production technology such that national institutions will establish.
89
Q

Regarding the deferral of exploitation of mineral resources. What can be said about substitutions.

A

The deferral also ignores the role of substitutes. If the
production of a demanding mineral is deferred, the buyer will direct to the substitutes in middle/long term. The technology regarding substitutes can advance such that price lowers. Thus, the resource may lose competitiveness.

90
Q

Explain how new technologies can make a deposit/mineral product (partly) unviable.

A

Digital cameras led to decreasing demand for silver.

Breakthroughs in technologies of mining deep-sea nodules could make irrelevant land-based nickel–cobalt operations.

91
Q

The deferral can be only acceptable for short-term objectives. Name 4 Examples.

A
  1. Controlling mineral prices in a short-term
  2. Sustaining monopoly or oligopoly (cartel) structure as a result of cartel decision in a short time.
  3. If there are not sufficient knowledge and institutional structure, this can be useful for developing countries in short term.
  4. There could be an opposite effect, and a mineral resource, which was not widely used in the industries in the past, can be important by new technologies (e.g., graphite, lithium).

Nevertheless, the social benefit lost due to the deferral should be considered

92
Q

Name the conclusions of Deferral exploitation and Hotelling’s rule.

A

New technologies decreases and recourse degradation increases production costs.

Deferring production is very risky and the resource may be irrelevant over time.

Technological changes will also occur in substitutes.
Bear in mind that materials never diminish from the earth. There is always a chance for recycling. However, recycling may not viable economically with existing technology after the secondary process.

Long before the last ounce of copper/barrel of petroleum is extracted, demand will be zero.

As minerals diminish, the price will increase. The consumer will orient to substitutes. At a point, the resource will be unviable economically before exhaustion of the resource.

93
Q

What is Economic rent?

A

Economic rent is surplus that is obtained through production factors over production and capital costs

94
Q

Many developing countries with mineral endowments have not made significant progress? Why?

A

Mineral endowment does not guarantee to make economic development.

This phenomenon shows that there should be a mineral policy on how to spend the rents* obtained from mineral resources.

95
Q

Governments are suspicious of international mining companies. They thought that they took a big portion of benefits obtained from mining operations. However, what can mining compagnies provide (4) ?

A

International mining companies put forward that they:
1. Provide job opportunities,
2. Spend a considerable amount of capital,
3. Undertake technical and market risks,
4. Bring the production technologies.

96
Q

Governments and international mining companies aim to maximize their utility. What tool can be used to do so?

A

Taxation policy can find an answer to this multi-objective optimization problem.

A taxation policy should be high enough to contribute to the development of the host country. At the same time, it should be low enough to create incentive profit-oriented international mining companies.

97
Q

How rents obtained from mineral production should be spent?

A

These rents should not be spent for more consumption or more import. They should be re invested or spent for necessary infrastructure.

98
Q

What are the 2 parts of mineral rents?

A
  1. Absolute rent : Difference between revenue and production costs
  2. Differential rent: Cost differences between mineral providers. Differential rent is obtained in high-grade deposits, shallow deposits, or easy geologic conditions
99
Q

What are the three different views on relationship between mineral rents and economic development?

A
  1. Neoclassical growth theory
  2. Structural theory
  3. The Dutch disease
100
Q

Explain Neoclassical growth theory.

A

Neoclassical growth theory: Economic growth needs an increasing supply of production factors. Mineral exports provide an opportunity to cover required government revenue and foreign exchange. Therefore, mineral export has strong potential to contribute to economic development.

101
Q

Explain Structural theory.

A

Structural theory: This is the opposite of the previous view. Mineral export appreciates local currency and wages increases. Consumers spend more. The competitiveness in the other industries is lost in favor of the mineral industry. Therefore, the economies should be diversified, and the role of mining should
be reduced.

102
Q

Explain The Dutch disease

A

The Dutch disease: This theory proposes a trade-off between the two previous theories.

103
Q

Name the 4 step of the cycle that may occur in mineral exporting countries

A
  1. Import policy effect
  2. Redistribution effect
  3. External factor effect
  4. Feedback effect on the mining sector
104
Q

In the cycle that may occur in mineral exporting countries, explain Import policy effect

A

Income obtained from mineral export was spent on imports (e.g., food). This caused to weakening agriculture industry, and agriculture products were available cheaper. At the same time, consumer prices increased.

105
Q

In the cycle that may occur in mineral exporting countries, explain Redistribution effect

A

Redistribution effect: Since the import harmed the domestic agriculture industry, the people from the countryside moved to the cities. The unemployment rate increased quickly because the emigration rate is larger than the labor requirement in the urban areas. The government created unnecessary jobs and implemented costly unproductive social programs (e.g., free food). In the cities, there was a big difference between high and lowincome groups (social issues).

106
Q

In the cycle that may occur in mineral exporting countries, explain External factor effect

A

External factor effect: Current deficit increased, and governments need external borrowing. Also, mineral prices fluctuate in the markets and production may also fluctuate in terms of quality and quantity. Therefore, mineral rents are not constant/continuous. This loop ends up a debt crisis.

107
Q

In the cycle that may occur in mineral exporting countries, explain Feedback effect on the mining sector.

A

Feedback effect on the mining sector: Since mining was a profitable sector, the government initiated new taxes
and imposed import restrictions for the materials used in mineral production. An option of expropriation started to discuss.

108
Q

Name the 9 Daniel policies that may help economic development

A
  1. A solid tax system based on resource rent should be built.
  2. International mining companies that bring high technology and productivity, sustainable return, best
    practices and environmental friendly approach should be encouraged.
  3. Mineral revenues should not be overestimated.
  4. Mineral rents should be spent such that noninflationary growth is sustained.
  5. A stable growth model of public expenditure considering business cycles should be chosen.
  6. Mineral revenues should be separated from the other revenues and spend carefully (if it is too much,
    creating a sovereignty fund can be thought).
  7. Currency appreciation and inflation should be avoided.
  8. Labor market should be monitored and stable wage policy should be chosen.
  9. Governments should be flexible for mining company’s strategy change on production and investment.
109
Q

Describe 3 problems which may complicated the 9 Daniel policies.

A
  1. Some countries may be dependent on import and acute high unemployment rate.
  2. Import should be directed to goods and services that can boost domestic production in an effective and
    productive way. However, the trade balance should be kept in an acceptable way.
  3. When mineral prices are low, governments of the country that mining companies operate devaluates the local currency. This causes low wages, which reduces productivity. The relationship between wages and productivity is a key issue.
110
Q

A well-prepared mineral policy should aim to accomplish: Name 7.

A
  1. Establish guiding principles for current and future generations to use resources.
  2. Create an enabling environment for local and international investments in mineral exploration, development, and production.
  3. Encourage governments, companies, and communities to work together to ensure that operations are conducted in an environmentally and socially sustainable manner.
  4. Ensure local economic benefits, revenue sharing, and the transparent management of revenues.
  5. Help to make informed decisions through the collection of geological data and resource assessment.
  6. Regulate artisanal and small-scale mining and provide adequate institutional and technical support for related activities.
  7. Apply internationally accepted standards for environmental and social protection, including for indigenous peoples and the resettlement of affected communities.
111
Q

What is the Resource curse?

A

The resource curse asserts that mineral recourses-endowed countries are not able to make economic progress, and these countries encounter poor economic performance, less democracy, corruption, and social and gender inequalities.

112
Q

Where does the resource curse usually happens? Why?

A

It was especially observed in the countries whose economies are based on natural resources only.

The economy of these countries are very sensitive to the commodity price they produced.

113
Q

Whether the endowment of mineral resources is a curse or blessing depends on: Name 3.

A
  1. The strength of economic and political institutions
  2. Human asset capacity
  3. Public policy, addressing inequality, poverty alleviation, education reforms, and the contribution to political decision-making.
114
Q

What is Dutch Disease Generally?

A

It is an economic trend relating to :
* Increase in natural resources revenues (Boom)
* Decline in manufacturing and other sectors

115
Q

Describe the 5 steps of the Dutch Disease.

A
  1. Starts with a rapid and large influx of money caused by Increase revenues from resources
  2. Foreigners purchase the resources with Local currency and Foreign currency
  3. Demand for the local currency rises since Foreigners need it to purchase so Increase the value of the local currency
  4. If they pay with foreign currency Foreigners bring foreign currency which Decreases the value of foreign country by increasing supply
  5. Global competiveness of the manufactured goods declines since Salaries and local costs are still the same in local currency but worth more in global currency
116
Q

In the Effects of resources boom, name the 3 Resources movement effects.

A
  1. Production shifts toward booming sector
  2. Employees move toward easier to get and higher paid jobs
  3. Direct deindustrialization
117
Q

In the Effects of resources boom, name the 3 Spending effects.

A
  1. Wages increase and people spend more in service
  2. Employees move toward the service sector
  3. Indirect deindustrialization
118
Q

Name the 3 factors affecting a solution regarding the resources boom.

A
  1. Is resources boom only for a short time?
  2. Are the loss in the manufacturing sector permanent?
  3. Is the gains from resources exploitation greater than losses from manufacturing sector?
119
Q

Describe solutions/upsides to resources boom.

A
  1. Slow the currency appreciation by reducing the influx of money by creating long term funds.
  2. Increase competitiveness and innovation :Education, training and infrastructure investment in the non resources sectors
  3. Reduce government deficit
    No need of foreign loans
    Reduce amount of foreign investments
120
Q

Give the 4 conclusions of the resources boom.

A
  1. Many factors can affect economy
  2. Resources based economies are more affected by increase in currency value
  3. A rapid influx of money due to resources boom can reduce competitiveness of others sectors
  4. Long term economic planning can help to reduce this effect
121
Q

What are critical minerals?

A

Critical minerals are raw materials that are needed by essential sectors of a country.

122
Q

What are strategic minerals?

A

These minerals change from country to country, depending on their strategies that achieve policies and sustainable growth.

Mineral Industry Economics (2 decks)

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