We are a mining-dependent economy. All mines eventually close down. This country needs to prepare for a scenario where the major production points from Jwaneng to Tati reach the end of their lives, writes *PROF ROMAN GRYNBERG
The last few weeks have been traumatic and trying for the approximately 800 employees at one of the nation's largest private employers - the Tati Nickel Mining Company (TNMC). TNMC has two mines in close proximity, the Selkirk mine, which was shut down, and the Phoenix mine, which is currently running but scheduled to close in 2015.
TNMC was acquired by the Russian nickel, copper and palladium ( i.e. a platinum group metal) giant Norilsk in 2007 from Lion Ore. Norilsk is the world's largest nickel producers responsible for about 17 percent of total global production. While 85 percent of the Tati mines are owned by Norilsk, the other 15 percent is owned by the government of Botswana. It is the ownership by the government of Botswana which stems from the old Mining Act which gave the government 15 percent stake free that now obliges Norilsk, the principle mine owner, to consult at all times with its junior partner on decisions regarding the future of the mine.
When the hard rock men who run the global operations of Norilsk in Moscow looked at their global operations around the world, they took one look at the financial and production results coming in from Tati Nickel and similarly from Australia and saw output levels that are declining significantly. In Australia, Norilsk has recently closed its Lake Johnson mine with the loss of 60 jobs.
The production of nickel which is amongst one the highest priced of the so-called 'base metals', can sustain very low grade nickel ore at levels of purity at 0.1 percent grades. Such grades would have sent any copper, zinc or bauxite mine into what the mining companies politely call 'care and maintenance' ie closure.
Directly as a result of the growth of Chinese demand, nickel prices, which were fairly stagnant in the 1990's and the early part of the century, reached dizzying heights in the middle of the last decade peaking at USD 57,000 per tonne in May 2007. It was precisely at this time that Norilsk acquired its shares of Lion Ore, the previous owner of Tati. Since then nickel prices have plummeted to some USD 15,000 per tonne in late April.
Norilsk is caught in a pincer between declining production levels and a falling market price for nickel. Whereas the Tati mine was producing some 22,000 tonnes of nickel in 2007 when Norilsk bought it by the end of 2012, it was down to some 7,000 tonnes with rapidly falling head grades of nickel, copper and palladium which is also produced at the Tati mine.
The mine was scheduled to close in 2015 in any case but careful intervention by the Botswana government and the company may see an extension as the company moves back to rework the deposits at the Selkirk mine, which was previously put under 'care and maintenance' as it ran out of commercially viable nickel deposits.
In order to delay the inevitable day when the mine must finally close, Norilsk has put in place a so-called 'ABC' strategy which may see the mine continue until 2015 when the work on the Selkirk tailings deposit may commence and hence many of the jobs may continue for several years to come.
The strategy is based on the three inter-linked components. The first part of the strategy is to increase production by 5 percent by allowing head grades to come down to 0.1 percent which will in turn raise the costs of producing nickel concentrate. Normally mines have a fixed cut-off for their head grades so as not to spend vast sums on the creation of concentrate. The nickel/copper concentrate is then sent to Phikwe to be processed into higher grade matte and then finally exported overseas for refining into nickel and copper which is the end product of the process. So why would
Nothing in business is free and this increase in production volumes will lower unit profits as poorer quality grades of ore are processed. So to counteract these rising costs TMNC has proposed the 'B and C' components of its strategy. The B component of the strategy is a 10 percent reduction in costs. Tati has reportedly approached its stakeholders which presumably includes the suppliers as well as unions for a large cost reduction to allow it to continue operating.
The third 'C' component is the issue of some importance to the country as a whole and that is the reduction in the costs of processing its nickel/copper concentrate into matte through a lowering of the tolling fee imposed by BCL where the concentrate is processed. Norilsk has made it perfectly clear in press statements that all three components of its strategy will have to be implemented or it will close the mine at the end of the year.
Mr Rapitsenyane, Tati spokesman, reportedly said, "These measures must be implemented for TNMC to keep the mine in operation until the end of 2015. The important aspect of the plan is that failure of any of the three components will render the entire strategy unsuccessful".
In other words, BCL will have to accept lower smelting tolls in order to keep TNMC alive. But BCL needs all the funds it can get if it is ever to fully implement its own very important 'Polaris II' development strategy which is vital to the long term interests of Phikwe and the country as a whole.
Under this strategy, BCL is planning to develop a copper refinery in Phikwe which would be capable of refining the copper concentrate from the various copper mines currently under development in Ngamiland as well in the north of the country. The government of Botswana will need to make sure those resources are available to BCL, which is largely state owned and has not been very profitable, so as to make sure that BCL does not end up cross-subsidising Tati.
What has happened at Tati is a classic 'end of mine life' scenario where head grades drop and the company starts looking at recycling its tailings dump or developing the last marginal pockets of ore. When this happens a mine is at the end of its end of its life. There is no question of the Tati mine staying open indefinitely - mines are by definition non-renewable and unsustainable. But what is happening at Tati will in 15 years be precisely what happens at the Jwaneng diamond mine where the bulk of the nation's export and government revenues come from.
When Jwaneng reaches the stage of Phoenix and Selkirk mines in around 2025-2027, the consequences will be far more drastic for the country as a whole than the loss of 800 jobs, as painful as this will be to the workers and their families that will be directly affected. The most important matter is how we prepare for that day and make sure that our diamond revenues are used on sustainable developments.
In order to assure that the country can withstand the decrease in mining production, the most important thing the government can do is to help prepare the coal mining sector, which is the most propitious of the new mining sectors, through the rapid development of the railway to Namibia. But the hardest thing to recognise is that just like the ABC programme of Tati, the country as a whole will face severe belt tightening to accommodate the decline in revenues that will come with the inevitable closure of these mines.
*These are the views of Professor Roman Grynberg and not necessarily those of the Botswana Institute for Development for Development Policy Analysis where he is employed.(The conversation)