Appealing to multiple investor categories: Artisanal mining formalization

With 45 million miners producing precious metals and stones, critical minerals and construction materials across 80+ countries, ASM is highly diverse.  One commonality across the sector is that it is mostly informal, with only 15% of miners formalized.

What is formalization?

Estelle Levin, founder of Levin Sources and a recognized global expert on artisanal mining, defines formalization as ‘the transition toward organized and professionalized systems of production in and through which responsible business conduct and sustainable development are more feasible and desirable, and thus more likely.’  Transitions to stable predictable equitable business relationships through enhanced governance, access to financing, value chain redefinitions and mining practice improvements are all implicit in formalization.

Results combine meaningful financial value with social and environmental gains.  What are these and how do they align with investor interests?

Traditional mining/Value investors’ perspective

Traditional mining and value investors focus on returns relative to risks.

Professionalizing artisanal miners involves shifts toward robust governance through companies, coops or associations, with miners equipped, trained and shifted toward good practices.  Productivity increases of 2X, 3X or even 5X result from this process, remembering that the starting point prior to professionalization is an environment that combines a lack of equipment with inconsistent practices.  Productivity equates to value of course, the basis for potential returns.  The process takes 12-18 months, a relatively short time horizon when considering extensive shifts in productivity.

What about risks?  

A diverse portfolio of projects - across locations and minerals - mitigates risk relative to returns.  Savvy project selection that focuses on projects in places where conflict, corruption and legal barriers do not impede success helps to improve risk/return relationships further.

The bottom line for traditional investors - potentially compelling value through productivity gains across a portfolio of projects that mitigates risks.

Social impact investor perspective

Professionalization of artisanal mining delivers a broad variety of social gains.  At core, fit for purpose governance combined with trained equipped miners increases productivity, which translates into value for miners, lowering poverty levels.  Along with this basic impact:

1. Human rights adherence is enhanced – sad realities that include child labor in places are shifted toward responsible practices, reducing the likelihood of abusive situations

2. A focus on gender diversity enhances roles for women, who are relatively disadvantaged in many parts of the sector today; this shift of course increases both dignity and opportunity for women, who are often critical for leveraging mining benefits into community gains

3. Improved tunnel designs, PPE usage, mercury elimination and good practices all improve mining safety, lowering the potential for accidents and deaths that are often a reality in informal mining operations

4. Informal artisanal miners are often vulnerable to predatory intermediates.  Formalization includes the potential for transforming value chains, eliminating predatory actors who take disproportionate value away from the miners who generate this value today

The bottom line is that social outcomes improve considerably through formalization, with a variety of potential gains in play across differing situations.  Theories of change can be developed that predict what these improvements look like, and they can be measured after the fact, naturally appealing to impact investors.  Recognizing that social gains can be co-mingled with increased value, there is a continuum of impact and return that apply to various scenarios, where projects and supporting investors can target patient and impact-basis investment to varying degrees depending on their specific characteristics.

Environmental/Climate investor perspective

Local as well as global environmental benefits accrue as the professionalization of artisanal mining takes hold.

1. The supply of critical minerals is increased through formalization, directly contributing to the energy transition given looming supply shortfalls.  Artisanal miners produce copper, cobalt, nickel, tin and other critical minerals today.  As training, equipment and good practices are brought to bear, supply is increased, which is a direct prerequisite for building the clean tech of our future.

2. ASM improves outcomes on deforestation, mercury contamination and soil erosion as capital and equipment supports transitions toward better practices, all resulting in cleaner air, water, soil and ecosystems that live in the vicinity of ASM

3. It is also worth mentioning that artisanal mining, which uses less and smaller equipment compared to large scale projects by definition, has lower carbon impacts then the large mechanised mines found at mega-projects

Depending on the specific focus of climate-related investors, shifts in the environmental outcomes that they look for are significant.  Investors can combine the kinds of social and environmental shifts in outcome that are described in this section and the section above with financial value that results from productivity – results from formalization are not necessarily either/or are categories, but combine various forms of value.

Public financing perspective

At core, artisanal mining formalization delivers fit for purpose governance that support shifts toward stable predictable equitable business relationships.  An environment with stable predictable business relationships extends beyond the miners to neighboring communities, given that miners are often extensions of these communities who procure food, shelter, clothing and equipment from local sellers. There are various public policy wins that result from formalization which may be catalysts for state financing: 

1. Social gains for miners themselves and environmental gains that may relate to broader regions are both delivered for formalization.  These gains may be the direct focus of public policies

2. Regions with stable predictable business relationships with increased mining production that generates value are ripe for sustainable development.  The economic gains that formalization delivers can be significant

3. Critical minerals supply directly correlate to long-term energy security, and precious metal supply, especially gold, correlates to long-term financial security.  Both energy and financial security are highly strategic of course.  Significant geopolitical strategies play out in mining, especially in the supply-constrained critical minerals space.  With artisanal mining formalization delivering enhanced tonnage, ASM is geopolitically strategic, a natural opportunity for state-based investment

To summarize

Formalizing artisanal miners delivers a variety of economic, social and environmental benefits.  

Basic financial attractiveness relative to risks are compelling given productivity gains that ground value.  Recognizing the diversity of the ASM sector, different places will also see differing social and environmental benefits that go hand-in-hand with economic value.  This positions attractive investment options for traditional investors, for impact investors, for state-based investors and for several other specialized investment categories.  

As understanding of artisanal mining increases and as awareness of the critical minerals potential of the sector grows, there is every reason to expect that an investment marketplace that includes a broad variety of debt and equity based financial instruments will mature.  There is already focus on developing investment products.  For instance, The Blended Capital Group is working with strategic investors to define and deliver fit for purpose vehicles.  As focus on the sector increases, it appears inevitable that significant economic, social and environmental value will be unlocked in coming years.

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