Artisanal mining (ASM) formalization delivers compelling long-term outcomes for investors

We live in a short-term world, with many investors focused on quarterly results, which are very different from the optimization of value over time. In mining, this translates into stories about the spot price of gold and copper, which impact today’s earnings, but investment in new large mines takes over 15 years as projects need to be moved from pre-exploration through to operations.
The value that artisanal mining delivers through professionalization is also long-term by definition.

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, how do they align with investor interests, and what do they look like over time?

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 places where conflict, corruption, and legal barriers do not impede success helps to improve risk/return relationships further.

Financial Value - Traditional Mining / Value Investors
Formalizing artisanal miners at a given location happens relatively quickly and cost-effectively, requiring 12 to 18 months and involving implementation costs of $250-500K. Once in place, a well-managed coop can operate for many years, delivering multiples of production from what the informal site had produced prior to formalization. Thinking in traditional investor terms, this means that a solid NPV/IRR can be delivered for a given project, with risks associated with individual projects being mitigated through a diverse portfolio of projects that includes multiple locations and minerals.

With formalization projects delivering financial value combined with positive social and environmental impacts—all of which are long-term oriented—patient capital and concessionary rates of return associated with specific investments make sense depending on the focus of investor categories, some of whom value social, environmental, or economic gains as much as or even above pure financial returns.

Social Outcomes

Professionalization of artisanal mining delivers a broad variety of social gains. At its 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:

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

Effectively implemented formalization projects deliver governance structures that sustain gains over time. Impacts like human rights adherence and poverty alleviation are long-term by definition, where sustaining and building on gains over the course of time are natural goals. Theories of change can be developed that outline how social gains co-mingle with economic value, and what the long-term arc of progress likely looks like for given initiatives. Recognizing that social gains can co-mingle with financial value, there is a continuum of patient capital and concessionary returns that may make sense for specific investor categories.

Environmental outcomes

Local as well as global environmental benefits accrue as the professionalization of artisanal mining takes hold.
The supply of critical minerals increases 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.

As good practices combined with capital and equipment take hold, outcomes improve on:

• deforestation
• mercury contamination
• soil erosion
• water contamination
• biodiversity protection

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 than the large mechanized mines found at mega-projects.

As with social gains, improved environmental outcomes are long-term focused by definition. From investor perspectives, this means that social and environmental gains co-mingle with value, allowing for differing financial instruments with varying degrees of patient and concessionary capital.

Public policy

At its core, artisanal mining formalization delivers fit-for-purpose governance that supports 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. Beyond the social and environmental gains that formalization delivers, broader public policy wins that result from formalization include:

• 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.
• Critical minerals supply directly correlates 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.

As with other elements of formalization, economic value through catalyzed sustainable development as well as from enhanced critical minerals supply are optimized over the fullness of time by definition, which is an important consideration for governments that choose to blend public financing with private enterprise in supporting the professionalization of artisanal mining.

In summary

Formalizing artisanal miners delivers a variety of economic, social, and environmental benefits. Basic financial attractiveness relative to risks is 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.

What is common across all the value domains generated through a focus on ASM is that gains are optimized over the long term by definition. This is true with mining in general and certainly critical for ASM, given that it is about developing capacity and capability from the ground up that exerts value over the fullness of time.

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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