Print4.1.3: Socioeconomic Factors
This category is intended to capture a disparate group of factors that are often beyond the control of the mining company, and which can occasionally create large problems for the mining company.
Demographics
The population characteristics are especially relevant to the labor force considerations, which we discussed under locational factors.
Financing and Market Conditions
Generally, mining companies will want to raise capital to finance the proposed mining venture. The prevailing condition of the financial markets will impact the ease or difficulty of raising capital. Similarly, prevailing regional, national, and global economic conditions can radically alter the demand for mined products as well as the price paid for those products. Sometimes, these conditions can change radically from when a project was begun and when it came online. In recent years, the simultaneous crash of both the commodity and energy markets has had disastrous effects for a number of mining companies.
Government Actions
Governments at all levels can incentivize mining by giving tax breaks for example, or they can restrict mining by delaying permit approvals, among other actions. The degree of government regulation is a consideration, and especially the consistency of interpretation and enforcement of regulations, as these can affect the cost of compliance.
Taxes
Tax policies such as income tax and depletion allowances will affect the profitability and, hence, feasibility of a proposed project.
Political Stability
Undertaking projects in lesser-developed countries(LDC) presents a higher risk for investors, and this may make it difficult to obtain financing at a reasonable rate, if at all. Governments change and policies can be overturned or reversed in an instant, and what was a welcoming and investment-friendly government can become quite hostile. Civil wars and terrorism can make it difficult to operate, not to mention the difficulty in recruiting and retaining a skilled workforce. Sometimes, governments will expropriate the company’s assets in the country, e.g., the mine, the equipment, and the reserves – this may occur years after the mine has opened. Despite the risk, companies and investors continue to pursue projects in these areas. Why? The “reward” for investing in higher-risk projects is a much higher rate of return on the investment. Thus, in the prefeasibility stage, the analysis would have to support the likelihood of a much higher rate of return. Otherwise, the project will be a nonstarter. It is difficult to account for these factors, not only because they are largely out of the control of the company, but also because they are difficult to quantify and predict. One can use the historical record as well as seek advice from outside experts, e.g., economists, political analysts in the U.S. State Department, and so on. Practically, we can account for some of these risks by performing risk and sensitivity analyses. For example, if we estimate that the likely selling price is $150/ton, and a worst-case scenario is a selling price of $100/ton, we would evaluate the desirability of the project over this range, and report our findings to those making the decision on the project.