Greenlandic raw materials are worthless

30. January 2014

The poor economy of Greenland will not benefit from the underground minerals unless these are extracted. Greenland is overestimating the current interest in its raw materials, and mining companies are not prepared to - or capable of - investing the huge amounts that are necessary. If these raw materials are to save the Greenlandic economy, the Danish Realm will have to focus its efforts and lead the way. An investment fund can set the wheels in motion - and it is urgent.

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Feature printed in Danish newspaper Berlingske 30 January 2014.

By Jóannes Niclassen, Vice President of MT Højgaard Mining.

Despite the underground minerals, Greenland is - in many respects - not that attractive to the international mining companies and investors. We have to see things from a different perspective in order to get the industry started. And because revenue from the mining industry is already being included in the Greenlandic economy, we must act quickly if we are to stop the downward financial spiral.

To set up a governmental investment fund like the Danish Export Credit Agency (EFK) might be an idea. An amount equivalent to three years' block grant will boost the industry, create Greenlandic and Danish jobs and, hopefully, help phase out the block grant in the long run. If the necessary infrastructure like harbours and roads is paid by the fund, and the mining companies pay a fee to use it, costs are transferred from the construction phase to the operations phase, during which revenue is created, and the fund will receive interest on its investments. Canada, Australia and Alaska have successfully used similar methods, making it desirable for mining companies to get started.

If Denmark and Greenland together fail to choose this solution or in other ways make an effort to start the minerals industry, it is very likely that the Greenlandic minerals adventure might end up being a potential that we never utilised.

I have worked with the mining industry since 2005; I have taken part in a number of investigations and preparatory surveys together with international players. This has taught me a great deal about how the mining companies and investors think when they are going to decide if investments in Greenland are attractive compared to investments elsewhere in the world.

At first, two factors are of vital importance when investing in a mine: There must be a prospect of increased demand on the world market; and comparable mines elsewhere in the world must not be able to start up faster. Mineral prices follow the course of the world economy; typically with a cycle of seven to ten years during which prices are up, respectively down. When a mining company considers potential mining projects, it should therefore be possible to establish the mine in 3-4 years from the time the state of the market begins to peak, and reimbursement on the money invested will also have to be within 3-5 years, thus enabling the mine to pay for itself, so to speak, during the first boom.

By all appearances, we are facing a new boom. Mine establishment should therefore be initiated now if the mine is to pay for itself in the coming boom. If we do not start now, it will probably be another 15 years until Greenland enjoys the same international attention on its raw materials that we have witnessed the last five to seven years.

The value of the minerals, the political stability, accessibility, operation costs and potential financing are other decisive factors when the mining companies and investors prepare realistic business cases.

Greenland offers a rich variety of minerals of high value. Compared globally, Greenland is also a stable society ruled by law; however, unclarified regulations as to the distribution of company tax and royalties as well as changing political statements related to the Mineral Act have planted a seed of doubt with the mining companies and investors.

Although Greenland might seem difficult to access, it should be seen as an advantage that many deposits are found close to the sea. On the other hand, the climate might prevent a Greenland mine operate year round.

Operation costs are expected to be fairly high in Greenland as wages are far higher than in Asia and Africa and even a little higher than in North America. This fact has already become a topic of discussion during the first realistic negotiations on establishing mines in Greenland. The vulnerable environment of Greenland might also entail increased costs for environmental precautionary measures. Furthermore, there is no infrastructure; as it is now, mining companies will have to provide all infrastructure themselves, that is harbours, roads, airports and power.

High operation costs might result in the potentially biggest problem: Financing. Capital is in high demand on the global markets. When investors contemplate whether to invest in Greenland rather than Canada, Australia or Africa, they deselect Greenland because of its lack of documented experience with mining, lack of infrastructure and high operation costs. The price of iron, zinc or even uranium is the same no matter where it comes from. The lack of history, however, in relation to construction and operation of mines in Greenland as well as the current political circumstances make investing in Greenland far more risky. Australia has more than 300 active mines, Canada more than 900 and Sweden about 10. Greenland has none. Only last week, the report "For the Benefit of Greenland", demonstrated that 12 large-scale projects must be initiated before 2040 if exploitation of minerals is to balance the Greenlandic economy. Nobody, however, wants to go first - and this is exactly why an investment pool might kick-start the industry.

Greenland itself is unable to provide capital for specific infrastructure investments. It is therefore logical to approach Danish investors like the Danish state, foundations and pension funds. All parts of the Danish Realm are interested in strengthening the possibilities of Greenland developing a self-sustaining economy. According to The Economic Council, an extrapolation of the current Greenlandic development will result in large deficits in the public budgets year after year - up to one billion Danish kroner in 2040.

Experience from other countries shows that investments in infrastructure bring about new projects in the same areas. The local government in Quebec, Canada, is investing 1.7 billion kroner in the construction of a main road for a coming mine, and the local government in British Columbia is investing 900 million kroner to establish a transmission line for a mining company. The federal state governments take great care to maintain mining in their country, and by subsidising the infrastructure they make it easier for the mining companies to raise capital for the establishment of the mines. The same goes for Australia where the government builds harbour facilities, roads and miles of railways into desolate places. In Greenland, all infrastructure has to be established from scratch, and the mining companies will have to pay for everything themselves with the current situation. It is therefore hard to imagine that investors will choose Greenland over countries where mining start-up is made easier.

Construction costs are paid back by having the mining companies pay user fees; and the likelihood is great that other projects develop in the wake of new infrastructure. The construction of a harbour and road at the bottom of the Nuuk Fjord for the Isua project will make the area much more accessible, and industrious entrepreneurs from Nuuk and the surrounding area will be able to set up accommodation facilities for tourists, hunting expeditions or similar creative activities that will increase tourist and tax income.

A side benefit is the competency development of the Greenlandic workforce, entailing a positive gain for both the individual person and society as a whole in the form of increased tax income.

Advantages are obvious if politicians and long-term investors enter the scene. Greenlandic raw materials will not positively influence the country's economy until they are extracted. And straightening the economy is urgent if Greenland is to become financially independent of block grants during the lifetime of all living Greenlanders and Danes.

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