Are Miners Getting A Fair Deal?
by Ahmed Olayinka Sule, CFA
“He was a beloved husband, father, son and brother, and will be missed by his entire family, including aunts, uncles, cousins and many friends”
– Obituary of Steven Cain (who died in a mining accident)
“Dear Mommy and Jenna, if anything happens to me, I will be looking down from heaven. If you take care of my baby girl, watch over her, tell her all the good things about her daddy. She was so cute and funny. She was my little peanut.”
– Josh Napper
(content of a sealed note written by Josh and read after his death in a mining accident)
“The families and communities of the dead miners have been changed forever by today’s catastrophic blast……. They were screaming. It was absolute despair. When the news came, everyone just cracked up. People were openly weeping everywhere”
– Tony Kokshoorn (Mayor of Grey district)
“No miner should ever have to die for a paycheck”
-Hilda Solis (US Secretary of Labor)
Two Players in the Commodity Value Chain
He hugged his wife and kissed his four-month-old son James and then rushed to his car to make the thirty-minute drive to the Sekondina Mine (where he had worked for the last fifteen years). After Jim Reid parked his car, he headed for the mine with his other colleagues. Jim got onto the lift and began the 2,670-meter descent underground. Forty-five minutes later, Jim disembarked from the truck; work had just started. He tied his torch on to his forehead and started to crawl inside the tunnel. He began to extract coal from the pit using his drilling machine.
Unknown to Jim and his colleagues, 183,570 cubic meters of gas had leaked out. As a result of the leak, 3,600 tons of coal dust was released, thereby leaving a high concentration of gas underground. There was a big explosion and the impact of the explosion smashed Jim’s six foot five inch frame against the wall. Jim died instantly. He was thirty-five years old. At the time of his death his total remuneration was $50,000 (comprising of a salary of $30,000 and a bonus payment of $20,000).
Sixteen thousand, two hundred and sixty eight kilometers away in New York, Alfonso Raul enters the lift and takes the two-minute ride to the eighty-fourth floor. Alfonso is a commodity trader at Hale Commodity Advisors, one of the leading global commodity trading firms. Alfonso switches on his Bloomberg and Reuters terminals and then logs on to Factiva and starts to monitor events taking place in the financial markets. He focuses on developments relating to the various commodities he trades i.e. zinc, copper and gold. He receives several calls from his clients and he advises them on the best way to position themselves within the markets. On the same day, he calls the various operators, shipping and back office teams to ensure efficient completion of contracts. When the markets open, he executes a number of profitable trades for his client and employer, using a range of trading strategies. He later takes part in a conference call with his Chief Operating Officer to evaluate the risk and profitability on a number of commodity transactions and financial commitments. He leaves the office at 11 pm. Alfonso is thirty years old. Based on the trades made to date, Alfonso should expect a salary of $350,000 and a bonus of $1,000,000 at the end of the financial year.
Commodity value chain
The above hypothetical example illustrates a day in the life of two players in the commodity market value chain. Commodity traders and miners are key players in the chain. Other participants in the chain include the mining executives, investment bankers, transporters, insurers, storage companies etc. Without these players, it would be difficult for the natural resources buried underground to reach the end user in a processed form.
Resource Scarcity
Most products consumed today are sourced from resources buried underneath the earth’s surface. The petrol used in cars is derived from crude oil found underground, while some dietary supplements are derived from zinc. Magnetrons, found in microwave ovens contain copper while nickel is a major component in the production of coins. Jewelries such as gold, silver and diamond are sourced from beneath the earth’s surface.
Due to growing urbanization, expanding population and improving life style in emerging markets, there has been an unprecedented increase in global demand for the earth’s natural resources. However, most of these resources are limited in supply. According to Strategy Dynamics Global Limited, by the mid 2030s, demand for many resources will substantially exceed what the planet can supply.
A major consequence of the increased consumption and limited supply of commodities is an increase in commodity prices. With commodity prices elevated, it becomes more profitable to extract the commodities from beneath the earth and sell it at these elevated prices.
Prevalence of mining disasters
Extracting minerals from under the earth has always been a risky business, often resulting in injuries and loss of lives. Due to advancement in technology and better safety practices, the injuries and deaths experienced while mining are not at the elevated levels of the early part of the twentieth century. However, in recent years, there has been an increase in mining disasters.
On 27 September 2011, a miner died at the Kellingley Colliery, a mine owned by UK Coal. A couple of days earlier, four miners died at the Gleision Colliery in Wales, when the coal mine got flooded. In October 2010, thirty-three miners were trapped in a Chilean mine for sixty-eight days. Their ordeal generated worldwide attention. Twenty-nine miners were killed at the Upper Big Branch mine owned by the Virginia based firm Massey Energy in 2010. In November 2010, twenty-nine miners died at the Pike River mine in New Zealand. Five people were killed in a mining incident in South Africa in July 2010. In Colombia a total of one hundred and seventy three miners died in various mining related disasters in 2010. In November 2009, one hundred and seven miners died at the state-run Xinxing mine in China. The miners died because the company’s ventilation system did not ventilate the mine, thereby allowing explosives to build up. Two thousand and six hundred people were killed in several coal mine accidents in China in 2009.
Risk and reward
Before I proceed with this section, I would like to lay down three declarations:
- I believe that human life is priceless and cannot be valued in monetary terms
- I believe that human beings are created equal.
- I believe in the dignity of ALL work
Mining executives, commodity traders, investment bankers and individual miners are key players in the commodity value chain. They all take risks and get rewarded for the risks they take.
Mining Executives: provide overall leadership for the mining company. They comprise of the Board of Directors and senior management. The principal duty of the Board is to create and deliver shareholder value by setting the company’s strategy and ensuring that management implements it. They determine the level of risk that the business should take and ensure that principal risks have been properly identified and are appropriately managed.
At an individual level, the executives face the risk of forfeiting their bonuses or inability to exercise their share option if the company’s share performance deteriorates significantly. They could also lose their jobs due to underperformance. On the reward side, mining executives receive various forms of compensations for their responsibilities including salaries, bonuses and share based payments, which are linked to the share performance of the company.
According to PwC, in 2010, the average annual base pay of Canadian mining Chief Executive Officers (CEO) was $480,000 and average bonus payouts were over $540,000 resulting in a total average compensation package of $1,020,000. In 2011, 56 per cent of Canadian mining CEO’s earned in excess of C$1 million. During the 2010-2011 financial year, BHP Billiton paid its executives a total of $19 million. Don Blankenship, the CEO in charge of Massey Energy, which in 2010 experienced a mining disaster where twenty-nine miners died, received $10.4 million salary in 2010 in addition to a $12 million retirement package.
Mining companies often engage in deal activities as large companies within the sector seek to acquire rivals. According to PwC, during the first six months of 2011, there were 1,379 mining merger and acquisition deals announced worth US$71 billion. Bloomberg estimates that between January 2010 and January 2011, $30 billion worth of deals were announced in the coal-mining sector. Mergers and acquisitions often benefit mining executives as it can result in the rewriting of management compensation contracts.
Commodity traders/brokers:executes orders to buy or sell commodity contracts on behalf of clients or his/her employers account. As an employee of an institution, he does not bear personal liability for such losses. However, he faces the risk of losing his job or forfeiting his bonus due to poor performance. In extreme cases where he makes unauthorized trades on behalf of his employer, he could be termed a rogue trader and could face imprisonment.
If things go well for the trader, he would get recognition from his colleagues and bosses. She would be awarded huge bonuses, which sometimes run into millions of Dollars.
Glencore International plc, the world’s largest commodity trading firm, which controls 60 per cent of the global zinc trade, 50 per cent of the copper market, 45 per cent of lead, 28 per cent of coal, and 10 per cent of the global wheat market was worth $47bn as at September 2011. In 2010, the company paid sixty-five of its senior staff members an average bonus of $14 million each.
Investment banks: provide a very important service in the commodity value chain. They act as advisors to mining companies that engage in mergers and acquisition activities. They also underwrite debt and equity securities issued by mining companies. These transactions that the banks advise on are very complex and involve a lot of brainpower and man-hours. For these services, banks earn fees. Part of these fees is guaranteed despite the outcome of the deal, while some fees are contingent upon the deal being completed. Where a deal is not completed, the banks face the risk of not generating the contingent fee income.
The fees generated by the banks are also dependent on the economic cycle. Very often in times of commodity booms, investment banks generate additional mining fee income and the reverse is the case when there is a commodity slump. Employees in the commodity division often benefit in form of additional bonuses when the overall business condition is positive. Employees get reduced or no bonuses if the bank’s fee income is reduced due to poor business conditions.
According to Thomson Reuters and Freeman Consulting, for the period 1 January 2011 to 28 September 2011, the combined global investment banking fee income generated from the global mining sector was $6.9bn. In 2010, the total fee generated from the mining sector was $8.02bn.
Miners: are involved in the extraction of minerals from under the earth. They either work directly for the mining companies or are employed by contractors. Their reward comes in form of salaries and bonuses. The salary component is fixed, while the bonus element is tied to productivity. Sometimes, due to the salary level and in order to claim the bonuses , miners are motivated to take excessive risks, which could endanger their lives.
The average net monthly salaries (based on 2005 USA Purchasing power) of miners in some countries are detailed below:
| Country | Amount |
| Australia | US$3,913.00 |
| USA | US$2,694.00 |
| Canada | US$2,607.00 |
| Brazil | US$747.00 |
| China | US$620.00 |
| Mexico | US$584.00 |
| Peru | US$531.00 |
Source: The International Average Salary Income Database
Although the salaries earned by the miners may be enough to meet their basic needs, however, the question to ask is: are they rewarded adequately for the risk they face in carrying out their responsibilities?
Miners face a myriad of risks when performing their duties. Coal mines often produce methane gas, a toxic asphyxiating gas. This gas is highly inflammable, causing coal dust explosions, which is dangerous for miners. Miners also face danger from rock slips and inrushes of water, which could cause the walls of the underground tunnel to collapse. They also face the risk of getting trapped in the mine and getting starved of oxygen. The roof could also give in resulting in death. In some instances, miners also face the risk of dying from carbon monoxide poisoning. They also face the risk of developing elements of claustrophobia especially when trapped inside the mine. A number of miners have also been buried under crushed ore and rock.
While the above-mentioned risks usually result in immediate death for the miners, they also suffer long-term side effects due to the nature of their job. Due to working under very high temperature, they are often inflicted with heat related sicknesses such as heat stroke. They also develop respiratory related ailments such as silicosis and black lung disease due to exposure to crystalline dust, which they inhale while drilling.
Way forward
Miners just like the mining executives, commodity traders and investment bankers engage in a risky activity. It is therefore rational that miners should be adequately rewarded for the risk that they take. However, unlike other players in the commodity value chain who are handsomely rewarded for the risk they take and the services they render, the miners fall short in terms of remuneration on a risk-adjusted basis.
Contrary to other members on the commodity value chain, miners have a higher probability of dying in the cause of their work, due to the level of risk involved. Miners upside rewards are limited and small, whereas the downside risk is very severe. In a worse case scenario, the mining executive, commodity trader and investment banker could lose their jobs, face imprisonment or forfeit their bonuses; however their life is still likely to be intact. This is not the case for the miner who could lose his life in a worse case scenario. Despite the differences in the job risk profile, the mining executive, trader and bankers are adequately rewarded and often receive bonuses running into millions of Dollars.
While efforts are continuously being put in place to improve safety in the mines, miners still need to be adequately rewarded for the risks they face.
To redress this asymmetric imbalance, it is imperative for some of the upside generated by the advisors, mining executives and commodity traders to trickle down to the miners who bear the greatest risk. After all without the miners to extract the resources from underneath the earth, there would be fewer commodities to trade; fewer deal activities and lower income generated by mining companies, thereby resulting in lower remuneration for commodity traders, investment bankers in the bank’s commodity division and mining executives.
Conclusion
In conclusion, I would like to clarify what I am saying and what I am not saying regarding rewarding miners for the risk they face in carrying out their jobs.
I am not saying that capitalism is bad or that it should be scrapped. This article does not promote a leftist, socialist or communist agenda; I am not saying that the bonuses paid to commodity traders, investment bankers and mining executives should be discontinued; I am not saying that work carried out by traders, bankers and mining executives are irrelevant.
What I am saying is that miners are human beings and deserve to be treated as such, rather than as statistics and numbers. What I am saying is that those higher up the commodity value chain should allow some of the riches they extract from the commodities to flow down to the lowly paid miners . There is enough wealth from under the ground to satisfy all players in the commodity value chain. What I am saying is that miners could, should and must be adequately rewarded for the risk they take.
If any skeptic feels that the miners don’t deserve to be adequately rewarded for the risk they face when extracting minerals, I suggest that he or she should take a pay cut, work in a coal mine for a week, take the lift two thousand meters below the earth and crawl inside a tunnel to extract coal from the pit.
October 2011
© Ahmed Sule
THE ALATENUMO 