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Oil & Minerals

Time to zag

In order for Greenland to meet the goals it set out in its 2014 mining strategy, it must give investors a reason to return

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In February 2014, Greenland adopted a five-year strategy for developing its mining sector. The strategy assumes increasing investment levels in prospecting and exploration. This has not been the case.

This is worrisome, because Greenland needs more prospecting activity in order to uncover the mineral deposits that can support the its mining strategy, which in turn is necessary for job creation and economic growth.

The mining strategy calls for tying Greenland’s economic development to the growth of the mining and oil sectors. What must be done if this is to happen?

SEE RELATED: “Not enough” minerals in Greenland to fund independence: report

The best place to begin would be to ensure that Greenland is competitive as a mining country, or whether it is doing the right things to attract investment.

The underlying premise of the mining strategy is the conclusion, reached in 2011 by a government-seated panel of economic experts, that national economic health was failing, and that prompt action was needed. The problem is that the cost of running Greenland is increasing faster than tax receipts were. In 2013, the gap was 1 billion kroner ($150 million), or 6% of GDP. Closing the gap requires expanding the economy.

One of the assumptions made in the mining strategy is growing foreign investment. This was the case between 2007 and 2011, when interest in Greenland’s underground saw investments reach record levels. This is no longer the case.

The downturn in the market that began in 2012 has as its root overproduction of a number of commodities, which led to falling prices and a concurrent erosion of investor appetite. In 2012 alone, investments fell 27%. The steep decline in investments was made clear to Self-Rule decision-makers in a report published on April 1, 2013.

SEE RELATED: Ready, set, dig?

In all, foreign investments fell 67% (from 711 million kroner to 236 million kroner) between 2011 and 2014. (During the same period, the total decline in mining investments worldwide was 37%.) The decline continued in 2015, and by the start of this year totalled 100 million kroner, the lowest level in 11 years.

It takes time to develop new mines. In Greenland, where snow and bad weather can make prospecting difficult, it takes even longer. The best way to deal with this is by investing as much as possible in small-scale prospecting, regardless of the market situation. A constant level of prospecting means that when new projects are always ready to get started when the investments start flowing again.

The mining strategy assumes that within a few years, there will be between five and 10 active mines in Greenland at any given point. These operations are expected to contribute more than 30 billion kroner in taxes over 15 years. With just two mining licences issued right now (to True North Gems, for Rubies, and to Hudson Resources, for anorthosite) that goal is far from achievable.

More and larger mines need to come on-line soon if the goals set out in the strategy are to be met. Three such projects are in the works (Kvanefjeld, for rare earths uranium and zinc; Tanbreez, for tantalium, niobium, rare earths, zirconium; and Citronen, for zinc and lead), but there is no guarantee that anything will ever become of them. It is one thing to carry out a feasibility study on an exploration project, it is another thing for a project to move into production, let alone turn a profit.

SEE RELATED: Don’t take our word for it

Because not every project will eventually show a return on investment, it is necessary that Greenland has a pipeline of projects that can be started easily and which can be exploited in a socially and environmentally responsible manner. The process would be helped along by infrastructure improvements. The mining strategy recommends that educational and job-training programmes be set up as a way to make sure that the country makes the most of its mines. Mining companies, for their part, will be required to hire as many Greenlanders as possible.

As was the case at the Black Angel lead and zinc mine between 1973 and 1990, these will be skilled positions. But even at its highest, only 35% of Black Angel’s workers were Greenlanders. On average, the figure as around 20%. If the mining strategy is to be a success, more people will need to receive relevant educations, otherwise the jobs will go to foreigners.

Since the Second World War, 10 billion kroner (adjusted for inflation) has been spent exploring Greenland’s underground. As a rule of thumb, each time the public sector invests a krone, private investors chip in two kroner.

SEE RELATED: Between a rock and hard times

Greenland is an expensive place to do business, making it one of the first places that investors cross off their list when times are tough. The annual Fraser Institute ranking of mining economies this year showed an improvement in Greenland’s ranking, but, overall, its reputation has worsened considerably in recent years.

Countries like Australia and Canada that take mining seriously are all too aware of the importance of mining for their economies. They keep their industries going by doing things to attract investments to small-scale prospectors.

The most obvious way this can be done is by letting investors benefit from the tax-deductible losses that small-scale prospects invariably rack up. Small-scale prospectors attract investors in the expectation that there is a long-term profit to be had. Before that happens, they run at a significant loss. The tax deductions that these losses are entitled to are rarely taken advantage of, however. In other countries, write-offs are used to attract investors willing to put money into prospecting. The scheme is akin to giving individuals a tax deduction for making a charitable donation.

Greenland is known to investors for having a zigzag mining policy. Its most recent move was to zig. That was a success with voters, but it renders the mining strategy unattainable. If Greeland wants to attract investment, create jobs and generate wealth for the country, it needs to zag soon.

The author is a geologist and the former managing director of NunaMinerals.