Nov 26, 2013 02:20 PM

China's Arctic Mining Adventure Left Out in the Cold

(Beijing) – Greenland's new industry and mining minister, Jens-Erik Kirkegaard, visited China for the first time in November, just seven months after taking office. He made the intentions of his visit clear at the China Mining Conference and Exhibition in Tianjin on November 4.

"There is big room for Greenland and China to jointly explore commercial opportunities," Kirkegaard said. The minister also stated Greenland's intentions to become a natural resources exporting power.

Chinese businessmen have been eyeing the resource-rich North American country. In the summer, a group of businessmen from more than 10 private companies visited Greenland to seek possible investment opportunities in mining, fisheries, tourism and other industries. Similar trips are planned for the next year.

As economic recovery in Europe and the United States has been sluggish, Greenland is eagerly looking for alternative investors, especially China.

However, the progress of cooperation between Greenland and Chinese businesses have been slow as challenges over distance, environmental concerns and local infrastructure have hindered Chinese investors.

Tax Questions

Greenland is the largest island on Earth. Eighty percent of its territory is in the Arctic Circle and covered in ice. Most of its 57,000 residents live along the coast, with some 15,000 in the capital of Nuuk, which has only two traffic lights. Most of the settlements are not connected by roads and transportation is limited to sea or air.

Greenland moved to gradual self-rule from Denmark in 2008. Thus, it enjoys autonomy in domestic affairs, but Denmark sets foreign and military policy. Denmark also provides US$ 600 million in subsidies a year.

Foreign investment was major issue in Greenland's election in March. The residents of Nuuk are predominantly involved in fisheries and hunting, and were concerned about ecological damage from mining. They voiced skepticism about whether their communities would be able to benefit from a focus on natural resource extraction.

In October, parliament voted 15 to 14 to end a 25-year non-tolerance policy regarding uranium extraction. The result was an iron ore mining project, called Iusa, with a British firm.

Though Kirkegaard is from a different party than his predecessor, he has largely stuck to policy of promoting mineral extraction. In fact, he welcomed outside investors at the Tianjin conference, saying the government has already issued over 100 foreign permits, including some to Chinese companies.

Mineral extraction is one of the few ways Greenland can diversify its economy from fishing and achieving independence from Denmark's subsidies. The island's economy depends heavily on fishing, which accounts for 90 percent of exports. However, the industry is endangered by global warming.

Greenland has modified its rules and regulations to create a more attractive environment to outside investors. The island also permits foreign workers to work on foreign mining projects. The vast majority of workers on the Isua project are foreigners. The issue has come up with Chinese investment projects, which often prefer to bring in their own workers.

However, there are some complications in using migrant workers for mineral extraction, as Denmark stills controls foreign affairs, Jorn Skov Nielson, deputy minister of industry, mining and resources, said.

Also up in the air is the issue of a mineral extraction tax. According to previous government policy, fees are to be collected as soon as a project begins. Yet the current ruling party, Siumut, has promised to delay collection until projects begin to generate profits. But a final decision has not been made.

Su Jingjing, a lawyer at a Denmark-based firm, said a final policy may vary for different projects.

In Search of Buyers

With Australian and Canadian mining companies facing difficulties in financing, the Greenland government has focused on Chinese companies, which have been the most active mining investors around the world.

The Isua project is 150 kilometers north east of Nuuk. The rights are owned by London Mining Plc., a British firm. London Mining estimates the Isua mineral deposits contain 1.1 billion tons of iron ore with a possible annual output of 15 million tons. The mineral extraction will require investment of US$ 2.35 billion and generate a 20 percent rate of return. Yet London Mining has not disclosed detailed accounting of the cost of extraction, including factors involving expensive infrastructure building.

London Mining has been looking for a Chinese investor for the last two years. It began negotiations in 2011 with Sichuan Xinye Mining Investment Co., a company owned by the provincial mining bureau. The Sichuan firm even sent a team to Greenland in 2012.

Sichuan Xinye estimated it would need 700 workers for the project and as many as 3,000 during the peak period. The firm eventually withdrew, citing uncertainties over costs.

A number of other projects are still in the exploratory phase. Several foreign companies have received offshore oil and gas drilling permits, but have not begun production. In 2011, Britain-based Cairn Energy came up empty in several test drills.

Other factors contributing to the slow progress of investment include expensive infrastructure required for Greenland's Arctic conditions and vigorous environmental regulation. A firm must spend two to three years collecting water and ecological samples to study the environmental impact at the site as part of its permit application process.

Besides iron ore, Greenland also possesses reserves of lead, tin, uranium and rare earths.

A China Nonferrous Metal Mining Group Co. subsidiary, Foreign Engineering and Construction Co., signed a non-binding agreement with Australian miner Ironbark Zinc Ltd. in 2011 for zinc extraction near the Citronen Fjord. The Foreign Engineering and Construction Co. would undertake a wide gamut of services, from testing, procurement and design to mine construction, extraction and sales. It would also obtain financing from China's state banks.

Jonathan Downes, an executive at Ironbark Zinc, said the project is still undergoing a feasibility study. Uranium deposits have been found near Kvanefjeld Bay. Australian-listed Greenland Minerals and Energy Ltd. is assessing the feasibility of rare earths and uranium deposits, including social and environmental studies. It is speaking to investors and has plans to begin extraction in 2015.

Yet despite the allure of resources, there are still inherent difficulties in actual production. According to Nie Fengjun, a Chinese Academy of Geological Sciences researcher who has conducted several exploratory trips to southern Greenland, the difficulty in undertaking mining operations is due to "harsh conditions, remoteness and swarms of mosquitoes."

Thus despite the welcoming attitude of the Greenland government and efforts to attract overseas investors, the depressed nature of global mineral prices and uncertain outlook of the China's domestic economy and credit conditions have made large deals unlikely within the next one or two years, say Chinese experts.

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