Caveat Emptor: Mineral Development, Sanctions, and North Korea

By | May 13, 2012 | No Comments

Caveat Emptor: Mineral Development, Sanctions, and North Korea

by Scott Bruce

The most recent round of UNSC sanctions on North Korea targeted three entities involved in missile trade with Iran. One of these companies, the Green Pine Associated Corporation, is also heavily involved in North Korea’s mineral expert business, having taken over much of the activities of the Korea Mining Development Trading Corporation (which itself was sanctioned by the US in 2010). Sanctions on groups involved in mineral development in North Korea are nothing new, but they demonstrate the challenges involved with investment in the DPRK’s mineral sector.

Cash for Gold  | Mineral development sounds like a win-win endeavor. North Korea’s mineral sector is one of the few assets the DPRK can leverage for foreign current or use to attract foreign investment. More than 58% of North Korean’s exports in 2009 were related to the mineral sector, and, as I’ve noted in previous Sino-NK articles, the DPRK is increasingly dependent on it for foreign exchange. North Korea lacks the ability to develop this sector itself, requiring foreign investment and cooperation from the outside world. The DPRK is particularly interested in securing foreign investment in its gold deposits, which, unlike coal or iron, do not meet a domestic development need for the North.

Furthermore, North Korea’s mineral sector has the potential to spur economic development in the state. Many mines in the DPRK have been severely damaged by floods, and production at almost all North Korean mines is hampered by the lack of basic energy supplies. These mines would need to be rehabilitated and a stable energy supply would have to be secured for mineral development operations to resume. These infrastructure improvements could support local communities and other economic development efforts. Even if the mines are remotely located, mineral development, given the large population these efforts require, is often accompanied by the provision of social services for the mine workers, and sometimes their families, that need to be relocated near the site. Finally, joint ventures for mineral production could support the development of legal and economic instruments that could help bring the North into line with international norms.

Industrial Plant in Sunchon, Vital City for the DPRK’s Weapons Manufacturing Base | Rodong Sinmun, May 11, 2012

Let the Investor Beware | However, mineral development is a multi-generational enterprise. This means that mineral development companies are looking for a stable climate to invest in for the decades between initial exploration and scoping of a site to mine closing. The Green Pine sanctions illustrate one challenge for North Korea. While Green Pine will undoubtedly be replaced by a similar organization with a different name, it will be a hard sell for companies to partner with a group that is likely to face US, if not UN Security Council, Sanctions in the near future.

Second, investors will need to be confident that North Korea will honor the agreement for the duration of the project. Given North Korea’s ambivalent attitude toward joint partnerships, this seems unlikely. In other cases, as seen by South Korean firms who invested in the DPRK mineral infrastructure, a change in political relations at the state level can sink the business relationship. Firms that spent years developing a partnership with a North Korean entity and negotiating terms of a joint agreement now have no idea of the status of those projects and little hope of getting a return on their initial investment.

This is not simply a matter of allowing open bids on mineral contracts. Investors need to be confident they have a long-term partner and a stable business environment before these investments can be seriously considered. Even if one is prepared to assume that the North Korean state will still exist in a decade, sanctions on North Korea and the state’s own willingness to shut down partnerships due to domestic or international political concerns makes development of the mineral sector nigh unthinkable. Is it any wonder that China remains the dominant player in North Korean resource development?

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