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Illegal mining and organized crime is a huge threat to mining industry profits that many of us are not thinking about. In some nations, it now appears that gangsters are taking a large cut of some minerals, particularly gold. Sooner or later, this growing racket is going to start hurting the profits and stock values of major mining companies.

In Peru, illegal mining could actually be bigger than the drug trade, organized crime analyst Elmer Cuba estimated. Cuba, who works at the Macroconsult firm, estimated that crooks in that country dug up and sold $1.79 billion worth of ore in 2011. That's actually more than the estimated value of cocaine shipped out of the Andean country. Cuba also estimated that the black market now accounts for 22% of Peru's gold exports.

Obviously, there's no way to know if Mr. Cuba's estimates are accurate or not. Crooks are not going to tell him what they are making, but if his figures are true, it points to a large and well-organized criminal enterprise. It also has some very bothersome implications for the mining industry and mining stocks.

How Illegal Miners could hurt the Bottom Line

The biggest way that illegal miners can hurt legitimate mining companies is to disrupt or hinder their operations so they can swipe the ore for themselves. This could be the real motivation behind a lot of the strikes, sabotage, violence, and protests over environmental issues that are plaguing mining operations in some countries. After all, gangsters don't have to worry about union contracts, nor do they have to file for permits.

An example of this could be the massive Minas Conga gold and copper mine that Newmont Mining (NEM) and Buenaventura (BVN) are building in Peru. That $4.8 billion project has been delayed for months by protests supposedly related to water. The real motivation behind the protests could be to delay the project so gold can be stolen. Some media reports indicates that Newmont executives are now thinking about writing Minas Conga off, so. Such shady activities could even hurt the profits of major U.S. mining companies.

Illegal Mining could be at the Root of Freeport's Grasberg Troubles

Illegal mining may already be affecting the bottom line at Freeport McMoRan (FCX). The Asia Times reported that the company spent $28 million for unarmed security at its giant Grasberg mine in Indonesia in 2011 and another $14 million to pay for a special armed police unit for additional security. The major purpose of this security is to keep illegal miners off of Freeport's claims.

The company started beefing up security after what was described as itinerant (illegal) miners started operating nearby in 2003-2004. In what does not appear to be a coincidence, violence around Grasberg-- including shooting attacks on Freeport planes and vehicles and the sabotage of a pipeline-- has escalated since then. There's no evidence that illegal miners are attacking Grasberg, but they could be. The violence has been blamed on pro- independence "rebels", but the rebels are obviously getting their guns and ammunition from somewhere.

The situation in Indonesia could soon get worse. The government there has unveiled plans to slap a 20% tax on metal ore exports and to restrict metal ore exports to 2009 or 2010 levels. Those moves would obviously encourage illegal mining and ore smuggling by making it even more profitable. The black market will grow and criminals sensing more money will move in. That would mean that Freeport and other miners would have to spend more on security.

Obviously, at some point, the cost of such security could make operations unprofitable, particularly with other costs escalating and gold and copper prices falling. Stock values could also be driven down by the media coverage of violent attacks on mines. So far, the U.S. media has ignored the Grasberg situation, but Freeport's chairman Richard Adkerson is so concerned about the violence that he mentioned it to analysts earlier this week.

Freeport could face similar problems in Africa, where it is developing a huge new mine at Tenke Fungurume in the Democratic Republic of the Congo. In 2010, a gang of illegal miners apparently attacked the mine, burned trucks, and stole copper. At the time, there were over 1 million illegal miners working in the country. That means Freeport's security costs in the Congo could be as high or higher as those in Indonesia.

AngloGold Ashanti (AU) could be in worse trouble in the same nation. Reuters reported that there are 200,000 illegal miners working around one of its major gold projects, the Mongbwalu mine. To make matters worse, many of the illegal miners are former rebels who are apparently armed and members of organized gangs.

Anglo has not said how it will deal with this situation. It will either have to spend a fortune on security or pay off the rebels or their leaders. Either way, it will have to spend some money that should be going to earnings per share to combat illegal mining.

Contractors block Roads at Chilean Copper Mines

Contract workers protesting a lack of job security reportedly blocked roads leading to several mines owned by Chile's government copper company, Codelco, on Thursday, May 17, 2012. A spokesman for the contract workers union told a Bloomberg reporter that his organization had paralyzed Codelco's Andina by blocking roads that shift workers use to get to work.

Contractors also staged marches at several other Codelco mines and at least one smelter. It is not clear if work was disrupted, but Codelco is the world's largest supplier. It would take a sustained strike to raise prices and increase profits at other copper companies. No protests were reported at the Collahuasi copper mine, which is owned by Anglo American (OTCPK:AAUKY) and Xstrata (OTC:XSRAY). The current glut of copper on the world market probably means that this unrest will have little effect on other major producers, such as Freeport, Vale (VALE) and BHP Billiton (BHP).

Copper Mine Tailings could be a Major Source of Molybdenum

Chile's huge piles of copper mine tailings could be a major source of molybdenum. Business Insider reported that a Canadian company called Amerigo Resources (AAREF.PK) has bought the right to process 10,000 tons of tailings a day from El Tenniente, the world's largest underground copper mine, which is run by Codelco.

This could be a nice deal for Amerigo, which produced 6,294 tons of copper and 216,292 from tailings at the Colihues mine in Chile in the first quarter of 2012. The reprocessing business is apparently very good for Amerigo. Business Insider noted that its revenues rose by 10.8% in the first quarter. Unfortunately, this won't be reflected in Amerigo's bottom line; the company's earnings dropped from $15.4 million to $2.3 million in the past year because of high electricity costs in Chile.

So reprocessing of old tailings could be a growth industry if costs can be contained. With the cost of developing mines sky rocketing, it won't be long before major miners like Freeport and BHP Billiton start looking into reprocessing. It also won't be long before illegal miners start stealing old tailings and reprocessing them as well.

There is one factor that could stop both reprocessing and illegal mining from growing into big businesses: lower metal costs. If metals prices start plummeting, it won't be just mining stock value that will fall, it will be the levels of illegal mining and reprocessing. The illegals and reprocessors need very high prices to make a profit.

Source: Illegal Mining May Affect These Mining Stocks In 2013