BLBG:Nationalism Replaces Crisis as Biggest Threat to Metal Supply: Commodities Q
Rising government demands for higher taxes and royalties are becoming a bigger threat to mining companies and their production than the financial crisis that’s wiped $6 trillion off stock market values since July.
“You can’t ignore it and the problem is it’s gathering pace,” David Russell, a director at Ernst & Young LLP’s mining and metals team in London, said Nov. 14. “It’s almost like a contagion. The key risk is an inability to plan.”
Resource nationalism, as the push by states is known, jumped to being the number one concern among mining executives this year, replacing capital allocation, Ernst & Young said in its annual risk survey published in August. At least 11 countries from Australia to Ecuador have this year raised or revealed plans to increase taxes or royalties on sales of resources such as gold and coal, according to Deutsche Bank AG.
“If it continues to rise, it just raises the uncertainty for the companies when making investments for the future,” Evy Hambro, manager of the $16 billion World Mining Fund for BlackRock Inc. (BLK), a top-two shareholder in four of the five biggest mining companies, said in an interview. “We are definitely going to see more. We’re concerned about it.”
Guinea and Zimbabwe are among others that have sought to nationalize mining assets, while Zambia last week doubled some royalties on minerals. Resource nationalism ranked fourth among mining executives’ concerns a year ago and ninth in 2009.
‘Leap-frogged’
“Resource nationalism just leap-frogged right to the top this year,” said Russell, who has 30 years of experience in the resources industry in Africa, Canada and Australia. “In the last year there has been a shift. Now we are facing a situation where resource nationalism could just continue as a contagion until this issue is resolved.”
Capital allocation, referring to decisions around applying funds amid uncertain global economic conditions, topped the firm’s risk survey in 2010. Containing rising costs was the key concern in 2009.
“Some governments have managed the changes quickly and efficiently but many have not,” Deutsche Bank analysts said in a Nov. 1 report. “These governments have also slowed investment decisions in our view and will likely lead to a prolonging of the period of elevated commodity prices.”
The advance of resource nationalism has accompanied record profits at the world’s largest producers. BHP Billiton Ltd. (BHP) and Rio Tinto Group announced net income this year that totaled almost $40 billion combined as prices soared.
Depleted Treasuries
“Quite a few treasuries are finding themselves depleted and they are casting their eyes around as to where they can actually lay their hands on funds,” Ernst & Young’s Russell said. “They are looking at the resources sector which at the same time is reporting massive increases in earnings.”
Australia, the world’s biggest exporter of coal and iron ore, this month placed before lawmakers legislation for a 30 percent tax on profits for the two raw materials. The government has pledged to use the increased revenue from the levy to lower the overall corporate tax rate. The tax aims to raise A$11.1 billion ($11.3 billion) over three years from companies including BHP, Rio Tinto and Xstrata Plc. (XTA)
Zambia, where Glencore International Plc and Vedanta Resources Plc (VED) are among companies that own mines, said Nov. 11 it will double its mineral royalty on base minerals to 6 percent and raise the royalty on precious metals to 6 percent from 5 percent.
Hugo Chavez
The increase and a tax change on mining income will raise about 981 billion kwacha ($195 million) for the nation, Africa’s biggest copper producer, Finance Minister Alexander Chikwanda said Nov. 11.
Venezuelan President Hugo Chavez ordered the nationalization of the gold industry in September and gave companies 90 days to form joint ventures with the state.
“Venezuela is quite disturbing with respect to the moves to nationalization there,” Russell said. “The similarities between Africa and South America are not that far removed when you start talking about resource nationalism.”
Crystallex International Corp. (KRY), based in Toronto, had its right to operate the Las Cristinas mine removed in February. An arbitration hearing on the dispute will begin next month as Crystallex seeks to regain ownership or win more than $3.8 billion in damages from the government.
Peru’s President Ollanta Humala, a former army rebel, was elected in June on pledges to raise mining royalties and tighten state control over resources. Peru is the world’s third-largest copper producer and the tax increase has been estimated to generate $1.1 billion in annual revenue.
Mongolian Gold
Mining companies are trying to fend off demands from governments to gain a greater share in projects or raise taxes on royalties on sales. Last month, Rio and partner Ivanhoe Mines Ltd. halted a bid by Mongolia to raise its stake in the Oyu Tolgoi copper and gold mine which has been estimated to make up one-third of the nation’s economy by 2020.
“History has shown nationalization doesn’t work,” said Richard Adkerson, chief executive officer of Freeport-McMoRan Copper & Gold Inc, the world’s largest publicly traded copper producer. “Everybody wants more. Governments want more, workers want more, shareholders want more and so in running a company it’s balancing those interests in the right way.”
Adkerson’s Freeport delayed expansion of the $2 billion Tenke Fungurume mine while the Democratic Republic of Congo’s government completed a review of mining deals which took more than three years. The review resulted in the government’s ownership in the mine increasing to 20 percent from 17.5 percent.
South Africa
“If I was having this discussion a year ago I would be hard pressed beyond talking about Zimbabwe and possibly South Africa,” Ernst & Young’s Russell said. “But now we easily jump from country to country. In the last year there has been a shift. Now we are facing a situation where resource nationalism could just continue as a contagion until this issue is resolved.”
In South Africa, mining companies have said a debate about nationalizing assets is deterring investment.
“South Africa is looking very carefully about how it can actually use natural resources for the benefit of the nation where unemployment is very high and poverty is still very high,” Ian Farmer, chief executive officer of Lonmin Plc (LMI), the world’s third-largest platinum producer, said in a Nov. 14 Bloomberg Television interview. “I’m sure when that debate settles, it will find the right balance between fairness and competitiveness that will enable us to continue to grow our business and invest with confidence.”
To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net
To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net
