That venerable firm, Ernst & Young have just issued their latest, Business Risks Facing Mining and Metal 2012-2013. It is worth looking at their site at this link and downloading the report’s Executive Summary. To whet your appetite, here is the number one risk they write about, namely Resource Nationalism:
- Imposition/increasing of royalties or mining taxes: The announcement in 2010 of a proposed new ‘super profits’ mining tax in Australia had a significant ripple effect around the world. Many mining and metals jurisdictions announced increases in taxes and royalties during the course of 2011–12 and many looked at Australia’s action as commercial cover for proposed changes. Amendments to mining and tax laws can result in changes to capitalallocation based on a weaker risk/reward profile.
- Mandated beneficiation/export levies: Many governments are now seeking to have minerals beneficiated in-country prior to export. South Africa has announced a beneficiation strategy, as has Zimbabwe, Indonesia, Brazil and Vietnam. In order to better ensure in-country beneficiation, governments are imposing new steep export levies on unrefined ores.
- Retaining state or national ownership of resources: Governments are also seeking to ensure that they retain ownership of their minerals, which is not a new phenomenon. These changes in ownership laws can have a significant impact on the reward miners’ expect to receive for the risk they have taken as they have paid for 100% of the investment but will receive only a percentage of the future investment return.
The remaining risks are:
Global skills shortage and infrastructure access retained second and third spots on the risk rankings this year. Both these risks are more acute in more locations now than they were 12 months ago, highlighting the supply capacity constraints that have hampered the sector for some time. Sharing the benefits makes its debut at number nine this year. Stakeholders ranging from the government to employees, the local community and suppliers, feel they are entitled to a greater proportion of company profits. Rounding out the top 10 risks are cost inflation, capital project execution, social license to operate, price and currency volatility, capital management and access, and fraud and corruption.
Guatemala is one example where imprudent statements have caused mining companies to loose value. I quote from a long report at this link:
Guatemala Finance Minister Pavel Centeno ruled out a government seizure of stakes in mining or other natural resource companies as part of a series of proposed constitutional changes. Existing investors won’t be affected by the proposed changes, which would allow the government to have as much as a 40 percent stake in natural resource companies, Centeno said in an interview today in Guatemala City. Shares in Reno, Nevada- based mining company Tahoe Resources Inc. (TAHO) (TAHO) and Goldcorp Inc. (G) trimmed losses following the comments. Shares in Tahoe Resources, which has its Escobal silver mine southeast of Guatemala City, fell 2.2 percent to $13.75. Shares had fallen as much as 4.6 percent earlier. Tahoe’s stock price tumbled 23 percent June 28 after reports of the proposal surfaced. Vancouver-based Goldcorp declined 0.4 percent to $37.62 in New York trading.
The debate continues in South Africa. Here a pithy comment on ANC and mutterings of takeover of South African mines.
Even the ANC’s options that are slightly more palatable than outright nationalisation are antithetical to investment in the minerals sector. The ruling party continues to labour under a strange ideological hatred for business (unless they are direct beneficiaries). In the process, they ultimately jeopardise the ability of industry to lift thousands out of poverty through job creation and undermine the very profitability required to earn tax revenue which could be used to create an environment conducive to growth.
Bolivia has already moved with a vengeance:
Bolivia’s leftist government, headed by Evo Morales, took over operations at the Colquiri mine on Wednesday after weeks of violent protests. Morales, who has already nationalized the Andean country’s natural gas and electricity industries, said the decree brought the local operating company Sinchi Wayra - which has been owned by Glencore since 2005 – back into state hands, resolving the dispute between employees and independent miners that has left 18 injured. Glencore said on Friday that it would seek an orderly handover of control of the mine but condemned the government’s action. “Glencore strongly protests the action taken by the government of Bolivia and reserves its rights to seek fair compensation pursuant to all available domestic and international remedies,” the company said in a statement.
But that is all you can do: seek fair compensation and stay away in the future.
All of which invites another blog on the ten greediest countries seeking to nationalize mines. Let us have your list.