According to Ernst & Young’s assessment of the global mining industry in 2013, resource nationalism is the most worrisome risk threatening miners.
If you’ve been reading the papers over the last year, this may not come as much of a surprise.
But when you consider that resource nationalism has rapidly climbed from the bottom of the list of 10 factors included in Ernst & Young’s yearly report to the very top, it clearly illustrates a worrying trend.
“There is no doubt projects around the world have been deferred and delayed, and in some cases investment withdrawn altogether, because of the degraded risk/reward equation”, writes Ernst & Young’s Global Mining and Metals Leader Mike Elliott.
“The uncertainty and destruction of value caused by sudden changes in policy by the governments of resource-rich nations cannot be understated”,
In many ways, mining companies are victims of their own success.
The strong commodity prices and high reported profits seen in years past have spurred politicians and local stakeholders in some resource rich nations to demand a larger piece of the pie.
The tragedy though is that bureaucracy moves slowly and the policy response to the mining boom has begun to take effect after the good times have passed and the industry has fallen into recession.
And it’s not just the emerging economies that present risks to investors. While a number of South American and African states have been in the headlines for resource nationalism of late, Ernst & Young identify Australia’s proposal of a “super profits” tax in 2010 as the catalyst for the recent round of nationalistic tax reforms.
The proposal later evolved into the Minerals Resource Rent Tax which came into effect on the 1st July 2012 placing an additional 30 per cent tax load on profits generated by iron ore and coal companies making over A$67 million.
That development in Australia prompted Chile and Peru to enact similar taxes targeting profits rather than simply production.
Following, India has created a taskforce to work on the creation of new levies on minerals. The initiative followed demands raised by several provinces in India for a new mineral resource rent tax with a minimum of 50 per cent on “super profits” earned by miners.
A number of host governments are also now seeking to have minerals beneficiated in-country prior to export. That’s a fair enough aspiration, but the cost of constructing new refineries or smelters and, often, the lack of affordable power, skilled labour, competitive tax regimes, and the loss of flexibility in their global supply chains are all areas for concern.
So far, South Africa, Zimbabwe, Indonesia, Brazil and Vietnam have announced beneficiation strategies.
Still, Ernst & Young points out that the majority of growth in the global mineral supply has come from emerging economies.
The rise of mineral exploration and supply from emerging economies has coincided with a slowdown in developed nations. This dichotomy is seen most sharply in the copper, aluminum, and steel sectors.
In these sectors growth has certainly been driven by emerging economies.
Meanwhile, according to Metals Economics Group, between the year 2000 and 2010 mineral exploration spending in the developing world increased from 40 to 60 per cent of the global total.
With so much of the exploration funding being spent in emerging markets, international mining companies and the governments of emerging economies must find a workable compromise in order to keep the industry on track.
But there are examples of countries where the local government is eager to facilitate the expansion of mining.
A notable example of this is Nicaragua where foreign direct investment has grown at an average compounded rate of 23 per cent since 2003, from US$186 million to over US$1 billion in 2012.
While mining does not account for all of the investment growth in Nicaragua, gold mining within the country has been one of the biggest growth industries and the government has set up a targeted agency to promote the sector abroad.
To that end, the government is keen to point out that Nicaragua has a favourable tax regime, with a corporate tax rate of 30 per cent, and mining investment credits in place.
What’s more, companies enjoy the freedom to expatriate all capital and profits, enjoy full international ownership, and maintain full protection of intellectual property rights, patents, and brands.
In fact, Nicaragua now has the second lowest labor market risk in Central America and, according to the Doing Business 2013 report put out by the World Bank, is the top jurisdiction there in enforcing contracts, resolving insolvency, and protecting investors.
One company making the most of Nicaragua’s favourable policies is Condor Gold. The company’s La India project already hosts an NI 43-101 compliant resource of 2.4 million ounces of gold grading 4.6 grams per tonne.
And the company has recently announced the completion of a 23,598 metre drilling program which is designed to provide an upgrade to the resource figure with an emphasis on defining open pit resources.
SOURCE; MINESITE
