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There is nothing quite so heartbreaking to an investor as having his
company’s flagship project taken over, nationalized, by the "El
Presidente for life" of the country they’re working in.
Security of Supply
Access to raw materials at competitive prices has become essential to the
functioning of all industrialized economies. As we move forward developing
and developed countries will, with their:
- Massive population booms
- Infrastructure build out and urbanization plans
- Modernization programs for existing, tired and worn out
infrastructure
Continue to place extraordinary demands on our ability to access and
distribute the planets natural resources.
Threats to access and distribution of these commodities could include:
- Political instability of supplier countries
- The manipulation of supplies
- The competition over supplies
- Attacks on supply infrastructure
- Accidents and natural disasters
- Climate change
Accessing a sustainable, and secure, supply of raw materials is going to become the number one
priority for all countries. Increasingly we are going to see countries
ensuring their own industries have first rights of access to internally
produced commodities and they will look for such privileged access from other
countries.
Numerous countries are taking steps to safeguard their own supply by:
- Stopping or slowing the export of natural resources
- Shutting down traditional supply markets
- Buying companies for their deposits
- Project finance tied to off take agreements*
Country Risk + <Security of Supply = >Resource Nationalism
Resource Nationalism isthe tendency of people and governments to assert
control, for strategic and economic reasons, over natural resources located
on their territory.
Traditionally the major benefits for developing countries (from their natural
resource endowment) came in the form of:
- Employment/wages
- Government revenues - taxes, royalties or dividends
There can also be indirect benefits such as knowledge and technology
transfers. Foreign investments can also involve infrastructure investments,
sometimes on a massive scale, like electricity, water supplies, roads,
railways, bridges and ports.
Today many governments are looking at other ways to get more money from
miners.
Ernst & Young Global Mining & Metals Leader Mike Elliott says
governments have gone beyond taxation in getting more out of the mining
sector with a wave of requirements such as mandated beneficiation/export
levies and limits on foreign ownership.
Mandated beneficiation/export levies - Governments are
imposing steep new export levies on unrefined ores to force mining companies
into domestic beneficiation. Minerals beneficiated in-country capture more of
the value-chain as the products will achieve higher prices.
Increasing state ownership- How does a mining company factor in a change to
forecast returns after a countries mining policy mutates during/after project
development? Miners are easy targets because mining is a long term investment
and one that is especially capital intensive – mines are also immobile, so
miners are at the mercy of the countries in which they operate. Outright
seizure of assets happens using the twin excuses of historical injustice and
environmental/contractual misdeeds. There is no compensation offered and no
recourse.
Below are a few examples of recent resource nationalism:
Argentina re-nationalizationed YPF, in 2012, at the expense of Spain’s
Repsol.
Bolivia’s President Evo Morales expropriated South American Silver’s silver
and indium mine on Aug. 2, 2012. “The nation has no financial obligation
to South American Silver.” Mining Minister Mario Virreira
“Indonesia has kicked off the new year (2014 – editor) with a total ban
on exports of nickel, tin and bauxite, a warning that resource nationalism
remains a potent force despite the commodity slump.” The Telegraph,
Resource nationalism alive and well as Indonesia bans key metal exports
Zambia, Africa’s second largest copper producer, has raised both underground and open pit
mining royalties from 6% to 8% for 2015. The hike in royalties is especially
painful as it’s on gross revenue not a companies’ bottom line, completely
missing rising operating costs. Zambia will also introduce a 30% corporate
processing and smelting tax, a 30% tolling tax and open pit mining will be
subjected to a 20% mineral royalty.
Guatemala is going increase its mining royalties in 2015, from 1 percent to
10 percent, with 9 percent going to the central government and 1 percent
remaining in the municipalities.
Conclusion
There’s a storm brewing on the horizon - country risk and lack of security of
supply means resource nationalism is on the upswing. These developments could
also mean increased regional militancy and insurgency.
Keeping a weather eye on developments in the countries we’re invested in
should be on all our radar screens.
Are you storm watching?
Richard Mills
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Ominous signs emerging in one of the world's most well-endowed mining
nations. Where a newly-elected president may be setting up for a major battle
with foreign minerals firms.
The place is the Philippines. Where president elect Rodrigo Duterte made
some very strong comments this past week about the mining sector -- and the
companies that work in it.
Duterte was elected president of the Philippines in May. And is now touring
the country on a series of press junkets ahead of his June 30 takeover of the
federal government.
Speaking last Thursday at one such news conference in the southern
Philippines city of Davao, Duterte
let rip on the mining industry. Telling the assembled crowd, "I have
a big problem with mining companies. They are destroying the soil of our
country."
He continued, "The mining people must shape up. It has to stop. The
spoiling of the land, the destroying of Mindanao." The latter statement
being a reference to the mineral-rich southern island of the Philippines,
where major copper-gold projects like the Tampakan deposit are located.
Perhaps most ominously, Duterte insinuated that he might support local
mining firms over international operators. Saying, "I want it to be a
cooperative of all Filipinos. We will support them and give them instructions
how not to end up spoiling the land."
All of which is very concerning for a mining destination that has already
seen a major flight of international capital the last few years. Due to
permitting issues and local opposition to the mining sector.
There had been some headway
late in 2015 on permitting of copper-gold mines here. But Duterte's
comments raise the possibility that any recent advances in mining will be
negated under the incoming government.
Of course, it's possible all of this is just strong words meant to win
public support. But the mining sector will be cautious as Duterte assumes the
presidentship in July -- watch for any further news on mining policy changes
here, as well as possible moves toward nationalization of mining assets.
Here's to knowing when to fold 'em,
Dave Pierce
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