Understanding the risks

 What is the biggest threat to mining? Is it the carbon tax, the mining tax, nationalisation, or indigenisation?

It is all of the above – mainly, it is the uncertainty surrounding these issues.

According to Grant Thornton: “Increasing and unpredictable government intervention across the globe is adding further complexity to a sector that is already heavily laden with risk.

“The shadow of higher taxes, restrictive regulation and indigenisation looms large of an industry already grappling with the risks normally associated with exploration and extraction,” the company states in its report Facing an uncertain future: Government intervention threatens the global mining sector.

Speaking to Scott Griffin, the national head of corporate finance industry leader – resources & energy at Grant Thornton, he told Australian Mining that a lot of governments are dissuading mining investment with taxes and nationalisation moves, essentially giving “too much stick and not enough carrot.

“The growing calls for [the] nationalisation and indigenisation of mining assets and resources threaten the very existence of some mining companies.”

In the report, it states that government interventions are raising sector uncertainty and complexity to acute levels, complicating decision making; it is also increasing risk for investors (often driving them to look elsewhere); and affecting project viability by reducing supply and disrupting demand.

Rio Tinto chief Tom Albanese has also spoken out against nationalisation, encouraging governments to look towards royalty schemes instead.

He said there is a massive debate on whether it is best for governments to gain their revenues via taxation and royalties, through partial operational ownership, or a combination of both.

His comments come on the back of increased pushes from South Africa’s ruling party, the African National Congress (ANC), to bring in legislation forcing miners to give more than half of their operations to the state; echoing the recent legislation changes in Zimbabwe.

Grant Thornton stated that “nationalisation is arguably the number one issue affecting the mining industry in South Africa”, which is causing serious concern amongst miners and investors.

“With the ruling ANC party debating state participation, analysts agree that reform of some sort is needed, but most argue that full-blown nationalisation will be detrimental.”

In Zimbabwe, legislation has already seen many miners lose majority control of their operations, with Rio Tinto forced to cede control of its Murowa Diamonds mine.

Zimbabwean indigenisation minister Savious Kasukuwere explained that all foreign miners would be expelled from the country unless they met a September 2011 deadline for selling the majority of shares to locals.

After September “any mining companies that did not comply, we will kick them out,” Kasukuwere said. A threat already under way.

Morgan Tsvangirai, Zimbabwe’s prime minister, said at the time that the move would discourage investment in the nation, adding that the law was simply “looting and plunder by a greedy elite”.

In a move viewed as in form, Venezuela has also announced that it will nationlise all gold mining in the country.

In 2010 alone, the country nationalised 234 private companies.

On the Australian front, the Mineral Resources Rent Tax and Carbon Tax have created a high level of uncertainty.

In particular, the new regulations and legislations have shaken Chinese investor confidence.

“The Chinese are finding it hard to understand why Australians attract Chinese investment in the early stages, only to then take effectively take the assets away,” Griffin told Australian Mining.

Miners, such as the aforementioned Rio and BHP have already come out and said their unwillingness to pay increased taxes may force them to look towards countries more open to mining, such as Mozambique, where taxation, nationalisation and indigenisation are less of an agenda for the local governments.

Griffin explained that “the problem is not so much with the changing of policies, but the speed at which they do it, without even a year or two consultation”.

This consultation period may have also reviewed whether gold should be included in the tax.

“Structurally this tax is very narrow, and has anomalies that are yet to be addressed, gold for example; there are coal producers which are not making as much as gold miners – and gold’s price keeps rising; there is still the view that [the MRRT] was brought in quickly without enough consultation, and is not broad based enough.”

So is this the future of mining? Is nationalisation of assets the way to go, or a strong mining royalty agreement?

While “one size doesn’t fit all … if you speak with a finance minister, someone from the treasury side of the country, they will recognise that the appropriate taxation royalty regime actually pays economic rent to the country in good times and bad,” Albanese said at a recent Commonwealth Business forum in Perth.

Is it a grab for control, cash, or a fair call?

 

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