(The following is an extract from the recent PricewaterhouseCoopers global mining survey “Mine: Let the Good Times Roll”. The report may be read in its entirety at www.PWC.com/mining. All dollar figures are in U.S. dollars.)
Over the past decade, Russia, China and India have established significantly enhanced profiles in the global mining industry. In a recent PricewaterhouseCoopers global mining survey “Mine: Let the Good Times Roll”, we looked at the key opportunities that have arisen for these countries and others, along with the challenges that they need to overcome to maximize the opportunities before them.
RUSSIA: WORLD-CLASS DEPOSITS AND LEGISLATIVE UNCERTAINTIES
Russia has vast natural resources and is a major mining commodity producer. Mineral prospectivity is high and the ability to convert known deposits to reserves has been successful. The industry in Russia has the potential to expand rapidly given access to new technology and Western capital.
Currently, there are few Russian companies that can be considered as key players at a global level. An exception is NORILSK NICKELthe world’s largest nickel producer and owner of nickel reserves. However, consolidation is underway and will undoubtedly continue in the years to come. Russian metal companies are vertically integrating by acquiring mining assets such as coking coal and iron ore producers.
In terms of opportunities, foreign investment in the Russian mining industry has been increasing in recent years. The growth has been led by investments in gold mining operations, particularly by Canadian companies. BARRICK, KINROSS GOLD, BEMA GOLD and HIGH RIVER GOLD have been operating in Russia through their subsidiary companies for many years. The ventures are successful and are primarily done through joint ventures with Russian companies and local governments.
Some global mining companies have come back to Russia. The highest profile is RIO TINTO’s exploration and development joint venture with Norilsk Nickel. Furthermore, as a result of high metal prices, the major Russian mining companies possess substantial financial resources and are investing in domestic assets to develop production. In addition they are acquiring equity stakes in foreign mining companies to obtain exposure to foreign markets.
Russia’s mining industry is becoming increasingly transparent, with more information on reserves and resources becoming available for public usea trend that is likely to continue as more Russian companies plan for future IPOs.
Russia’s mining industry, however, faces many challenges.
For one, there are many uncertainties regarding government policy towards mining taxes and foreign investment. There continue to be delays surrounding the receipt of approvals, while licence awards lack transparency, and compliance requirements are onerous. An imminent new Subsoil Law is expected to improve the business environment, but it may also place a number of potentially onerous demands on foreign investors.
Russia has a 24% flat corporate income tax rate, which is low in comparison with many other countries, and the government is working on creating tax holidays for grassroots projects. Royalty regimes are revenue-based and are comparatively high at 6%, which may impact the attractiveness of inbound investments.
CHINA: ENGAGING THE HIDDEN DRAGON
China claims to be the world’s third largest mining producing country, although most companies are small in scale. There are approximately 150,000 mining companies, of which merely 30 are publicly traded.
As a whole, the industry suffers from structural problems and the Chinese government has recently stepped up its efforts to improve various aspects of the industry. Thousands of unsafe and polluting mines have been closed, and a more transparent and market-oriented system for awarding exploration and mining licences has been introduced.
Foreign mining companies are being encouraged to enter China and are doing so in droves. In 2005, 206 exploration permits and 187 mining licences were reportedly issued to foreign companies. However, due to numerous market barriers, limited access to geological data and financial restraints, foreign investments are concentrated in a few sectors such as gold and coal.
There are often inconsistencies between central and local governments in policy implementation, leaving foreign companies at a loss in knowing which one to follow. Also, Chinese companies tend to be unwilling to do grassroots work and are somewhat averse to making long-term investments in exploration. This causes friction between joint venture parties on the future direction of a company. In addition, Chinese companies need to appreciate more the value of soft technologies brought in by foreign companies, such as geological and economic modelling expertise, mining expertise and management practices. Red tape and difficulties in gaining access to key government officials also cause problems.
These issues largely explain why the major mining companies, while investing heavily in countries of similar geological endowment, are not doing the same in Chinaat least not on a large scale. China’s regulatory infrastructure makes it difficult to conduct proper investment assessments for large projects.
More importantly, the major mining companies have been obtaining sufficient benefits from the current trading arrangement with China, leaving them with little incentive in taking the risks associated with direct investment.
As China’s situation improves, more foreign mining companies are reviewing their China strategies. Companies such as ANGLO AMERICAN and GOLD FIELDS have made investments in China either directly in Chinese companies or through joint ventures.
INDIA: HUGE POTENTIAL WITH SIGNIFICANT HURDLES
India’s economic growth is targeted to reach 10% per annum. It relies on mineral imports to fuel its tremendous growth and faces acute shortages in certain minerals. Consumption is growing rapidly, causing the mineral trade deficit to increase at the rate of 26% annually since 2002 and it now stands at $25.8 billion.
The trade deficit arises despite the fact that India is rich in mineral wealth. Ores and mineral exports (excluding gems and jewellery) now constitute 5.3% of all Indian exports, earning $4.2 billion in 2005 (of which $3.2 billion is attributable to iron ore).
The Indian mining industry remains dominated by the government sector. While only 820 of the 3,000 operating mines are government-controlled, they account for 75% of mineral production by value. The production share of government mines has reduced slightly in recent years, and over 90% of new mining leases have been awarded to the private sector, showing that the situation is beginning to change. Government policy continues to evolve and 100% foreign ownership is now permitted for all non-fuel and non-atomic minerals. This policy is enhanced by the government’s move to reduce its hold on mining. It has divested 70% from HINDUSTAN ZINC and 51% from BHARAT ALUMINIUM, both of which are now held by VEDANTA RESOURCES.
Private companies are seizing the opportunity. They are investing significantly to expand mining capacity in India while several Indian companies have also made substantial investments and acquisitions abroad. The government has begun to emphasize the promotion of foreign direct investment and usage of modern technology in the mining sector.
As of September 2005, $18 billion of investments have been committed to the mining industry, of which more than 42% are in the implementation stage. However, the mining industry has not yet succeeded in attracting much foreign direct investment. Only $38 million has come into the country over the past three years despite the government’s approval of foreign investment applications totalling over $830 million.
The growing private sector and massive investments in building infrastructure across the country are expected to trigger conside
rable demand for minerals. This will provide excellent opportunities for increased revenues for the global mining industry, but the Indian domestic industry also has the opportunity to benefit. When compared with other competing emerging mining markets, the expenditure outlay in India seems low compared to its prospects. This gap is likely to be met by the private sector for those bold enough to invest.