Dealing with the avarice of the state
Almost as soon as life returned to the mining commodities sector and capital started to come back into the space, resource nationalism has re-emerged as a major threat to miners.
The same jurisdictions that have enjoyed years of capital investment by miners – Western Australia, Greece, Tanzania, Indonesia, South Africa, Zambia and elsewhere – have recently looked to miners to try to solve their fiscal problems.
Despite mining companies being a major employer, often responsible for the entirety of the economy in certain regions, governments see mining companies as easy prey. What better target than a company that won’t show up at the ballot box, is typically barred from donating to the political process, and won’t march in any street protest. When finances tighten and governments look to cover their profligacy, increasing taxes and royalties in conjunction with political attacks on mining companies appears to be an all too elegant solution. Companies need to be wary and engage in defensive tactics quickly.
The latest analysis
EY’s recent study, Top Ten Business Risks Facing Mining and Metals 2017-18, identifies resource nationalism as back this year at number five. While the challenge isn’t new to mining companies, some of the approaches being taken are. EY writes, “[m]any governments and tax authorities have a new view of resource nationalism and will seek to increase the level of tax raised from the sector through controversy and disputes, with a shifting of focus to the way businesses are structured rather than what was attempted in the earlier part of this decade, through creating new mining taxes or increasing royalty rates.”
So while countries are getting more creative in how they approach their cash problems, their solution remains the same. Rely on mining companies for an easy revenue grab. This easy answer does not, however, reflect the realities of mining. Successful projects require long-term and carefully executed exploration and development, which often stretches past the term of one elected government. This timeline and the prospectivity of the ground may lead some investors to ignore political uncertainty, but investors do take notice. The Fraser Institute’s latest survey of mining companies, which ranks countries based on their policies toward miners, lists South Africa, Greece and Indonesia – all countries with a penchant for resource nationalism – as 84th, 91st and 99th, respectively, out of 104 countries.
Like it or not, mining companies are easy targets for governments in developing nations. Mining projects are incredibly capital intensive and governments know they are there for the long term.
Governments can also pull the lever of infrastructure, including the cost of power, which can be used to shift costs to industry.
Increased taxes, royalties, putting in import-export restrictions or redefining a country’s mining laws may go so far as to constitute expropriation creep. Any of these changes may fall short of expropriation, but when taken to extremes can have severe and significant impacts on the mining companies that do business in that jurisdiction. Ultimately, they can lead the companies to abandon future investment in the face of regulatory hostility.
How to deal with the new, old challenge
Companies are not without tools to respond to rising risks. They should be thinking about how to do all of this.
- Engage and ask their employees to engage. Initiatives to publish tax and other contributions provide a basis to demonstrate contributions made to the host communities. To the extent permitted by law, engage with the community to clearly and regularly communicate the investment in the community and the benefits of their presence. Encourage employees to speak up for the industry that is changing lives for the better through stable and lucrative employment.
- Use their home government (and the home government of their investors) to pressure the host governments to respect the international rules, and the conditions put in place to encourage the investment in the first place.
- Consider the rules carefully. Structure activities, where possible, to fall within investment protection agreements. Encourage your home government to pursue or expand such agreements with the host government.
- Communicate the pricing of risk in the marketplace to the home government and try to get them to join in investment promotion activities by joining roadshows and making commitments to encourage further investment.
___________________________________________________________SANDER GRIEVE is a partner, head of mining, and co-head of the corporate department at Bennet, Jones LLP.