Resource nationalism – A growing challenge for miners globally – by John Gravelle (Canadian Mining Journal – December 2012)

The Canadian Mining Journal is Canada’s first mining publication providing information on Canadian mining and exploration trends, technologies, operations, and industry events.

John Gravelle, PwC Mining Leader for the Americas

Mining companies looking to establish mine operations in developed and developing nations must consider the risks associated with the investment. A reoccurring challenge faced by miners is resource nationalism. Resource nationalism is when governments assert greater control, influence or demand a larger share of mining revenues from companies engaged in the extraction and processing of a country’s natural resources.

A common myth is the belief that resource nationalism is restricted to developing countries. This is not always the case. These trends are prevalent in developed nations, including Canada, but the ways to exercise resource nationalism may
differ. For example, while developing nations often apply export duties to mining companies in order to support local
related industries, developed countries tend to increase taxes charged to mining companies as a way to generate additional
government revenue.

An example of resource nationalism in a developed country is Australia’s Mineral Resource Rent Tax (MRRT). The MRRT, which came into effect this year, imposes a substantial additional profit-based tax on upstream iron ore and coal operations that achieve a specified rate of return. Also in Canada, the Quebec government raised the tax rate of its mining duties to miners in 2010 and the recently elected PQ government has indicated that they plan to further increase this and impose a 5% mining royalty. An example in a developing country this year is the Indonesian government establishing rules capping foreign mineownership at 49%.

Rising commodity prices pushing resource nationalism forward

Mining fiscal regimes designed in the 1980s and 1990s typically favoured mining companies over the state. Favourable terms were set up because countries were focused on increasing the competitiveness of their mining fiscal regimes to attract investment.

However, this has changed as commodity prices have increased. Mining jurisdictions appear to have become less concerned about the competitiveness of their mining fiscal regimes and more worried about obtaining a larger share of mining
revenues. In response to resource nationalism, some mining companies have publicly stated that they may decrease investment in capital projects.

Impacts of resource nationalism

Generally speaking, mining companies invest in projects that produce the highest return for their stakeholders. When you introduce resource nationalism into the equation, it increases the risks mining companies
face and lowers the expected return for shareholders. The result is that resource nationalism reduces investment in a country. The perceived risk of future resource nationalism also reduces investment.

Mining companies also face pressure from shareholders to distribute profit through dividends. This not only affects mining companies in the form of reduced availability of capital to invest, but negatively impacts counties that would have
received investment for mining.

Resource nationalism can also impact the countries that depend on the mining industry. For example, many developing nations depend on the sector as a source of employment and foreign investment helps drive local economic growth. As well, mining can prompt the growth of needed infrastructure and spur knowledge transfer (e.g. adoption of new technologies).
These developments may be stalled if mining companies delay or cancel projects or become more selective as to where to direct investment dollars as a result of resource nationalism.

Communication is key

Mining companies need to improve the way they explain and reinforce their economic contribution to the countries in which they operate. Some mining companies provide this information to local governments as part of their Corporate Social
Responsibility (CSR) reporting. Properly done CSR reporting is required to limit political risk in the form of resource nationalism since many host countries are unaware of the total contribution that miners make. While a number of companies’
sustainability reporting is credible and transparent, the majority of mining companies fall short of reporting their contributions in respect of taxes and royalties paid as well as social and economic impact.

One way to communicate these benefits clearly is by having companies outline their economic impact analysis. Economic
impact analyses can help mining executives strengthen their business cases to negotiate funding, permitting and other
arrangements with government and local stakeholders for mine development and construction. Not only does the company’s
economic impact analysis benefit their company, but it also helps mining industry associations voice the economic
importance of their members’ operations and activities to key stakeholders.

Resource nationalism won’t be disappearing anytime soon – however, mining companies that properly assess the risks
associated with its planned operations, establish rapport with regional stakeholders,including government officials and NGOs, and clearly outline the social and economic benefits to the local community, will be one step closer to lessening the value destruction inherent in resource nationalism.

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