State participation in mining will grow

[] — BHP BILLITON chairman Jac Nasser’s letter to the Australian Stock Exchange last week is a strong indication of how political the dispute against the Australian government’s proposed super tax on the resources industry has become. Nasser’s chief concern is that the tax reform proposals come with almost no consultation and he is attempting to raise popular consciousness against the government’s apparent insouciance.

“One of the key questions you asked,’ wrote Nasser of requests by shareholders to the company, “. is why BHP Billiton and the resources industry do no engage in more consultation with the Government to find a solution in Australia’s best interests .. For reasons we do not understand the Government chose not to undertake consultation on the nature and design of the proposed super tax prior to its announcement.’

BHP Billiton’s position is why some fundamentals of tax reform have not been applied in this case. For instance, if the tax puts the Australian minerals industry as a disadvantage, then why is it being applied? Nasser also calls for flexibility. Profits on mineral production alone should be taxed, not infrastructure investment. Rate variations should also be applied accounting for the mining of certain minerals, he says.

It’s difficult to avoid comparisons between the Australian government and South Africa’s much-derided Department of Mineral Resources (DMR), formerly the Department of Minerals & Energy (DME), which has never shirked consultation. The Royalty Act, for instance, was first a levy on revenue and has now been negotiated into a pretax levy. Account has also been made for marginal producers and there are different rates of tax for minerals.

Let’s not put the DME on a plinth (hell, no), but credit where credit’s due: the South African government wears a silk glove compared to the iron clad first of Kevin Rudd’s Australian administration. The expectation, however, is that the Australian government will have to negotiate. Perhaps that will be only after a successful election race. Elections must take place within 10 months from now.

The fact of the matter is, however, tax reform is just one manifestation of an increasing move towards resource nationalism.

Resource nationalism has many faces: the renegotiation of mining rights (Democratic Republic of Congo), compensation for exhaustion of national patrimony (South Africa), even the US state of Nevada has imposed higher taxation on mineral profits as well as Zambia and Uganda.

In a recent interview with Heinz Pley, the principal of McKinsey&Company’s global mining practice, which is run out of Johannesburg, the view emerged that government “participation’ in the mining sector would continue to grow. The interview with Pley was for Miningmx’s coming Mining Yearbook 2010, but it’s worthwhile previewing a slice of the interview here.

Said Pley: “Societal demands for participation in the mineral wealth of countries are omnipresent. Besides Zambia, Mongolia and other developing resource countries, the UK increased its take from British Gas during the boom of 2008. The mining industry risks inadvertently sliding towards a similar outcome as margins are attractive, and societal demands and technical competence are growing in resource countries.’

The planned creation of South Africa’s state-owned mining company is an extension of this argument. I also spoke to mines minister Susan Shabangu for the Yearbook and when addressing the issue of nationalisation, she commented that market watchers shouldn’t be confused about the difference between expropriation, banned by our constitution, and government participation.

The fact drilling for petroleum is relatively technically simpler than some mining (the BP disaster excepting), means that governments find it easier to participate in this kind of industry and explains why governments have tended to steer clear of mining in the past. There’s also a wide base of skilled contractors in the petroleum industry which can operate on behalf of government whereas that’s less obvious in the mining industry.

But it’s coming. It’s not as if government participation in the mining industry is always an unmitigated disaster: take Codelco, for instance, Chile’s large and successful base metals producer. It’s not that I’m making a case for government “interference’ in mining, so much as suggesting it’ll continue while the sector’s fortunes continue to soar.

Skeat: A moving target

Having suggested Peter Skeat’s new mining company, Galaxy Gold, is a speculative venture, and having case aspersions on his troubled past with the late Brett Kebble and Mintails, I was duly asked to join Skeat for lunch. Him and Ian Watson, formerly of Northam and Platmin, and now chairman of Galaxy.

I am unmoved on one point. Set against investor choice, Galaxy Gold – when it lists in August – is speculative. But I have got to give Skeat his due: he tells a quite superb story with all the conviction of a true entrepreneur. His is the kind of passion for mining that probably confounds his own mind. He’s financially independent enough to smell the roses, but – he says – he is compelled to develop the Barberton gold reefs (I’ve probably got the jargon wrong again) as an “honest South African’.

One of Skeat’s many contentions is that the many orebodies that make up Galaxy Gold’s planned Agnes “supermine’, if that term can be allowed, have by dint of neglect been completely unnoticed for years. Only after buying Agnes, and stepping into its data backroom, which Skeat said was like stumbling upon some archaeological treasure, was its true worth revealed to him.

It’s an interesting thought, so here goes: Avmin only mined some of the Barberton mines for sulphide to use as flux for other mines. Once sold to Algy Cluff’s Cluff Mining, they were undeveloped as Cluff had many fingers in other pies. Then they passed on to Metallon Gold, but Mzi Khumalo was far too interested chasing down gold possibilities in Zimbabwe. And now they land up with Galaxy.

I find it interesting the highly reputable AllanHochreiter is helping arranging the listing and will begin a bookbuild shortly. James Allan and Rene Hochreiter are old pros of note and I can’t see them backing a deliberate grift of the market. Skeat wants to raise up to R400m which will dilute him to between 25% to 30% of the overall share capital. I may have been too hasty dismissing Skeat but the market is the ultimate arbiter in such matters.