[miningmx.com] — MICK Davis, Xstrata CEO, is probably right in believing resource rents, as taxes and royalties on mining revenues are known, should be prospective rather than retrospective.
Yet tell that to Africa’s resource rich nations. Ghana, Tanzania, Zambia, and Guinea among others well and truly cashed in on the recent history of high commodity prices throughout much of 2011, a year that will surely be remembered as the time when resource nationalism strode back to centre stage.
Perhaps the most spectacular example was Rio Tinto’s decision in April to pay the Guinea government $700m and grant it 35% in the Simandou iron ore project. This ended a dispute dating from 2008 in which the Guinea government said Rio Tinto had missed production deadlines and therefore it planned to rescind its mining licence.
There are other examples such as the 1% increase in royalties imposed on African Barrick Gold by the Tanzanian government earlier this month, or the imposition in November of a fixed royalty rate of 5% in Africa’s second largest gold producer, Ghana. This compares to a 3% to 6% rate previously adopted in that country.
Stability clauses protect companies such as Newmont and AngloGold Ashanti, which will continue to pay 3% royalties in Ghana for the 15 years, but even these traditionally cast-iron ways of protecting a contract are being tested.
In a study published in November on 10 trends likely to characterise the mining industry, consulting firm Deloitte stated: “Amid these rising levels of resource nationalism, some countries are even threatening to renegotiate existing tax stability agreements, throwing mining company financial projections into disarray and heightening political risk.
Even in perceived stable fiscal environments, such as Mozambique where the discovering of millions of tonnes of coking and thermal coal has drawn every major diversified mining company to its shores, stability clauses are a point of debate.
Mozambique will in January legislate a range of mining laws, although none of them have fiscal consequences, but are largely friendly to investment and intended to improve efficiencies. But one that is a cause for concern is changing the stability clause from life of mine to 10 years. Says Eduardo Calu, an attorney at Maputo’s Sal & Caldeira Advogados, a stability clause of only 10 years might not be enough to attract finance; in other words, it’s too short and too risky.
Incidentally, one shouldn’t see the advance this year of resource nationalism as an African phenomena only. Far from it. Australia pushed through its 30% tax on coal and iron ore miners while the carbon tax, which drew the ire of Xstrata’s Davis who dubbed it “bloody stupid”, has also seen light of day.
Export duties were introduced in India, Kazakhstan and Russia while in Indonesia, miners are obliged to help the country meet its energy commitments before they can ship the region’s coal to the lucrative Asian markets.
The effect of these changes, quite apart from project profitability is that it’s demanding a higher level of soft and political skills from mining company executives – a development identified by Randgold Resources CEO, Mark Bristow.
Speaking to the Guardian newspaper in May, Bristow spelled out the need to provide real returns to host nations, and he’s pretty uncompromising about it.
Commenting on how competitors manage social investment in Africa, Bristow said: “They do these presentations showing pictures of snotty-nosed African children, giving them clinics and schools.
“It’s a few hundred thousand dollars a year, maybe a million. But we’ve paid the Mali government $800m in taxes in seven years – you can buy a lot of schools and roads for that money.”
But if this year’s resource nationalism has taught the industry anything, it’s that the discussion is not limited now to taxes. The adoption of indigenisation by Zimbabwe, the discussion regarding nationalisation in South Africa and in Namibia, and the Mozambican government’s intention to invest up to 20% in ‘strategic mega-projects’ bears out Deloitte’s observation that governments want a permanent stake in the mining industry.
