Investors in a number of mining companies operating in Africa – including Randgold Resources, Acacia Mining and Ivanhoe Mines – have had some unpleasant surprises over the past year as their share prices are penalised amid a wave of resource nationalism that is surging through the countries where they operate.
Acacia Mining has been the worst affected following the bust-up between the gold producer and the Tanzanian government but, arguably, the most embarrassing impact has been on Randgold Resources.
That’s owing to prior statements made by CEO, Mark Bristow, to the effect he expected the situation in the Democratic Republic of Congo (DRC) to be resolved and, even if it was not, Randgold Resources would be relatively insulated from the fall-out.
In February, Bristow accused nervous shareholders of “panicking” as Randgold shares plunged 7.5% because of negative news on the proposed new DRC mining code that broke on the same day that the group announced a doubling of its dividend. Bristow told an investor presentation in Cape Town the debate on the DRC mining code was “not over yet”, and said the likely impact on Randgold’s Kibali mine was “relatively benign as we stand today”.
He had previously stated that “unlike South Africa, the DRC is a country where you can engage in an open forum with government and 90% of the time the commercial logic will prevail.”
This time around “the commercial logic” did not prevail as DRC president Joseph Kabila refused to change the legislation which has been imposed on a number of major mining groups. The new code, signed by DRC President Kabila in March, axes ten-year protections for existing projects against changes to the fiscal regime, imposes a windfall profits tax and raises royalties.
Next up appears to be international legal action and arbitration and – possibly – a reduction in new mining investments into the DRC. Robert Friedland, executive chairman of Ivanhoe Mines which was another group affected by the changes in the DRC, told the Cape Town Mining Indaba conference in February: “Money is a coward. Money flees at the speed of light when it gets scared.”
Like Bristow, Friedland at that time was optimistic the situation would be resolved declaring: “This is a marathon, not a sprint. I ask all of you to have faith in our efforts. Don’t freak out too much about what you are reading. There’s a lot more underneath the surface. We will get there. Peace.”
Ivanhoe shares are down 35% since February and sit about 50% below their 52-week high. Randgold shares are down around 20% over the same period and 30% below their 52-week high. Acacia is down around 58% over the past year.
In addition to changeable regulatory regimes, another common experience is that several African countries have withheld VAT refunds to mining companies while insisting that those mining companies still pay the VAT as it falls due from their operations. The amounts are material running into hundreds of millions of dollars for some companies.
So what’s going on? Said Ian Cockerill, the lead independent non-executive director of Friedland’s Ivanhoe Mines: “My perception is that some countries did not benefit as much from the resource cycle as they would have liked to and some of the earlier agreements were not as equitable as they might have been”.
“These things tend to go in cycles and, hopefully, sanity will prevail, but what the nations involved must realise is that they need the risk-takers to come in and invest. But if the risk taker is not allowed to get his rewards and the government makes it too onerous, then don’t be surprised if the money dries up and moves elsewhere.”
Gold Fields CEO, Nick Holland, reckons there is frequently a view that the mining companies are making too much money despite the fact that the investor is usually only making a return of between 10% and 15% “for all the effort and for taking all the risk on prices and costs.”
He adds that governments get pressured by international donor agencies – and sometimes also the International Monetary Fund – to try and get more out of the mining companies which are viewed as “easy targets”.
My perception is that some countries did not benefit as much from the resource cycle as they would have liked to and some of the earlier agreements were not as equitable as they might have been.
“You cannot move the mine. They are captive to the country they are in. These things bubble up and subside, and bubble up and subside, and that’s the way it’s going to be going forward.”
Gold Fields has been highly successful with its operations and Ghana, which Holland puts down to exhaustive research before committing to projects.
He comments: “We analysed the world to pick the areas we were concerned about. There are places we don’t want to go such as Russia, China, the ‘Stans’, the DRC and Tanzania.
“We looked at the DRC ten years ago and decided it’s a tough place. Hats off to those who got it to work because it requires a particular skill and a massive amount of effort to pull it off.”
The impact of the actions taken by various governments against mining companies operating on their turf is also souring the attitude of those investors normally prepared to back junior miners taking a “high risk, high reward” approach.
Andrew van Zyl, partner and principal consultant, SRK Consulting SA, says that the key to addressing resource nationalism is for the mining industry to be engaging constructively with governments over the long term.
“We should expect that this dialogue is a learning process; many African countries do not have a long history of mining, and policies are often only starting to evolve. The downturn was a good time for stakeholders to take time to talk about how the benefits of mining are to be equitably shared, but this discussion must be ongoing,” he says.
According to Sacha Backes, a senior investment officer with the International Finance Corporation: “The resurgence of resource nationalism is further shrinking the limited pool of investors prepared to look at the junior resource mining space, which has already been shrunk by the losses made over the years.”
Backes also warned about the long-term consequence of future investment drying up because of short-term action by governments apparently aimed at maximising revenues.
“Tanzania and the DRC have made decisions that seem detrimental to investor sentiment. Investors in the junior space don’t sit in Johannesburg. They sit in Toronto, London and Perth. It takes years to rebuild confidence for those investors prepared to take on the high risks in the junior miners.”