Carlos Vilhena of Pinheiro Neto Advogados looks at the trend of mineral resource nationalism.
"Existing mineral rights should always be strictly respected. The state should be efficient in its role, having strong, autonomous institutions that are financially and administratively independent from government, capable of doing their job and most importantly free of political interference."
During the last global boom of the mineral industry, from 2004 to 2012, a number of different countries introduced measures attempting to exercise greater control of their mineral resources and raising their share of the economic benefit from the production of mineral substances. This process has been described as a trend of mineral resource nationalism.
Outright nationalisation seems to be off the table in most parts of the world, but mineral resources nationalism has been expressed most recently through more subtle ways, such as:
• fiscal measures, mainly through the increase of royalties;
• new charges, such as signing and discovery bonuses;
• alteration of the system of access to exploration and mining grounds from a first-come, first-served method to a tender process;
• requirement for minimum local content and local supply;
• rebirth of state-owned mining companies;
• mandatory local equity;
• greater government control over operations of mining companies;
• definition of strategic minerals, strategic mineralised areas or state reserved areas, set aside for exploration and production under special rules and requirements in many cases with mandatory state participation; and
• obligation to supply the local market.
Countries like Indonesia, Kazakhstan and Mongolia in Asia; Angola, Ghana, Guinea, Mali, South Africa, Tanzania and Zimbabwe in Africa; Finland in Europe; and Bolivia, Ecuador, Honduras, Mexico, Peru and Venezuela in Latin America all have in the past few years changed their mining laws to adopt mechanisms towards mineral resources nationalism. (For a detailed description on the measures adopted by the different countries towards mineral resource nationalism please refer to “Global Trends and Tribulations in Mining Regulations” by John P Williams, Journal of Energy and Natural Resources Law Vol. 30, No. 4, 2012.) Brazil is currently discussing in its National Congress the adoption of similar measures.
In different ways these countries have adopted new rules seeking greater state intervention and a larger share of economic benefit from mineral production, such as adopting tender processes for the granting of new exploration licences, replacing a first-come, first-served method of accessing new exploration ground; strategic minerals and sate-reserved areas or minerals; increased royalties and taxes; requirements for local content; mandatory national equity investment; acquisition controls; and indigenisation and economic empowerment.
These changes were implemented in a time of relative prosperity. Notwithstanding, few of these changes have resulted in actually attracting more investments and reaching the aforesaid goals of economic and social development, increase of national wealth, creation of local employment and increase of local business. On the contrary, in most cases it has scared investors and led to reduction of economic growth within the mining industry.
The decline in the mining industry in most of these countries can be attributed in large part to a combination of excessive state intervention and discretion, inconsistency in its implementation, and a greater perception risk of nationalisation. (For the case of South Africa, refer to an article by Peter Leon “Wither the South African Mining Industry?”, in the Journal of Energy and Natural Resources Law, 30, pp.8–25.)
But the industry now faces much tougher times. 2013 has not been an easy year for anyone, and especially so for the mining sector. Major mining companies have made huge write-offs, reduced dividends, pushed into the future billions of dollars in expenditures and made large cuts in workforce as they seek to survive the downturn.
The recent write-offs are examples of the hurdles that are being faced by major companies, like Rio Tinto’s US$14 billion write-off from aluminium investments and from its Mozambique’s coal assets, followed by Anglo American’s US$5 billion pre-tax hit to its major iron ore project in Brazil, known as Minas Rio.
Canadian Barrick Gold recently took a hit of US$8.7 billion, resulting in a second-quarter loss of US$8.6 billion, leading to significant costs and dividend cuts in the large gold producer. Barrick has written off close to US$13 billion this year, including US$5.1 billion related to the company’s Pascua Lama project in the border of Chile and Argentina, US$2.3 billion in goodwill impairments and US$1.3 billion for other asset impairments.
Newmont, the United States gold miner, has also made heavy write-offs against its assets, including in its Australian mines at Boddington and Tanami, totalling US$1.8 billion globally.
Other gold producers such as Goldcorp and Newcrest have also made big write-offs and provisions against some of their higher-cost mines amid pessimism over the short-term outlook for the gold price.
Those hurdles have not been ignored by shareholders and chief executives at major mining companies have been replaced. Tom Albanese left Rio Tinto in January, followed by Anglo American’s Cynthia Carrol and BHP Billiton’s Marius Kloppers later in the year.
According to an IntierraRMG report disclosed in August, mining finance has slumped to record lows, leading to a severe capital drought and concerning levels of debt. Financing of exploration companies fell around 30 per cent. Cash holdings in junior companies are at critical levels and many of the smaller ones may not survive until the end of the year.
Will the current situation slow down the appetite of governments for what appeared to be a resource nationalism trend during the last high-price commodity cycle?
We are yet to see if this will be case. Brazil, for instance, sent a bill to National Congress in June 2013 attempting to reform its mining and royalty laws to seek to introduce mechanisms that will not only increase (in a highly undesirable way) state interference in the mining sector, but also augmenting the government’s share of economic benefit from mineral production.
However, hopefully countries will understand sooner rather than later that the resource nationalism measures undertaken during the last boom did not bring what was expected from them. In addition they may perceive that these measures will now put them in a disadvantageous situation in less prosperous times.
Mining rich countries should understand that the mining industry is cyclical. Changing the rules to allow governments to surf the wave of a boom may have tremendous negative effects when the industry slows down.
Resource nationalism measures during high commodity prices time will most likely scare investors at the time of a downturn, resulting in reduced opportunities, higher costs, disincentives for job creation and business generation at a time when attraction of investment is most needed.
A country’s mining policy and legislation should be balanced throughout time to preserve national interests, create a fair system for the country to share with the mining companies the wealth generated by mining operations, but at the same time attract private investment, stimulate exploration investments by the private sector, develop the local mining industry and value the industry as an activity which is essential for the development of a country’s transformation industry.
Countries should strive to make sure there is a safe and stable legal environment for investment and operations. Ideally, the system should be established in a way to permit and foster domestic and international competitiveness and harmonise the relations of the mining industry and the society in which it operates.
A strong institutional framework is essential, in addition to stimulus for attraction of local and international financing for exploration, development and operations.
In doing this, a country’s mining policy and legislation should seek to guarantee private sector protagonist in an environment of free and open private initiative.
The regulations concerning access to ground for exploration should incentivise risk-taking by the private sector. A first-come, first-served system for accessing new ground should always be preferred as the general rule, with very exceptional (if any) room for reserving areas on the basis of government interest of strategic concerns.
Security of tenure is essential. The laws should be stable, clear, objective and simple, in a way that facilitates their implementation and enforcement by the state.
The regulations regarding rights and obligations of the mining company to obtain and maintain mineral titles must also be clear, objective and stable. In this same sense, rules should not allow companies to keep vast areas with little investment or with no production.
The government take should be stipulated in a way that is fair to the country and that recognises the ups and downs of the industry, but which does not scare investments.
Existing mineral rights should always be strictly respected. The state should be efficient in its role, having strong, autonomous institutions that are financially and administratively independent from government, capable of doing its job and most importantly free of political interference.
Perhaps at this time of downturn of the mining industry we will see a new trend for altering national legislation in an attempt to introduce more market-friendly, competitive laws.