Grant Thornton - Facing an uncertain future: Government intervention threatens the global mining sector


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Grant Thornton - Facing an uncertain future: Government intervention threatens the global mining sector

  1. 1. Facing an uncertain future:Government interventionthreatens the global mining sectorMining hot topic report: government interventionThe mining sector faces an uncertain Nationalisation: where the state takes controlfuture. Increasing and unpredictable of some or all of a country’s mining assets. Indigenisation: where the people or nativegovernment intervention across the populations are ceded control.globe is adding further complexityto a sector that is already heavily increased environmental legislation with numerousladen with risk. regulatory frameworks in development around the world.The shadow of higher taxes, restrictive regulation Similarly, the growing calls for nationalisationand indigenisation looms large over an industry and indigenisation of mining assets and resourcesalready grappling with the risks normally associated threaten the very existence of some miningwith exploration and extraction. companies. Organisations that have “jumped ship” From a likely windfall levy in Peru, through from their home tax jurisdiction looking for a moreto potential mine nationalisation in South Africa, a relaxed set of rules must now contend with anwide variety of government interventions pose a real uncertain future, particularly in Africa.threat to commodity prices, corporate valuationsand, most critically, investment in the global miningsector. For the most part, interventions aremotivated by financial and political pressures. Governments looking to increase revenue –whether to fund developing or indebted economies,recover from the financial crisis or simply to top upthe coffers – are targeting what they see as a thriving,profitable income source. With global demandcreating high commodity prices1, government taxes,royalties and other sector-targeted revenue-boostingmeasures are on the rise, particularly in Asia. On the political front, governments areresponding to growing pressure from environmentalinterest groups and the public. In the face ofdevastating incidents, like the BP oil spill in theGulf of Mexico and the dramatic miners’ rescue atthe Copiapo mine in Chile, governments have1 Bloomberg. Accessed at commodities/futures/ on 16 June 2011. Mining hot topic report: government intervention 1
  2. 2. In short, government interventions are:• raising sector uncertainty and complexity to Government intervention includes direct and acute levels, complicating decision making and indirect taxes, royalty arrangements, heightening risks nationalisation and economic empowerment• increasing risk for investors, clouding corporate valuations, making it harder to raise capital; policies, as well as regulatory compliance with and environmental and other government standards• affecting project viability by reducing supply, and business criteria. disrupting demand and limiting overall profitability. Below we describe the three key intervention areas:Without clarity over the type and extent of 1. taxationgovernment interventions, the development of 2. nationalisation/indigenisationthe sector is in danger of stagnating, ultimately 3. environmentthreatening global economic growth. in more detail, providing examples of each across the world. We also suggest measures that companies and governments can take to improve the situation.Taxation: when the ‘take’ doesn’thave much giveThe tremendous profits being made in thecommodities markets are attracting significant As a simple measure the tipping point can beattention from governments developing their reasonably estimated as the point where theeconomies or looking to reduce deficits created by government’s aggregate ‘take’ – corporate taxes,the global recession. Even governments thatweathered the storm relatively well are seeing sales taxes, payroll taxes, royalties and specialmining corporates as a lucrative source of revenue. costs associated with doing business in aThis is, however, a short-sighted, potentially particular jurisdiction – exceeds 50% of profits.harmful assumption. Several factors make the spectre of increasedtaxation an ominous one. At an operational level, the Around the globecosts of meeting current booming demand will be Australiafurther increased by taxation. While taxation Mining companies operating indemands may raise immediate government revenue, Australia are experiencingit will also reduce overall mining profitability. uncertainty due to the introduction From the investor’s perspective, interest is likely of new federal taxes designed to replace existingto diminish in proportion to the level of taxation, state-based royalty schemes. BHP and Rio Tintolevies, royalties and other costs. The threat of have already publicly stated their reluctance to payadditional taxation will lower company valuations much more in tax or royalties and would considerand increase investor risk, making investment in moving operations to a nation such as Mozambiquejurisdictions with onerous tax burdens unappealing. where taxation is lower.At worst, companies and investors may reach a The concept of resource rent taxation is beingtipping point, where they see taxes reducing their explored in many countries on the basis that it is apotential returns to the point that they may simply more efficient cash flow based tax, compared towalk away and search for more competitive royalty regimes which charge royalties on the grossjurisdictions. value of extractions.2 Mining hot topic report: government intervention
  3. 3. Taxation can also disrupt demand, with Africacustomers stating that they will not tolerate new Industry analyst Thomas Wilson predicts morelayers of taxation. China’s Iron and Steel Association governments in Africa and elsewhere, especiallychief recently said that Chinese steelmakers will not newly-elected ones, will look at raising mining taxesbe able to accept rising costs from the Australian and royalties amid historically high commodityiron ore mining tax, as steel prices will reach a ceiling prices3. For example, the price of iron ore has risenand downstream users, including automakers and from US$80/Metric Tonne in 2009 to US$178.7/producers of home appliances, will not absorb rising Metric Tonne in Q1 2011. (International Monetarycosts. Fund). In some countries, such as Tanzania, the IMF has actually advised governments to tax miningCanada operations to meet their spending commitments. With each province taxing mining This summer the country’s National Assembly will companies at different rates, debate proposals for a super-profit tax on mining as national competition is strong. part of the country’s five-year development plan.Quebec recently announced CA$10bn ofinvestment in exploration, making it one of the Perumost attractive mining jurisdictions in the world. Throughout the campaign forThe Fraser Institute’s annual Survey of Mining Peru’s recent presidential elections,Companies ranked Alberta, Quebec, Saskatchewan both the main political partiesand Manitoba in the world’s top 10 most attractive campaigned on promises to tax mining companies.mining regions2. Though President-elect, Ollanta Humala, pledged to levy a windfall tax on mining operations, he now says he will negotiate rather than impose an unilateral levy4.Nationalisation and indigenisation:changing the state of playNationalisation, the takeover of a private company’s Around the globeassets or operations by the state, and indigenisation, South Africaincreasing local participation in or ownership of Nationalisation is arguably thecompany assets, are forms of government number one issue affecting theintervention related in scope but with varying mining industry in South Africa, aimplications and perceptions. In extreme cases of move which will be causing concern amongnationalisation or indigenisation, third-party investors. With the ruling African Nationalinvestor interest could be wiped out. Even if Congress party debating state participation, analystsmeasures don’t ultimately come to pass, interest will agree that reform of some sort is needed, but mostbe highly limited as long as uncertainty remains. argue that full-blown nationalisation will be detrimental.2 Fred McMahon and Miguel Cervantes. Fraser Institute Annual Survey of Mining Companies. P. 10. Accessed at Files/fraser-ca/Content/research-news/research/publications/mining-survey-2010-2011.pdf on 16 June 2011.3 Mining Weekly, 10 June 2011. More mining tax, royalty hikes ‘inevitable’ – Control Risks, by Liezel Hill. Accessed at more-mining-tax-hikes-inevitable-control-risks-2011-06-10 on 16 June 2011.4 Reuters. Humala seeks to reassure Peru mining companies on tax. Accessed at RE 75702520110608 on 16 June 2011. Mining hot topic report: government intervention 3
  4. 4. Namibia and Zimbabwe Venezuela Indigenisation is In Venezuela, falling oil prices in the spotlight combined with poor fiscal in Namibia and management and rising gold pricesZimbabwe. In the latter, proposals include the have switched the government’s attention to thedisposal of 51% of the shares in mining companies gold industry. In recent years, restrictions on exportsto indigenous Zimbabweans, which will apply to and foreign exchange controls, as well as increasedall companies with a net asset value of more than government participation through its own miningUS$1. operations and joint ventures, have become more prevalent.Environmental legislation:fine tuning the green machineRecent years have seen a number of environmental South Africadisasters involving big business, of which BP’s Gulf In its recently released Diagnosticsof Mexico oil spill in 2010 was the most high profile. Overview6 document, the SouthBut while environmental events are an inevitable African Government commits tocomponent of industrialisation, media and social ensuring that “natural wealth is harnessedmedia now put images, opinions and blame in the sustainably, in a way that protects our environment,public arena seconds after the incident. The stream using science and modern technology to ensure aof stories is continuous, providing interest groups growing economy that benefits all.”with the ammunition they need to mobilise thepublic. Governments around the world remain Germanyacutely aware that the green agenda is increasingly Germany’s decision to close allimportant, and that tightly legislating the mining nuclear power plants over the nextsector is a political necessity as well as an ethical ten years is at least partly driven byimperative. Though global governments are working the incumbent government’s need of the Greento achieve common regulatory ground, the current Party’s support to stay in landscape remains diverse. CanadaAround the globe Canada operates a two-stepAustralia approval system, where The Australian Association of environmental plans must be given Mining and Exploration Companies approval at a provincial level and then at a national (AMEC) says that areas recently level. A recent initiative to fall foul of the processdefined by the Queensland government as Strategic was the Prosperity mine, which was deniedCropping Land Protection Areas are so vast the environmental approval by the government havingpolicy will potentially cause “major impediments” been granted it by the province. This has renewedto the future of regional mining5. In addition miners complaints that the process is complex, timein Australia are grappling with the proposed carbon consuming and too political.taxation and how that will affect operations.5 Mining Weekly, 31 May 2011. Qld introduces policies to protect cropping land from mining, by Esmarie Swanepoel. Accessed at http://www.miningweekly. com/article/qld-introduces-policies-to-protect-cropping-land-from-mining-2011-05-31 on 16 June 2011.6 National Planning Commission, Republic of South Africa. Diagnostic Overview. P. 4. Accessed at Downloads/ Home/Tabs/Diagnostic/Diagnostic%20Overview.pdf on 16 June 2011.4 Mining hot topic report: government intervention
  5. 5. Corrective measures: keepingthe mining sector strongRecent years have seen a number of environmental South Africa Mining corporatesdisasters involving big business, of which BP’s Gulf In its recently released Diagnostics Overview6of Mexico oil spill in 2010 was the most high profile. document, the South African stable taxcommits • explore regions with minimal intervention threats and GovernmentBut while environmental events are an inevitable to ensuring that “natural wealth is harnessed frameworkscomponent of industrialisation, media and social sustainably, in a way that protects our environment,media now put financial plans blame strategies factor government interventions • ensure images, opinions and and in the using science and modern technology to ensure a into multiple tax and environmental scenarios that benefits all.”public arena seconds after the incident. The stream growing economyof stories is continuous, providing interest groups • be willing to work with local, regional and national governmentswith the ammunition they need to mobilise the Germany • ensure that key risks are understood and articulated toall nuclear power plantspublic. Governments around the world remain Germany’s decision to close investors,acutely aware that your investors’ tipping points carefully; when and where by the consider the green agenda is increasingly over the next ten years is at least partly drivenimportant, and that tightly legislating the mining incumbent government’s need of the Green Party’s will their cost of doing business outweigh stay in power. or benefit?sector is a political necessity as well as an ethical support to the profitimperative. Though global governments areand customs and recognise that you may • understand the local rules working need to give something back to theCanadaoperates a two-step approval system, whereto achieve common regulatory ground, the currentglobal landscape remains diverse. community. Canada environmental plans must be given approval at aAround the globe Governments provincial level and then at a national level. A recentAustralia initiative to fall foul of the process was the • work to end policy and taxation uncertainty; createwasstableenvironmentalThe Australian Association of Mining and Prosperity mine, which a denied legislative environment that enables operations, planning and granted itExploration Companies (AMEC) says that areas approval by the government having beenrecently defined by the Queensland government as by the province. This has renewed complaints that investment within the mining sectorStrategic Cropping Land Protection Areas are so the process is complex, time consuming and toovast the policy will potentially cause “major excessive intervention stifles investment • recognise that short-term, political. and explorationimpediments” to the future of regional mining5. Inaddition miners in Australia are grappling with the • resist targeting mining as if it were a limitless taxation/revenue streamproposed carbon taxation and how that will affectoperations. environmental protection without complication • seek • work to streamline the compliance process • understand and appreciate the many positive aspects that mining can and does bring to your economy. Mining hot topic report: government intervention 5
  6. 6. Interventionist policy minesa perilous veinGovernment intervention – unchecked UK Australiaand independent of broader government Gerry Beaney Dan Carroll T +44 20 7728 2589 T +61 (7) 3222 0200and sector strategies – poses a real threat E E mining. While augmenting revenue,reducing fiscal deficits and protecting the Martin Goddard Scott Griffinenvironment are clearly legitimate T +44 20 7728 2770 T +61 (2) 8297 2755 E E endeavours. The resultinginstability and uncertainty of current South Africa Holly Stilespolicy-making endanger the mining Steven Kilfoil T +61 (2) 8297 2400sector’s future development. T +27 11 322 4530 E E Moreover, though interventionist Russiapolicies may successfully meet some Canada Elena Dmitrievagovernments’ short-term fiscal Mark Zastre T +7 495 258 99 90requirements, they may ultimately hinder T +1 604 443 2170 E E global financial recovery. This will Sergey Tishakovdistort the cost of commodities and Troy MacDonald T +7 495 258 99 90capital and affect the viability of T +1 416 369 6401 E international exploration and E United Arab Emiratesextraction projects. Anand Beejan Martin Orbesen For more information on government T +1 514 878 2691 T +971 4 2688070intervention in the global mining sector, E E martin.orbesen@gtuae.netor to learn what it could mean for yourcompany, please© 2011 Grant Thornton International Ltd. All rights reserved.Grant Thornton International Ltd (Grant Thornton International) andthe member firms are not a worldwide partnership. Services aredelivered independently by the member firms.