This presentation discusses about the impacts of resource nationalism on mining companies and the protective strategies adopted by mining companies to minimize the effects of resource nationalism, which in turn would benefit the host nation’s economy while ensuring sufficient returns to the Mining companies.

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Abstract:
Rise in commodity prices drives mining investments especially in resource rich economies. However, governments in resource rich
countries have been formulating regulations that enable them to exercise a greater control over the assets operated by miners,
which in other words is termed as resource nationalism.
Resource nationalism has been the common strategy adopted by the governments mainly owing to improper share of the resource
benefits between the host nation and mining companies. Such policies incur significant additional costs for mining companies..
This article discusses about the impacts of resource nationalism on mining companies and the protective strategies adopted by
mining companies to minimize the effects of resource nationalism, which in turn would benefit the host nation’s economy while
ensuring sufficient returns to the Mining companies.
MAY | 2013
Threat of Resource Nationalism -
Impact on Mining Companies

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Introduction
Recent boom in mining sector has encouraged more miners to invest in new
projects. In 2012, mining investment was expected to peak with global mining
capital expenditure at around USD 142 billion. However, certain business risks
such as resource nationalism are expected to be a strong deterrent discouraging
investment into new projects. Owing to such business risks, the global mining
capital expenditure is expected to decline by 10% per annum to USD 115 billion
by 2014.
Why resource nationalism?
Resource nationalism is attributable to the fact that mine profits are not
appropriately shared between mining companies and the host nation. Resource
nationalism, an act through which governments exercise a greater control over
the assets from the mining companies has been known to pose significant
threat to miners. A leading research firm rated resource nationalism as the
biggest business risk for mining companies for the year 2012-2013. While
many believe that resource nationalism is restricted to developing economies,
this has been the trend in developed economies as well. About 25 countries
across the world have already strengthened their policies that support increase
in share of mining profits. Sudden policy changes by these governments have
led the mining companies to reduce investment and in worst cases have led to
shelving off the projects.
Resource nationalism in developed economies
Increasing the mine royalty taxes has been a prevalent practice in developed
nations. In July 2012, Australian government imposed Mineral Resource
Rent Tax (MRRT) which demands additional profit based taxes from mining
companies extracting coal and iron ore. Australian government has estimated
the total MRRT revenue to be about USD 10.6 billion by the end of 2015 with
major miners such as BHP Billiton, Rio Tinto and Xstrata expected to account for
90% of the MRRT revenue. However, government lowered its target to around
USD 2 billion by the end of 2012 mainly owing to fall in commodity prices in
Q2 2012, rising cost of operations and a high Australian dollar which would
strongly restrain mining companies from paying such high royalties.
Governments are also giving importance to retaining ownership of state owned
enterprises. In October 2012, Canadian government rejected Petronas’ bid
worth USD 5.23 billion to acquire Canadian state owned natural gas Company,
Progress Energy Canada Ltd. However, the bid was rejected due to Canadian
government’s desire to retain valuable resources and directly benefit from these
resources.0
50
100
150
200
2011 2012 2013 (F) 2014 (F)
MiningcapexinUSDbillion
Year
Mining Capital Expenditure (2011-2014)
Mining industry is confronted by business risks that are expected to deter the
global mining capital expenditure by 10% per annum to USD 115 billion by
2014.
Resource nationalism is attributable to the fact that mine profits are not
appropriately shared between mining companies and host nation.

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Resource Nationalism in Developing Economies
While resource nationalism in developed economies is less cumbersome,
resource nationalism has been quite rigid in developing economies which
would sometimes go far to the extent of expropriation. Stringent government
policies that insist on exorbitant taxation, mandatory domestic beneficiation of
unrefined ores and export levies are commonly adopted methods of resource
nationalism in developing economies. Countries like South Africa, Indonesia,
Ghana, Chile and Peru have already started implementing policy changes that
support resource nationalism.
In February 2012, Ministry of Energy and Mineral Resources (MEMR) of
Indonesia passed a regulation which requires domestic processing of minerals
and prohibits the export of raw materials to foreign countries for beneficiation.
In order to effectively mandate domestic beneficiation processes, Indonesian
government has announced plans to levy additional tax of 25% on export of
unrefined ores and has plans to further increase to 50% by 2013. However
processes such as mineral beneficiation will require additional infrastructure,
energy and skilled labor which would incur significant additional costs for a
mining company.
Developing economies are also ensuring that there is a significant participation
of state owned mining companies in their mining sector. South Africa has taken
steps to mandate 26% participation of indigenous people in mining operations
as a part of Black Economic Empowerment. South Africa’s ruling party, African
National Congress (ANC) has announced plans to levy windfall tax of 50% on
mining profits and 50% capital gains tax on sale of prospecting rights as a
part of increasing the state participation in resources sector and also to make
significant addition to the nation’s revenue.
Such dynamic nationalization laws have discouraged mining companies in
investing into new projects. Resource nationalism has affected FDI inflows in
developing economies especially inAfrica which recorded a decrease of 4.5% in
FDI inflows in 2012 when compared to that of 2011. With nationalization laws
becoming more stringent, FDI inflows in developing economies are expected to
show a decreasing trend in the years to come.
Recently, Zimbabwean government imposed mandatory indigenization which
demands the foreign mining companies to give up 51% of their share to the
locals. Revenue of USD 4 billion has been raised so far by the government after
many foreign owned resource companies obliged to the indigenization law by
ceding up 51% stake. In March 2011, Namibia announced “Strategic Mineral
Policy” which demands strategic minerals like copper, coal, gold, uranium and
platinum to be directly owned by a state mining company.
Major miners’ concern over resource nationalism
Resource nationalism became the major hurdle for Rio Tinto’s USD 6 billion
worth Oyu Tolgoi (OT) mine in Mongolia. In October 2012, government of
Mongolia announced plans to increase mine royalty tax for Oyu Tolgoi mine
by USD 300 million. Further to this, the Mongolian government has plans to
increase its stake in OT mine from a current share of 34% to 50%.
Indonesian government’s new mining law suggests cancellation of contract
based foreign investments and supports investment based on licensing
system.The US based mining company, Freeport-McMoRan operates Grasberg
copper and gold mine in Papua province of Indonesia. Recently, the Indonesian
government has demanded a 51% stake in the Grasberg mine and has also
announced plans to elevate royalties from current 3.4% to 10%. Additionally,
Freeport-McMoRan’s foreign investment contract is about to expire in 2021
and is currently negotiating with the Indonesian government to offer a 20
year contract extension. However, government has disapproved the request
according to Indonesian mining law of 2009.
FDI Inflows into mining sector-Developing economies
0
5
10
15
20
25
0
50
100
150
200
250
300
2009 2010 2011 2012
FDIinAfricaandLDC(USDbillion)
FDIindevelopingeconomies(USDbillion)
Years
Developing economies Africa LDC
• Increasing mine royalties and retaining ownership of state owned
enterprises has been the common trends followed by governments in
developed economies
• Mining companies in developing economies have been exposed to rigid
nationalization policies that would sometimes travel to the extent of
expropriation of mines.
• Developing economies have been enacting policies that demand mandatory
state participation. Such dynamic nationalization laws have affected FDI
inflows in developing economies like Africa.

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Strategies to mitigate the risks of Resource Nationalism
Infrastructure aid through Public Private Partnerships
(PPP)
Establishing partnerships with governments to aid in infrastructure development
might be a potential solution for the big miners to attract significant support
from local communities thereby avoiding nationalization of their operating
mines in developing economies. Resource rich countries like Zimbabwe, Congo
and Zambia suffer from unemployment and poor infrastructure.While these are
considered as hurdles for a mining company to incept its operation, the same
can be viewed as a gateway to mitigate risk of nationalization of resources and
contribute to the economic development of the country.
Rio Tinto has implemented PPP for its Simandou mine in Guinea, West Africa.
According to this partnership, Rio Tinto would aid the government in investment
of road and rail infrastructure in the region where the mine is located.
Government of Guinea currently holds 51% stake in infrastructure and 35%
stake in Simandou mine.
Prominent Uranium miner’s Management of Social
Sustainability
Paladin Energy Ltd, a prominent Australia based Uranium producer operates
Kayelekera mine situated in Northern region of Malawi where poor infrastructure
conditions prevail. Recently, Paladin Energy Ltd established Social Sustainability
Management Plan (SSMP). The initiative included plans to improve community
infrastructure by construction of school buildings, upgrading the existing district
hospital thereby contributing to local employment and staff skill development.
An estimated amount of USD 15 million was invested for SSMP by Paladin
Energy Ltd.
EITI – An initiative to minimize the risks of Resource
Nationalism
EITI (Extractive Industries Transparency Initiative) has been initiated out of
the need to establish a transparent transaction system between the foreign
mining companies and the host nations. EITI demands mandatory disclosure
of transactions happening between the governments and mining companies.
Such transparency showcases a miner’s share to the socio-economic benefit
of the host nation thereby gaining local community support which in turn would
encourage more investment from foreign mining firms. EITI is based out of
Norway. Currently, around 37 countries have successfully implemented EITI
norms and its being supported by World Bank, some NGOs and key mining, oil
and gas companies. Recently, Sierra Leone failed to disclose the transaction
history as required by norms of EITI. Hence, EITI temporarily suspended Sierra
Leone from global mining transparency board and has recommended corrective
actions to be undertaken.
Legal protective measures against resource nationalism
Mining companies investing in foreign economies are susceptible to financial
risks due to the ever changing law systems that support nationalization of mines
especially in developing economies. Hence, it’s always necessary for a mining
firm to minimize such risks by adopting protective strategies.
Protection of mining contracts through contract
stabilization clauses
Contract stabilization clauses is essential during contract negotiations between
government and mining companies as it offers protection of contracts for a
specified period of time against the local community’s right to alter the law.
However, such law has been viewed upon as distrust by local governing bodies
and NGO’s who fear such protective measures would disrupt country’s ability
to enact initiatives that may stimulate economic development, and decrease
poverty.
• Mining companies have been investing in infrastructure by establishing
partnerships with governments through Public Private Partnerships (PPP)
• Recently, Rio Tinto established PPP with government of Guinea and has
planned to invest in road and rail infrastructure surrounding the mine region
• Paladin, a prominent Uranium miner implemented SSMP through which
it has plans to improve infrastructure conditions in the area surrounding
Kayelekera mine in Malawi.
• Legal protective measures such as contract stabilization and BIT are being
adopted by mining companies in order to minimize the financial risks due
to resource nationalism.

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Legal Protection of resources through BIT and PRI
Bi-lateral investment treaty (BIT) is another prevalent protective measure signed
between the host nation and the foreign mining investors. Avoiding unlawful
expropriation, equitable treatment of foreign investors and local investors,
Protection and security of investment are some of the terms on which BIT is
signed.An act violating the terms of BIT is imposed, the host nation is subjected
to penalty in terms of financial compensation.
In June 2012, Churchill Mining PLC a London based mining company filed a law
suit against the Indonesian government as the latter violated BIT by revoking the
former’s right to mine in Busang regency, Indonesia. However, the government
cited that the mining company didn’t possess the correct mining licenses to
mine in the site. Some countries have objected to the renewal of BIT as they
believe BIT would restrain them from enjoying the benefits from domestic
natural resources. Recently, South Africa rejected BIT renewal with European
Union (EU).
Private insurers such as Lloyds, London are issuing Political Risk Insurance
(PRI) to the mining companies. PRI is a bilateral contract signed between the
insurer and customers such as mining companies and it provides insurance
against common risks of resource nationalism such as expropriation. PRI is
more flexible compared to BITs. However, PRI is premium in nature and cost of
PRI issued depends upon the region and the intensity of nationalization.
Resource nationalism forcing miners to alter procurement
strategy
Procurement of personnel, goods and products from outside countries has been
the traditional practice of resource companies operating in developing countries
mainly owing to lack of domestic availability of quality goods from a miner’s
perspective and ineffective engagement with local suppliers.Though the practice
of procuring goods through local dealerships of multinational companies already
exists, they were not observed to contribute significantly to the development
of local content. Such practices are fading as there is increased pressure to
develop local content. Nowadays, developing local content has shifted from a
miner’s choice to an activity that is mandated by reforms. Governments have
been increasingly pressurizing mining companies to adopt local procurement
as their procurement strategy thereby generating domestic revenue that in turn
would solve issues such as poverty, unemployment etc.
• Revenue through Local procurement would be a lucrative option than adding
revenue through increased taxation. Recently, there has been an increased
focus on local suppliers in providing core services to mining companies in
developing economies.
• Mine operations being complex, miners have increased focus on potential
suppliers with proven track records thus excluding local suppliers from their
portfolio.
• Governments have been increasingly pressurizing miners to develop local
content thereby adding significant economic benefits to the host nation

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Local Procurement - benefit to the host nation
Local procurement would encourage more miners to invest in FDI if the services
and products supplied by the domestic players nearly comply with the quality
of the mining companies’ incumbents. Hence there is a need for government
systems to finance local supply bases in order to cater to the demands of mining
companies. Obtaining revenue through local procurement would be more
lucrative compared to revenues from increased taxation. Till now, developing
economies have been successful in catering non-core services such as food
and beverage, software and packaging services to mining companies. Recently,
there has been an increased focus on providing core services to miners as it
would be a significant source of revenue for the local communities.
As a result of local procurement strategy, the local supply base for mining
in Brazil has expanded from 50% in 2003 to about 80% in 2010 thereby
contributing USD 9 billion to the economy. In 2008, BHP Billiton’s Spence mine
in Chile reported that 85% of the supplies to the mine were from domestic
suppliers thereby adding USD 485 million to Chilean economy. In 2010, Barrick
Gold’s Zaldivar gold mine contributed USD 285 million to Chilean economy
by procuring 70% of the mine supplies from domestic players. Local content
development is also prevalent in developed economies. Recently, Rio Tinto’s
Diavik mine reported 90% of supplies from local players thereby contributing
USD 1 billion to the indigenous groups.
Barriers to development of Local content
By engaging with domestic suppliers, miners have benefits of reduced lead
time and logistics cost, better bargaining power resulting in significant cost
savings. However, mining companies are exposed to barriers while adopting
local procurement strategy.
Provided Mine operations are capital and labor intensive requiring complex
procurement strategies, mining companies would generally prefer potential
suppliers capable of providing superior quality products to meet their demands.
Also the nature of contracts with suppliers being long term, procurement
decisions are usually taken at a central level (global office) thereby minimizing
opportunities for local suppliers in securing contracts.Some mines in developing
economies are located in remote areas which are present at far distances
from local community settlements thereby reducing chances of interactions
between mine procurement officers and local suppliers. Though some local
suppliers have the capability to cater to the challenging demands of mining
industry, miners are under the perception that local suppliers wouldn’t match
the expertise of their incumbents.
Recently in Ghana, a multinational oil company rejected a tender bid issued by a
leading local supplier .GHEITI (Ghana Extractive Industries Transparency Index)
claims that bid was rejected in spite of the supply being technically competent
and relatively cheaper compared to tenders received from its incumbents.
A sound local content policy ensures effective local
procurement
Emerging economies often suffer from lack of having a sound local content
policy that facilitates effective local procurement. Rigid policies of resource
nationalism that mandates local procurement may induce unnecessary pressure
on the mining company and may strongly deter from making investments.
Recently, Government of Ghana set target of achieving 90% local content
in the nation’s oil mining sector by 2020. However, Ghana currently lacks
sophisticated technology and skilled labor required to perform complicated oil
mining operations. International Energy Agency (IEA) claims the target to be too
ambitious and would be a difficult task to achieve.
In African mining conference (Mining Indaba) conducted in South Africa on Feb
2012, some of the local suppliers claimed that local content development would
not be a feasible option unless the government facilitates access for capital
required for their capacity expansions. Also, most of the contracts signed with
local suppliers were short term which would result in business breakdown if
the mining company suspends its operation owing to various economic factors.
Policies induced by government in most of developing nations are instable
at times and often subject to change which would incur significant losses for
the operating company. Hence there is a need for developing economies to
establish a collaborative approach in framing regulations and laws that ensure
local content development.
• Governments in emerging economies are politically instable enacting
stringent nationalization policies. Also, such policies are instable thereby
deterring mine investments.
• There is a need for developing economies to build a collaborative approach
in framing policies that support local content development.

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Conclusion
External investment is vital for development of mining industry especially in developing economies where there is lack of sufficient domestic capital and technology
in spite of the availability of abundant resource rich deposits. However, developing economies have been unsuccessful in motivating foreign mining companies to
utilize these natural resources by adopting nationalization strategies that demand a greater state control of resources from foreign investors.This has discouraged
and deterred foreign mining investment. Hence, governments need to develop a balanced approach by rationalizing existing laws and regulatory framework to
optimize revenue generation from foreign mining investment while enabling an investment friendly climate for mining companies to operate.
Author:
Sabarish Vaishnav A | Research Analyst
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