Country Risk - Where the political and economic stability of the host country is questionable, and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.
Resource Nationalism - The tendency of people and governments to assert control, for strategic and economic reasons, over natural resources located on their territory.
The major benefit for developing countries from natural resource development comes in the form of:
• Employment/wages
• Government revenues - taxes, royalties or dividends
There can also be indirect benefits such as knowledge and technology transfers. Foreign investments can also involve infrastructure investments, sometimes on a massive scale, like electricity, water supplies, roads, railways, bridges and ports.
Today, many governments are looking at ways to get more money from miners as companies report record profits - the higher the returns and the higher the profits, the greedier governments become. As commodity prices rise governments try to boost their share of the proceeds from their countries’ energy and mining sectors.
The PricewaterhouseCoopers Mine 2011 survey highlights what governments across the globe are looking at in regards to the world’s top 40 miners:
• Achieved net profits of $110 billion last year
• Halved their debt
• Built cash reserves of $105 billion
• Announced capital programmes of $300 billion for 2011
In 2011, resource nationalism became the number one risk for mining companies.
Miners are an easy target as mining is a long term investment and one that is especially capital intensive - mines are also immobile, so miners are at the mercy of the countries in which they operate. Outright seizure of assets happens using the twin excuses of historical injustice and environmental/contractual misdeeds. There is no compensation offered and no recourse.
“Resource nationalism is taking other forms as well, including greater controls on foreign participation, mandated beneficiation, use it or lose it demands and mandated government participation,” says an analyst.
The result is a spate of recent news regarding resource nationalism:• A government backed ouster of Brazilian mining giant Vale SA’s CEO, Roger Agnelli. Brazil’s government is considering a proposal that would make it easier to raise or lower mining royalties - depending on economic conditions and minerals prices - as part of a broad overhaul in Brazil’s mining sector which includes revamping the licensing process and boosting state income from mining companies.
• Panama recently repealed part of its mining code allowing investments from foreign governments.
• A handful of African countries have also increased tax revenue from miners in recent years – i.e Ghana plans to double royalties on mining to increase government revenues.
• In South Africa, the ANC’s Youth League is pushing to nationalise the country’s mines and banks. The Youth League wants the government to take 60% of private mining assets without compensation to distribute wealth and create jobs. As part of an empowerment drive South Africa’s mining charter already calls for 26 per cent of the mining industry - in Africa’s largest economy - to be transferred to black owners by 2014.
• Papua New Guinea introduced a plan to hand state ownership of mineral and energy resources to landowners - a move that may prove disastrous to foreign miners and their shareholders.
• President Hugo Chavez nationalized Venezuela’s gold industry.
• Peruvian president Humala (recently elected) promised, during his election campaign, to initiate windfall taxes on mine profits and to harden tax and royalty regimes.
• Australia and Chile are proposing fresh tax or royalty regimes.
• In the past 12-18 months at least 25 countries have increased or announced intentions to increase their government take from resources via taxes or royalties.
• Zimbabwe now requires foreign owned companies to “indigenize” their operations in the country - by transferring at least 51% ownership to locals. Youth Development, Indigenisation and Empowerment Minister Saviour Kasukuwere rejected a number of foreign companies’ plans and set a 14-day ultimatum for the submission of what he considers “acceptable” plans
“We know it’s tempting, at a time when government debt is mounting and metal prices are rising, for some governments to try to grab an even higher proportion of the revenue from mining. But we urge governments to remember that the cumulative effect of these unreasonable tax hikes will be to push up world prices and slow global growth,” says The Prospectors and Developers Association of Canada (PDAC) President Scott Jobin-Bevans.
Skills shortageA combination of mass retirements and increasing natural resource demand from emerging economies has created a crisis in the resource extraction sector - one which is definitely not on investor’s radar screens. Increased resource demand is driving demand for skilled workers. A shortage of skilled workers remains the second gest business risk for mining in 2011 (as it was in 2010) and is forecast to be the number two risk for miners again in 2012.
Skills shortages are global. A skills shortage slows growth and increases costs, projects are deferred or even cancelled outright due to the inability to staff operations - tighter labour markets also provide unions with greater bargaining powers when dealing with companies over wage settlements and other disputes.
The Mining Industry Human Resources Council (MIHRC) estimates that over 60,000 people employed in the mining sector are expected to retire by 2020 but that the industry will need an additional 100,000 people just to maintain current levels of production. Weak metal prices during the 1980s and 1990s killed the resource sector’s intake of talent - there’s not many people between 30 and 50 in mining any more.
The existing shortage of skilled personnel, the imminent retirement of so many baby boomers (many are mid-level managers), the skills supply gap in the 1980s and 1990s combined with the mining sector being in direct competition with the energy sector for people to train means prospects are bleak for either industry to obtain the necessary bodies and minds.
Analysts say attracting and retaining increasingly scarce skills will:
• Accelerate cost increases
• Squeeze profit margins
• Threaten the viability of some marginal projects.
The pool of available skill sets, the mine executives/managers, the miners, the engineers, drillers, geologists, mechanics, and other trades needed isn’t very deep. This labour shortage is going to increasingly hurt the industry in the coming years.
ConclusionMany governments are reviewing old agreements and renegotiating contracts. There are now many places, and the number is seemingly growing every day, where shareholders could, without warning, receive news that their operations have been taken over by the government and/or its friends, or that permits are suddenly suffering delays or have been cancelled outright.
We’ve seen far too many instances of companies and their shareholders losing assets that were lawfully theirs. If the management side of the companies we invest in is so important then maybe we should start regarding the management of the country they operate in as at least as important?
Mining sector employment trends are closely connected to:
• Global economic growth
• Commodity prices
• Intensity of exploration and or production levels
• State of mineral reserves.
As if the mining sector didn’t already have enough to worry about, mine production of many metals is showing a number of similarities:
• Slowing production and dwindling reserves at many of the world’s largest mines
• The pace of new elephant-sized discoveries has decreased in the mining industry
• All the ounces or pounds are never recovered from a mine - they simply become too expensive to recover.
Increasingly we will see falling average grades being mined, mines becoming deeper, more remote, and increased political and nationalization risk. Extraction of metals from the mined ore will become increasingly more complex and expensive, even more so when one considers that the cost of technology innovation to power mining will be very high.
Broad spectrum peak commodities is a cause for concern over the longer term. In the shorter to medium term there are several serious concerns in regards to global resource extraction that we need to consider:
• Resource nationalism
• Country risk
• A looming skills shortage
Junior resource companies with fully staffed, secure projects in safe, stable countries should be on every investors radar screen. Are they on yours?
If not, maybe they should be. n
(The original article by Richard Mills was posted on Mineweb.)