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Demands for taxes, royalties seen topping financial crisis as risks to mining

LONDON — Rising government demands for higher taxes and royalties are becoming a bigger threat to mining companies and their production than the financial crisis that’s wiped $6 trillion off stock market values since July.

“You can’t ignore it and the problem is it’s gathering pace,” said David Russell, a director at Ernst & Young’s mining and metals team in London. “It’s almost like a contagion. The key risk is an inability to plan.”

Resource nationalism, as the push by states is known, jumped to being the number one concern among mining executives this year, replacing capital allocation, Ernst & Young said in its annual risk survey published in August. At least 11 countries from Australia to Ecuador have this year raised or revealed plans to increase taxes or royalties on sales of resources such as gold and coal, according to Deutsche Bank.

“If it continues to rise, it just raises the uncertainty for the companies when making investments for the future,” Evy Hambro, manager of the $16 billion World Mining Fund for BlackRock Inc., a top-two shareholder in four of the five biggest mining companies, said in an interview. “We are definitely going to see more. We’re concerned about it.”

Since 1990, mining has contributed more than $100 million each year to Nevada and local economies, according to the Nevada Mining Association. This is particularly important to rural economies; mining is the largest industry in rural Nevada, the website notes.

Ghana, Africa’s second-biggest gold producing nation, said last week it will raise corporate taxes on mining companies to 35 percent from 25 percent, and introduce a “windfall tax” of 10 percent, in steps announced in Finance Minister Kwabena Duffuor’s 2012 budget.

Guinea and Zimbabwe are among countries that have sought greater stakes in mining assets, while Zambia last week doubled some royalties on minerals. Resource nationalism ranked fourth among mining executives’ concerns a year ago and ninth in 2009.

The advance of resource nationalism has accompanied record profits at the world’s largest producers. BHP Billiton and Rio Tinto Group announced net income this year that totaled almost $40 billion combined as prices soared.

“Quite a few treasuries are finding themselves depleted and they are casting their eyes around as to where they can actually lay their hands on funds,” Ernst & Young’s Russell said. “They are looking at the resources sector which at the same time is reporting massive increases in earnings.”

Australia, the world’s biggest exporter of coal and iron ore, this month placed before lawmakers legislation for a 30 percent tax on profits for the two raw materials. The government has pledged to use the increased revenue from the levy to lower the overall corporate tax rate. The tax aims to raise $11.3 billion over three years from companies including BHP, Rio Tinto and Xstrata.

Zambia, where Glencore International and Vedanta Resources are among companies that own mines, said Nov. 11 it will double its mineral royalty on base minerals to 6 percent and raise the royalty on precious metals to 6 percent from 5 percent.

The increase and a tax change on mining income will raise about $195 million for the nation, Africa’s biggest copper producer, Finance Minister Alexander Chikwanda said.

Venezuelan President Hugo Chavez ordered the nationalization of the gold industry in September and gave companies 90 days to form joint ventures with the state.

“Venezuela is quite disturbing with respect to the moves to nationalization there,” Russell said. “The similarities between Africa and South America are not that far removed when you start talking about resource nationalism.”

Peru’s President Ollanta Humala, a former army rebel, was elected in June on pledges to raise mining royalties and tighten state control over resources. Peru is the world’s third-largest copper producer and the tax increase has been estimated to generate $1.1 billion in annual revenue.

Mining companies are trying to fend off demands from governments to gain a greater share in projects or raise taxes on royalties on sales. Last month, Rio and partner Ivanhoe Mines halted a bid by Mongolia to raise its stake in the Oyu Tolgoi copper and gold mine which has been estimated to make up one-third of the nation’s economy by 2020.

“History has shown nationalization doesn’t work,” said Richard Adkerson, chief executive officer of Freeport-McMoRan Copper & Gold, the world’s largest publicly traded copper producer. “Everybody wants more. Governments want more, workers want more, shareholders want more and so in running a company it’s balancing those interests in the right way.”

In South Africa, mining companies have said a debate about nationalizing assets is deterring investment.

“South Africa is looking very carefully about how it can actually use natural resources for the benefit of the nation where unemployment is very high and poverty is still very high,” Ian Farmer, chief executive officer of Lonmin, the world’s third-largest platinum producer, said in a Nov. 14 Bloomberg Television interview. “I’m sure when that debate settles, it will find the right balance between fairness and competitiveness that will enable us to continue to grow our business and invest with confidence.”

 

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