The bull market has recently spelled a boom for Vancouver miners, but a specter looms on the horizon that could curb long-term growth and sustainability.
It’s called resource nationalism, a phenomenon that’s spreading throughout the global mining industry as governments seek new ways to bolster their balance sheets following the economic collapse.
Tom Whelan, Ernst & Young’s (E&Y) Canadian mining leader, explained: “The global financial crisis resulted in shrinking government revenues as the economy slowed down and governments were spending huge amounts of money to try and fire up various economies around the world. Now, as they try and replenish various treasuries across the globe, the mining industry is one of the first industries to be targeted, primarily because of the faster-than-expected turnaround in the commodity prices in late 2009.”
Essentially, governments are placing new cost burdens on an industry that was among the first to return to profitability after the global downturn.
The shift could have serious implications for Vancouver’s business sector, which is a global mining hub and home to approximately 800 resource companies.
Many of those companies are junior explorers that search for mineral wealth in the world’s most far-flung locales (see “Danger pay: Vancouver miners increasingly venturing into remote and unpredictable regions in the hunt for resource riches” – issue 1079, June 29-July 5).
In E&Y’s 2010 business risk report, resource nationalism ranked as the fourth-highest business risk for mining companies, up from ninth the year before.
The report said there are many forms of resource nationalism, but some recent examples include:
- Australia’s proposed 40% resource rent tax, which ultimately led to Prime Minister Kevin Rudd’s ouster from that country’s top job;
- increased royalty regimes for precious metals in countries such as South Africa, Ghana and Sierra Leone;
- a Venezuelan decision to revoke mining licences; and
- a Brazilian plan that could tax shipments of exported iron ore in an effort to increase investment within that country’s borders.
If well-known mining jurisdictions such as Australia, Brazil and South Africa increase resource nationalism activity, other countries might follow suit, the report said.
Terry Lyons, chairman of Vancouver-based Northgate Minerals Corp. (TSX:NGX), said many countries don’t realize that resource nationalism can actually cripple the mining industry because it drives investment away.
“We do not grudge anybody for getting a fair piece … but when the rules change it’s a bit like playing a hockey game,” Lyons said. “At the end of the first period its tied 1-1, and in the second period they say, ‘We’ll pull their goalie.’ Why would anybody want to play the third period? It’ll be 10 to one.”
Northgate owns the Foster and Stawell gold mines in Southern Australia, and plans to watch the progression of resource nationalism in that country “closely.”
Northgate has no plans to leave Australia, but Lyons said unstable political conditions in Africa have steered the company away from that continent.
Vancouver-based First Quantum Minerals Ltd. (TSX:FM) entered the Democratic Republic of Congo (DRC) in search of world-class copper and gold deposits, but it’s had nothing but trouble since.
The company filed international arbitration against the Congolese government after the permit for its Kolwezi mine was revoked.
Last month, the DRC seized First Quantum’s rights to its Frontier mine, which cost $226 million to build.
First Quantum president Clive Newall told BIV the situation in the DRC isn’t indicative of resource nationalism, but rather a government rife with corruption.
Still, he said resource nationalism is a worldwide phenomenon the company is concerned about.
“It doesn’t recognize the inherent problems of the mining industry,” Newall said. “If you think of the mining industry over time, it’s the worst-performing sector. You need the good times to make up for the bad times. If you have a windfall tax that takes off the profits during the good times then the industry dies during the bad times.”
Newall understands why governments want to reap the benefits of an industry that’s booming, but the solution is about getting the “economics” right between both governments and companies.
E&Y’s Whelan said governments in many developing nations don’t have a long history of mining and may not know how to cut deals that work for both sides.
That’s why it’s important to develop strong relationships early.
“Our advice for companies is … have those strong relationships and explain the value of the project to the host country, and be able to demonstrate the direct benefits,” Whelan said.
He also said junior companies should work even harder to build strong ties with governments because they can’t afford to waste time or money on mismanaged relationships.
Catherine McLeod-Seltzer, chairman of Pacific Rim Mining Corp. (TSX:PMU) and the subject of this issue’s BIV profile (see page 37), said her company has done its best to demonstrate that its El Dorado project will bring massive benefits to El Salvador.
Yet the Vancouver company has met with voracious opposition there, and has now filed international arbitration against the Salvadoran government for breach of international law.
McLeod-Seltzer said resource nationalism has obvious consequences for mining companies, but the people who really lose out are the workers who are denied jobs when a mining company takes its investment elsewhere.
“The part I don’t understand is they have no credible alternative for these communities,” McLeod-Seltzer said.
“This is an area of extreme poverty … a very small country with a high population that agriculture alone can’t support. The alternative is an underground mine built to the highest environmental standards that will create hundreds of jobs.
“They oppose it but they don’t provide an alternative. To me, you’re denying your people.”