The rise of resource nationalism and its implications for Canada
Resource nationalism – the tendency of governments to take a bigger slice of the money to be made from their states’ resources – is a global trend that is manifesting itself across the industry, and it may have major repercussions for Canadian mining companies operating at home and abroad. This trend was recently identified in an Ernst & Young Report as the top strategic business risk in the mining and metals sector in 2011.
The industrialization and urbanization of China, India and other emerging countries are at the source of a soaring demand for commodities, which suppliers are struggling to meet. This has caused prices to treble in the past decade, according to The Economist’s index of non-oil commodity prices.
While high mineral prices are good for the industry, higher profits also raise the covetousness of governments that are trying to increase their share of the windfall generated by their natural resources through higher taxes, royalties or even through nationalization and indigenization. We see this around the globe. In Australia, a pending new mining tax law will be introduced on July 1, 2012. The tax on mining companies’ profits on iron ore and coal is expected to be spent on pensions and tax cuts for small companies. In Peru, the new government of Ollanta Humala has implemented a new tax that will apply to operating profits, rather than revenues, the rate being scaled according to how high the company’s margins are. In Zambia, Africa’s largest copper producer, the recently elected government is going to double royalties from three to six per cent on copper mines. Meanwhile, in Chile, there are expectations that taxes or mining royalties will be raised by a centre-right government under pressure to invest in education.
But tax/royalty increases are not the only manifestations of resource nationalism. In some countries, governments are trying to renegotiate the terms of contracts with mining companies, increase state-owned companies’ participation in mining projects or even nationalize mining. Recently, Vale and Rio Tinto had to cede up to 35 per cent of their iron ore projects to the government of Guinea. In Zimbabwe, the mining sector is threatened by the indigenization law passed in 2007, which states that foreign and white-owned companies must sell 51 per cent of their shares to indigenous Zimbabweans. In Venezuela, Hugo Chávez announced last August that he will nationalize the country’s gold industry. The debate over nationalization of the mining industry in South Africa contributes to a high level of uncertainty that delays investment decisions and scares away investors.
Even Canada is not immune to resource nationalism. In Quebec, the Parti Québécois – the official opposition – says that Quebecers must regain control over their natural resources. Citing Australia as a model, they have called for higher royalties, even though they were already increased from 12 per cent of annual profits in 2010 to 15 per cent in 2011, and will reach 16 per cent in 2012. They mention the rising price of minerals as a reason to increase the government’s share of mining revenue.
Resource nationalism will also affect Canadian companies operating abroad. The Canadian mining sector already has a strong external investment presence and the high demand for mining products will probably persuade Canadian mining companies to invest more in developing countries where the temptation for resource nationalism is strong.
As long as mineral prices remain high, resource nationalism will play an important role in both developing and developed countries. It will create a high level of uncertainty and complexity for investors who will have to live with – or find a way to manage – a higher level of risk.