FOCUS: Resource nationalism key risk for miners amid economic volatility

Resource nationalism is one of the key risks miners will face in the increasingly volatile macroeconomic environment worsened by the Covid-19 pandemic, global law firm White & Case told Fastmarkets this week.

This is due to the stretched national budgets that governments are facing after supporting their economies through monetary and fiscal policies amid the Covid-19 outbreak, as well as increased healthcare spending.

“Fiscally stretched governments that are looking for alternative sources of revenue amid high commodity prices may target foreign investors which have already sunk large capital expenditure into major mining projects,” John Tivey, a partner at the law firm, said.

This is especially so with commodity prices riding high on returning confidence in China and demand for haven assets, such as gold bullion.

In such an environment, it is easy to see why foreign investors are easy political targets for additional taxes or government share, Tivey said.

Resource nationalism is most likely to manifest in the forms of increased taxation, in-country beneficiation, contract renegotiations, forced equity transfers or restrictions on exports, according to a straw poll conducted by the New York-headquartered firm, which formed part of its report on environmental, social and corporate governance amid the Covid-19 pandemic.

“These methods can be utilized by host governments with limited risk of the source of the wealth, i.e. the mine, being lost. Any all-out nationalization of the asset may result in the mine being unprofitable,” Tivey, one of the co-authors of the report, said.

In 2019, the government of Sierra Leone instituted an export ban and canceled the iron ore mining license of Gerald Metals subsidiary SL Mining for its Marampa iron ore mine.

It later detained five expatriate managers of SL Mining, alleging they had incited unrest that led to the destruction of property in the township of Lunsar. This followed a government-imposed suspension on SL Mining’s mine.

In the same year, the Indonesian government - after the reelection of President Joko Widodo - brought forward its a ban on nickel ore exports to 2020 from 2022 in an effort to boost its own nickel industry, including the development of processing facilities and increase value across the domestic supply chain.

Governments are unlikely to take a decision to nationalize 100% of mines due to their exposure to the rights of mining companies under investment agreements and international treaties.

Risky regions
The risk of resource nationalization is especially high in Africa, Latin America, Central Asia and Southeast Asia.

“These regions can see the situation inflamed by lobbying by influential local groups that aim to exploit the perception that wealth from a mining project invested by a private company is not being shared sufficiently with stakeholders in the host jurisdiction, just so that they can further their own objectives,” Tivey said.

Swiss trader Glencore remains in the midst of talks with the Zambian government regarding operations at subsidiary Mopani Copper Mines, it said in its first-quarter 2020 production report released in early June.

The Zambian government had threatened to revoke Glencore’s mining license in April due to the miner closing a key mine because of falling copper prices and restrictions related to Covid-19.

The drive to nationalize natural resources is especially so with commodity prices riding high on returning confidence in China and demand for haven assets such as gold.

“Investors are also seeing gold as a safe harbor given the uncertainty in the global economy. Iron ore and copper prices are being driven by the Chinese recovery.

“In iron ore, the impact of Covid-19 on iron ore production in Brazil is also driving up prices, as are copper prices edging higher on the back of the Chinese recovery,” Tivey said.

Iron ore prices have recovered steadily through the first half of the year from when the Covid-19 pandemic set in, with Fastmarkets’ iron ore 62% Fe fines index increasing to a peak of $112.48 per tonne cfr Qingdao on July 14 from an intra-year low of $80.38 per tonne cfr Qingdao on February 3.

The iron ore 65% Fe Brazil-origin fines index has performed similarly well, climbing to a peak of $123.90 per tonne cfr Qingdao on July 15 from an intra-year low of $95.30 per tonne cfr Qingdao on February 3.

Fastmarkets’ price assessment for copper grade A cathode premium has climbed to $95-120 per tonne cif Shanghai on May 15 from $33-48 per tonne on January 7, shrugging off the effects of the coronavirus pandemic almost entirely.

White & Case, in its report, also listed global market weakness, supply chain disruptions and commodity prices as the other key risks flagged by respondents to its poll.

Enforcement on environmental protection, sanctions
White & Case’s straw poll also showed increasingly stringent government enforcement activity in the mining sectors on the key areas of environmental protection and sanctions.

The United States, China and Australia are expected to be the most active in bringing about these actions.

“They have the most developed regulatory regimes and the associated regulatory agencies are adequately resourced. They are also supported by an independent and highly developed court system,” Tivey said.

China has been stringently cutting excess capacity and drawing down the operations of steelmakers that are not able to meet national “ultra-low emission” air pollution standards, requiring old blast furnaces to be shut and replaced by compliant, more environmentally friendly units or by electric-arc furnaces.

But White & Case believes that Africa, Latin America, East Asia (excluding China) and Russia will likely not be able to bring about enforcement actions due to an absence of adequately resourced government agencies and instances of parties not being able to access an independent judicial system that can review decisions effectively.

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