Resource Nationalism: A Challenge to the Modern Mining Industry – Metal Miner

24 January 2012, Stuart Burns

A keynote speech made by Brian Menell (chief executive of Kemet Group and CEO of Tinco, a vertically integrated tin miner) at the Mines and Money Conference in London, addresses a growing issue in the mining industry – namely, resource nationalism.

Brian Menell defines resource nationalism as growing assertiveness by host governments and regimes in resource-rich countries. It manifests itself in a number of ways, but before we list them, and before you ask what that has got to do with metal prices in Wisconsin, pause for a moment to consider the impact this phenomenon has had on the oil market, where host-government involvement has been more active and for longer.

Producing countries from Venezuela to parts of the Middle East have expropriated assets set up by the oil majors and sought to control production and prices, both nationally and via OPEC. While the development of this process into the mining of ore deposits will not impact day-to-day prices, it could have a medium – to long-term impact – just consider the dramatic rise in prices of rare earth metals following the Chinese state’s actions against mining and exports of the metals. So resource nationalism matters and unfortunately is a growing trend.

But how does it manifest itself? What causes it?

In Menell’s opinion, there are a number of ways it manifests itself. Firstly, punitive increases in tax and royalty regimes, such as the mining tax in Australia that looks likely to gain senate approval this year, and is being closely watched in South America and Africa. Menell believes these taxes are generally short-term responses to fiscal stress and to the perceived unfair distribution of excess profits resulting from the commodity super-cycle.

Secondly, there is increased assertive implementation of the “use it or lose it”-type regulation, in which short-term opportunistic investors acquire resource rights, but then don’t develop them as rapidly as expected.

Thirdly, there is legislation limiting foreign ownership of strategic resources – not so much in Africa, where the need for foreign capital and expertise is almost universally accepted, but, Menell cites, in Canada, where the derailing of BHP’s Potash deal is just such an example.

Fourthly, there are increasing demands for local beneficiation. Sometimes this can be successful in developing a local refining or smelting industry, such as tin in Indonesia, but too often is an uneconomic enterprise that depresses the viability of projects.

Lastly (and in Menell’s view the most interesting) is legislation for enhanced equity participation in mining companies and projects. On the one hand, it is the most dangerous trend as it can be a stepping stone to expropriation and outright nationalization; but to counter this, and for the benefits that can accrue if handled properly, it has the most potential to create a win-win long-term partnership and avoid accusations of exploitation.

So much for what resource nationalism is and how it manifests itself — we have all read reports of one or all of these trends in the business press over the years. The issue is what to do about it: what should mining companies do to counter the threat or engage with the host regime?