The big problem for miners

Resource nationalism, where hard-up governments grab a greater share of mining companies’ profits, is a growing threat in the commodities sector. Tom Bulford looks at three recent examples which should serve as a warning to investors.

There will be a lot to talk about at this year’s London annual mining conference. And there is one subject which seems set to dominate the conference – politics. Mines & Money is a four day event at Islington’s Business Design Centre, and brings together mining companies and investors from all over the world. In this most volatile of industries, I have seen sentiment at this conference swing like a pendulum from one year to the next.

This year a cloud will hang over the conference from which will stare the faces of the various political leaders who have seen fit to grab a greater share of the spoils of the mining boom than they had previously promised.

All over the world, agreements have been torn up. Deals carefully constructed by mining executives and their advisers have simply been cast aside to be replaced by regimes that see host nations levy more taxes, take a higher royalty on production or simply insist upon an ownership stake.

In today’s Penny Sleuth I want to look at three recent examples – because they illustrate just how much of a risk politicians are becoming for your mining investments.

The Egyptian government moving the goalposts

Let’s start with Egyptian gold producer Centamin (CEY). Shares in Centamin lost a quarter of their value after the local media reported that its concession to work the Sukari gold mine had been annulled by an Egyptian administrative court. When the court’s actual judgment was revealed it scarcely cleared up the matter.

The court confirmed that there was a valid agreement between Centamin and the Egyptian Mineral Resource Authority but “sufficient evidence was not submitted to court to demonstrate that the requisite approval from the relevant minister had been obtained… therefore the process of conversion from an exploration to an exploitation lease was invalid.”

Centamin has countered that it is “in possession of the executed original lease documentation which clearly shows such approval from the minister of petroleum and mineral resources” and says that this was not one of the documents requested by the Court. As such, Centamin is “confident that this matter can be resolved during the appeal process”. We shall see….

A fight to stop illegal mining in Tanzania

Meanwhile, two mining juniors have run into trouble in Africa. Tanzanite miner Richland Resources (RLD) wants the Tanzanian government to help protect its property from illegal mining.

Not only have the locals simply been helping themselves to Richland’s tanzanite, but they have also been dumping this on the market and knocking the tanzanite price. “Due to the aggressive nature of the illegal miners, assistance from the ministry, as well as the police, is required”, says Richland “including the setting up of a task force to take firm action against the illegal miners who often resort to violent actions”.

 

But support from the government may be conditional on another issue. The ministry is demanding $1.73m of additional retrospective royalties relating to the period from 2004 to 2008. The Tanzanian Minerals Audit Agency is re-auditing Richland’s financial records to assess this claim for royalties, while the Revenue Authority is auditing the company’s historic tax status all the way back to 2004.

Richland protests that it has already contributed $20m to the Tanzanian coffers to date, but as it has no operations outside Tanzania, the government has it over a barrel.

A new mandate to hold big revenues in Kenya

Now let me give you an example in Kenya, where Goldplat (GDP) has spent several years and a large amount of money bringing a gold mine into production at Kilimapesa. With a gold resource of 650,000oz, the company is looking forward to turning this into revenue and cash, but this has not escaped notice locally. “At this juncture”, says Goldplat, “we note that the Kenyan government has gazetted Legal Notice No. 118 under the Mining Act that seeks to mandate a 35% minimum local equity participation in mining licences”.

“Legal opinion”, Goldplat continues, “indicates that this notice does not apply retrospectively to Kilimapesa’s Special Mining Lease No. 27, and the company has engaged with the minister of the environment and mineral resources to ensure that the planned plant expansion and associated ramp-up to 10,000 ounces per annum is not jeopardised. We are confident of a favourable outcome for all stakeholders”. Do I share this confidence? Not really.

Mining companies aiding the state

The fact is that in many developing countries foreign miners are an easy target. It is easy to portray them as raping the land of its resources while walking off with the profits. In fact all mining ventures are required to build schools and homes and other amenities for the local community, while providing employment and contributing financially to the state. That, though, is not necessarily enough anymore.

Centamin, Richland and Goldplat can hardly threaten to take their operations elsewhere, and if they protest too much, they will only further antagonise the host government. This is an important lesson for resource investors.

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