Resource Nationalism

You may not hear the term resource nationalism often in the media, but it is a key consideration for many mining firms when deciding where to do future business—and consequently invest billions in infrastructure.

Resource nationalism is a governmental attempt to get a bigger share of profits from resource mining or production. It isn’t new; ostensibly it’s no different than other corporate taxes. While, in my view, lower taxes are generally an incremental economic positive, the key problem with resource nationalism is how governments go about levying these additional taxes. They are often fairly arbitrary, may come as a sudden out-of-left field and perhaps game-changing surprise, and layer on top of standard corporate taxes firms already anticipate paying.

The mining business isn’t one in which mine owners can easily “vote with their feet” with an operating mine. They can’t close up shop and move it to another locale. And for certain commodities there is little choice where a mine can operate. Exhibit 1 shows if miners want ready access to platinum, they likely must deal with South Africa—there just aren’t many alternatives. But for less geographically concentrated metals like iron ore, copper, silver or gold, it’s foolish for governments to think miners won’t be tempted to redirect future investments into more miner-friendly environments. And rational governments should be sorry to lose future development: Mining firms often spend billions in development of a mine and surrounding infrastructure—even though it may take years before anything is successfully extracted and the operation turns profitable.

Exhibit 1: Mining Production by Country

Source: US Geological Society.

I don’t argue resource-rich nations shouldn’t benefit from the vast stores of wealth they have. But governments should consider whether they’re trading long-term benefits for short-term revenues. There’s a huge difference between instituting a profit tax—which corporations generally expect to pay—and dictating firms must hand over significant stakes (as much as 51% in some cases) in a mine to the local government, after billions of private dollars have been invested (something that has happened in South Africa, Democratic Republic of Congo, Indonesia and other places). Mine owners need reasonable expectations their property rights won’t shift and will be protected by the government—not arbitrarily cancelled. Solid personal property rights are a critical component of capitalism. This should be true even if the mine is on land leased from the government—after all, the mine owners and the government no doubt entered into a contractual lease. If a firm lacks confidence the contract won’t be abrogated, there’s not much motivation to invest in future development.

The threat of seizure can have a chilling effect on the desire to invest in a specific area. But arbitrary tax increases can also cause increased dislocations. For example, last summer, Ecuador’s president said he wanted to raise the minimum mining royalty from 5% to 8%, which by itself is only a minor negative to the mining industry there. However, he also said miners should pay this tax before extracting any minerals from the ground. How miners are to know how much profit they’ll have on something they haven’t mined is a mystery. But certainly, it’s also a strong disincentive to future development of mines in that country.

Most large mining firms operate on different continents (let alone different countries) and can opt for favorable mining environments for future developments. Why would a miner choose to build into an environment that seems less friendly or even has the potential to become less friendly? If governments want to increase tax revenue, instead of chasing future industry from their nations, perhaps they should focus on competitiveness and becoming an attractive place to do business. It’s entirely possible for the local governments to benefit from these profits in the near and long term, but not if firms are driven off because of increasing resource nationalism.

If you are investing in this industry (and if you have a well-diversified global portfolio, you should be), know that most nations, even the US, engage in some degree of resource nationalism. Be wary of nations that seem likely to be the most egregious offenders. Increased profit taxes can be an annoyance, but aren't as harmful to near-term profits as outright mine seizure. To mitigate that risk, be mindful of mining companies with the majority of their mining interests in nations with autocratic or heavily socialistic governments—and naturally, nations with a history of seizing private assets.