Resource nationalism turning nasty for miners?
As if the global mining sector didn’t have enough to worry about as it needs to work in less and less hospitable areas of the world. Resource nationalism is becoming a more and more serious hindrance to mining infrastructure investment, and in some areas seems to be turning distinctly nasty in terms of ‘affirmative action’ by locals and sometimes by governments themselves.The history of mining in emerging nations has always been beset with problems but, arguably, many years ago the industry’s reputation was scarred by some unscrupulous companies treating locals with disdain, taking little care of the environment and almost certainly doing little in terms of building sustainable industry around the old mine locations. But nowadays it is largely a different story. Mining companies bend over backwards to satisfy local governments and populace alike in terms of protecting the environment to the fullest extent possible, supporting local communities and coming to at least relatively fair deals with governments which see mining investment as a means of helping drag living standards out of the stone age – whether the local people want that or not!
The industry itself sets up self regulating bodies like the ICMM to set standards and codes of conduct to which its members should adhere and supposedly mitigate any resultant social and environmental issues. On the face of things thus the industry should hope for less hostile treatment from the countries in which it finds itself operating.
To be fair this is often the case, but it does seem that the mining sector is coming under attack from governments and political and environmental activists and in some areas of the world this appears increasingly to be leading to violent confrontations – and in some extreme cases this has led to deaths – either at the hands of the activists or, perhaps more commonly, at the hands of government security forces (either army or police) who may have a more casual attitude to life or violent suppression than would be the case in the mining company’s home country.
Here the mining company faces a major dilemma. If it hires its own armed security guards it gets accused of running its own private army. If it relies on heavy-handed government paramilitary forces, which then use what the outside world sees as unacceptable violence in putting down demonstrations, then the company is often still seen as being responsible for deaths and injuries by the global press. If the miner contributes to the costs of the local police or army presence, then this can also be used to drum up opposition – as in the case, for example of Freeport at its Grasberg operation in Indonesia which is currently having to bear the brunt of adverse publicity on both over-zealous action by government security forces in the face of both debilitating strike action and local rebel insurgents, and for helping pay for the protection for its staff so offered.
In the extreme mining companies have been forced to close major profitable operations. Perhaps the most significant to have fallen foul in this manner was Rio Tinto’s Panguna mine on Bougainville Island in Papua New Guinea – at the time one of the world’s largest copper/gold mines. Here, the locals seeking independence were put down viciously by government forces – and now, some 22 years later Rio Tinto is being pursued on charges of contribution to genocide and war crimes in the American courts – the purported genocide, though, reportedly happened after the mine was forced to close down in 1989 (see: US Federal court revives Rio Tinto human rights law suit). How the American courts can exercise jurisdiction over events which happened in a foreign country between non-American citizens, companies and governments is a little puzzling to an independent observer and indeed appears to have been a matter of contention in the appeals Court with a majority verdict of only 6 to 5 for allowing the case to be heard on this very issue. This will no doubt keep the lawyers happy and in lucrative business for some time to come.
But lest one thinks that the Indonesia/PNG area is the sole area of contention of this type, there have been a number of other instances globally where the mining, and oil, industries in particular have been caught up in domestic disputes and violence – notably in the Philippines, Colombia, and recently in Peru where Newmont/Buenaventura has been a prime sufferer with unrest at Yanacocha and most recently over the new massive $4.8 billion Minas Conga gold mine. In Peru again Canadian junior Bear Creek has been barred from mining its Santa Ana silver project due to local demonstrations and opposition. Latin America appears to be an area where violence in industrial disputes is often extremely near the surface. And there have been recent violent incidents in Africa and Asia too. Seldom does a mining strike in Chile or Peru for example seem to proceed without mine blockades which have the potential to spring over into violent confrontations.
In other instances changes in government attitudes to foreign mining investment have also seen companies being hit with ridiculous tax or compensation demands and having to walk away – or be forced away – from their projects. The most recent of these are probably the problems Canada’s First Quantum suffered in the Democratic Republic of Congo (DRC) where it had to vacate all its mining operations, which since appear to have been sold off for a pittance. This has been taken to the international courts, but there may, in reality, be little the international courts can do should First Quantum be successful but if the DRC just ignores the verdict.
But it is perhaps the more insidious forms of resource nationalism that are becoming the biggest threat to global mining and this is not something which just happens in emerging nations. Increasingly governments see the mining industry as a cash cow to help finance their own profligacy and thus renege on agreements and raise taxes and royalties if there is the slightest whiff of what they may see as an excess profit. What they often tend to forget is that their country’s own economy may have been built on mining which has opened up major parts of it, contributed heavily to infrastructure and helped swell its treasury through taxes and royalties. To then jump in and bleed the companies dry is self-defeating. If they do so, mines will close, new mines will not be built, metals prices will soar, mining payments to the exchequer will fade and die and their economies will suffer as a consequence. With the huge lead times to build new mines, even a subsequent reversal in policy will not see a mining sector recovery for many years under these circumstances.
Mining is also an easy environmental target for activists who largely deal in local fear mongering about subjects such as cyanide (an emotive word in itself), ground water pollution, radiation etc. quite apart from despoliation of countryside, forestry, national parkland, agricultural land and other areas of possible concern to the local population, whether or not there is any basis for their stirred up fears. To be fair sometimes their opposition is, indeed, justified, but often is not – but the activists are frequently seen to be happy to utilise false, and scary, arguments to make their case in the knowledge that once such accusations are made the mining company is immediately seen to be on the defensive in disputing them and the statements will frequently stick in the minds of possible opponents however false the initial claims may be.
Mining can thus be an easy target around which to raise strong feelings for various political ends. Governments, and the local populace in particular, generally do not take into account that mining companies need to make big profits to finance future developments – they just look at the headline figures and feel they are being ripped off by the global miners. With large new mining operations starting at around $1 billion, up to perhaps $5 billion to develop the miners need to maintain big profits to even look at a big new project in a remote area.
Resource nationalism won’t go away, but it is becoming increasingly relevant to mining investment as companies have to source production in previously unexplored areas of the world while their domestic opportunities become more and more limited. To be fair, some countries do indeed recognise the contribution mining has made to their finances – and sometimes measures may be taken to dampen protest for the greater good of the nation (as witness recent moves by the Peruvian Government to try and bring an end to violent protest against mining companies.) But the rabble rousers of the world do tend to find mining an easy target and ignore the economic wealth a successful mining industry can bring.
For the investor in mining though resource nationalism is a fact of life. Possible potential losses can be mitigated by keeping investment in those areas of the world seen as more dubious to a small high-risk section of a portfolio, but perhaps not ignore them altogether as gains can be very strong too should operations process without hindrance. But remember bankers too are very conscious of political risk and at times when they are trying to de-risk loans to the fullest extent possible, mining companies with major development projects may find it increasingly difficult to generate the funds necessary to move ahead except, perhaps, in areas perceived as low-risk environments. Global mining will continue in these areas as overall the potential profits can make taking the risks involved worthwhile – but it doesn’t make management’s decisions to invest in these areas anything but walking a precarious tightrope.
The industry itself sets up self regulating bodies like the ICMM to set standards and codes of conduct to which its members should adhere and supposedly mitigate any resultant social and environmental issues. On the face of things thus the industry should hope for less hostile treatment from the countries in which it finds itself operating.
To be fair this is often the case, but it does seem that the mining sector is coming under attack from governments and political and environmental activists and in some areas of the world this appears increasingly to be leading to violent confrontations – and in some extreme cases this has led to deaths – either at the hands of the activists or, perhaps more commonly, at the hands of government security forces (either army or police) who may have a more casual attitude to life or violent suppression than would be the case in the mining company’s home country.
Here the mining company faces a major dilemma. If it hires its own armed security guards it gets accused of running its own private army. If it relies on heavy-handed government paramilitary forces, which then use what the outside world sees as unacceptable violence in putting down demonstrations, then the company is often still seen as being responsible for deaths and injuries by the global press. If the miner contributes to the costs of the local police or army presence, then this can also be used to drum up opposition – as in the case, for example of Freeport at its Grasberg operation in Indonesia which is currently having to bear the brunt of adverse publicity on both over-zealous action by government security forces in the face of both debilitating strike action and local rebel insurgents, and for helping pay for the protection for its staff so offered.
In the extreme mining companies have been forced to close major profitable operations. Perhaps the most significant to have fallen foul in this manner was Rio Tinto’s Panguna mine on Bougainville Island in Papua New Guinea – at the time one of the world’s largest copper/gold mines. Here, the locals seeking independence were put down viciously by government forces – and now, some 22 years later Rio Tinto is being pursued on charges of contribution to genocide and war crimes in the American courts – the purported genocide, though, reportedly happened after the mine was forced to close down in 1989 (see: US Federal court revives Rio Tinto human rights law suit). How the American courts can exercise jurisdiction over events which happened in a foreign country between non-American citizens, companies and governments is a little puzzling to an independent observer and indeed appears to have been a matter of contention in the appeals Court with a majority verdict of only 6 to 5 for allowing the case to be heard on this very issue. This will no doubt keep the lawyers happy and in lucrative business for some time to come.
But lest one thinks that the Indonesia/PNG area is the sole area of contention of this type, there have been a number of other instances globally where the mining, and oil, industries in particular have been caught up in domestic disputes and violence – notably in the Philippines, Colombia, and recently in Peru where Newmont/Buenaventura has been a prime sufferer with unrest at Yanacocha and most recently over the new massive $4.8 billion Minas Conga gold mine. In Peru again Canadian junior Bear Creek has been barred from mining its Santa Ana silver project due to local demonstrations and opposition. Latin America appears to be an area where violence in industrial disputes is often extremely near the surface. And there have been recent violent incidents in Africa and Asia too. Seldom does a mining strike in Chile or Peru for example seem to proceed without mine blockades which have the potential to spring over into violent confrontations.
In other instances changes in government attitudes to foreign mining investment have also seen companies being hit with ridiculous tax or compensation demands and having to walk away – or be forced away – from their projects. The most recent of these are probably the problems Canada’s First Quantum suffered in the Democratic Republic of Congo (DRC) where it had to vacate all its mining operations, which since appear to have been sold off for a pittance. This has been taken to the international courts, but there may, in reality, be little the international courts can do should First Quantum be successful but if the DRC just ignores the verdict.
But it is perhaps the more insidious forms of resource nationalism that are becoming the biggest threat to global mining and this is not something which just happens in emerging nations. Increasingly governments see the mining industry as a cash cow to help finance their own profligacy and thus renege on agreements and raise taxes and royalties if there is the slightest whiff of what they may see as an excess profit. What they often tend to forget is that their country’s own economy may have been built on mining which has opened up major parts of it, contributed heavily to infrastructure and helped swell its treasury through taxes and royalties. To then jump in and bleed the companies dry is self-defeating. If they do so, mines will close, new mines will not be built, metals prices will soar, mining payments to the exchequer will fade and die and their economies will suffer as a consequence. With the huge lead times to build new mines, even a subsequent reversal in policy will not see a mining sector recovery for many years under these circumstances.
Mining is also an easy environmental target for activists who largely deal in local fear mongering about subjects such as cyanide (an emotive word in itself), ground water pollution, radiation etc. quite apart from despoliation of countryside, forestry, national parkland, agricultural land and other areas of possible concern to the local population, whether or not there is any basis for their stirred up fears. To be fair sometimes their opposition is, indeed, justified, but often is not – but the activists are frequently seen to be happy to utilise false, and scary, arguments to make their case in the knowledge that once such accusations are made the mining company is immediately seen to be on the defensive in disputing them and the statements will frequently stick in the minds of possible opponents however false the initial claims may be.
Mining can thus be an easy target around which to raise strong feelings for various political ends. Governments, and the local populace in particular, generally do not take into account that mining companies need to make big profits to finance future developments – they just look at the headline figures and feel they are being ripped off by the global miners. With large new mining operations starting at around $1 billion, up to perhaps $5 billion to develop the miners need to maintain big profits to even look at a big new project in a remote area.
Resource nationalism won’t go away, but it is becoming increasingly relevant to mining investment as companies have to source production in previously unexplored areas of the world while their domestic opportunities become more and more limited. To be fair, some countries do indeed recognise the contribution mining has made to their finances – and sometimes measures may be taken to dampen protest for the greater good of the nation (as witness recent moves by the Peruvian Government to try and bring an end to violent protest against mining companies.) But the rabble rousers of the world do tend to find mining an easy target and ignore the economic wealth a successful mining industry can bring.
For the investor in mining though resource nationalism is a fact of life. Possible potential losses can be mitigated by keeping investment in those areas of the world seen as more dubious to a small high-risk section of a portfolio, but perhaps not ignore them altogether as gains can be very strong too should operations process without hindrance. But remember bankers too are very conscious of political risk and at times when they are trying to de-risk loans to the fullest extent possible, mining companies with major development projects may find it increasingly difficult to generate the funds necessary to move ahead except, perhaps, in areas perceived as low-risk environments. Global mining will continue in these areas as overall the potential profits can make taking the risks involved worthwhile – but it doesn’t make management’s decisions to invest in these areas anything but walking a precarious tightrope.
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