Commentary: Hide from resource nationalism at your peril

Brian Menell, heir to the South Africa-based Anglovaal mining fortune and a speaker of the Mines and Money conference here in December, states the obvious when he says increased government intervention in the mining industry is not generally welcome by private industry. But it is a factor the industry needs to learn how to live with, he says, because it is does not appear to be going away anytime soon.

“Is it all bad news and simply enforced transfer of value,” Menell inquires, “or does it hold potential benefits for our industry?”

Having spent most of his career working in Africa, expropriation and rapidly changing legislative environments are familiar concepts to Menell. Still, the growing trend of resource nationalism across both developed and developing countries – such as the failed deal between BHP Billiton and Potash Corp. in late 2010, the attempt months earlier by the Australian government to impose a super-profits tax on resource companies and the current anti-mining protests and the resulting cancellation of mining contracts in Peru, to name a few – represents a global shift that needs to be fully recognized and dealt with.

To do this, we need to look at where the recent burst of resource nationalism has come from. According to Menell, a rise in democratization among developing countries, the perceived excess of mining profits on the back of strong commodity prices in a time of political and financial uncertainty and increasing sensitivity to populist sentiments are all partly to blame.

Whether we like it or not, Menell says, in much of the developing world the mining industry is “perceived as having been a largely exploitative tool of imperial interests . . . regimes that need to either get re-elected in volatile environments, or in some cases, wish to avoid the need for re-elections, must therefore be seen as addressing this perceived historical wrong.”

Increases in taxes and royalties are government’s short-term reactions, Menell argues, symptoms that could have been avoided had the mining company, or in some cases, the mining industry as a whole, properly engaged in constructive and sustainable partnerships with their host nations.

“If, for instance, a new government in Tanzania was to increase export duties, a gold junior may well be able to reallocate its resources to some other country. But if you are a Rio, or a Vale, and you want to remain a major force in seaborne iron ore, you cannot afford to ignore the Simandou iron ore fields in Guinea. And you therefore have to deal with the aspirations of the government of Alpha Condé, whether you like it or not. In this case, probably not.”

Herein lies the biggest opportunity, Mendell argues. In order to avoid the potential future pitfalls of increased government intervention or expropriation, today’s mining companies need to consider implementing new legislation and new models for government participation in resource projects. This may take shape in the form of enhanced equity participation through state structures such as a national mining company, for example, or a direct interest in the project or company.

“On the one hand, this is the most dangerous trend,” Mendell concedes, noting some developing countries could use it as a stepping stone to outright nationalization. “However, in my view, the national mining company model, if correctly conceived, represents the best way forward with the best chance of creating a new and sustainable model of mining for the coming decades,” he says, adding that governments should aim to become valuable and constructive partners.

Social responsibility programs are required as part of being a good corporate citizen, but they will generate little of the national goodwill needed to avoid resource nationalism tendencies.

“I would say that the single most important thing that companies and senior executives need to do in order to manage the resource nationalism game is to act with respect.” A genuine appreciation of culture and values is an “essential prerequisite for constructive engagement,” Mendell notes.

The South African businessman lists fear and arrogance as the enemies of progress. “If we as an industry succumb to our natural instincts to rigidly resist any increased state intervention, we will be inviting enforced value transfers that will prove much more costly than if we engage with generally open minds.

“We need more political skills in the industry. We need more leaders who have the acumen and confidence to act like Harry Oppenheimer, when he negotiated with the Botswana government to create Debswana as a sustainable partnership, albeit one that has arguably evolved too far in favour of the Botswana government, but nonetheless one that is still a cornerstone of both Botswana and De Beers more than thirty years later.”

Mendell proposes a more sustainable model for national interests in mining projects. It will offer a real partnership where state bodies will participate as equals – though with less of an equity interest than equals – which will in turn protect the mining industry’s long-term position. The concept, essentially forming national mining companies which will own a percent of a mining project or company, has four main tenets: one, they should be transparent so that the electorate, media and international community can clearly see the value creation that is occurring in the nation; two, equity participation in new mining projects should be generally limited to a ceiling of 25%, of which a 10% maximum should be a free carried interest; three, any exercise of back-in rights should come hand-in-hand with preferential tax and duty rates, and with long-term security and stability agreements for the life of the project – this works on the principal of value for value; and four, national mining companies and private companies should be on a level playing field, with the same rights and responsibilities.

“If we can help to create partners that adhere to these guidelines,” Mendell suggests, “we will have a platform to turn short-term political problems into long-term sustainable solutions.”

When asked if he could list any companies currently acting like this, Mendell could not point to one. Some are starting to get there, he says, but the “fruits of the engagements and relationships” remain to be seen.