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GOVERNMENT: Global Mining Sector Unstable Due to Government Intervention

 





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The global mining sector is growing increasingly uncertain among companies and investors due to government intervention. This threatens not only the long-term growth of mining, but also that of the global economy.

That’s the view of global business advisor Grant Thornton International, in the firm’s recently released report entitled: “Facing an uncertain future: Government intervention threatens the global mining sector”. The report states that increasing and unpredictable intervention across the world’s leading mining jurisdictions is adding uncertainty to a sector already laden with risk.

“Changes to taxation, nationalisation and environmental legislation are pushing complexity to acute levels for mining companies and pose a threat to commodity prices,” says Steven Kilfoil director at Grant Thornton Johannesburg. “Critically, the wide varieties of government interventions are also increasing the risk factor for investors, clouding corporate valuations and making it harder to raise capital.”

Mark Zastre, global leader for mining at Grant Thornton International, says: “Intervention is having a real impact on the mining sector. The threat of nationalisation in South Africa, for example, is emblematic of the situation facing mining companies around the world.”

Zastre questions how companies can plan and operate successfully when governments keep chopping and changing the rules.

“The mining companies I talk with are really concerned about the threat posed by government intervention. They are finding it increasingly difficult to get funding, as the uncertainty and risk of intervention is putting investors off. Clients around the world fear that if uncertainty rumbles on, the threat of the sector suffering long lasting damage will become ever greater,” Zastre continues.

The Global Mining Sector a ‘Target Sector’


According to Grant Thornton International, the wave of intervention in mining around the world reflects the sector’s status as an easy target for many governments.

Mark Zastre adds: “Where they are looking to boost their revenues, governments see mining as a thriving, profitable income source. But this is creating problems. In Australia, the federal government’s new state tax is clashing with existing federal royalties, leaving mining companies in limbo as to how exactly the regulatory landscape there will evolve. Mining was expected to generate 7% of Australia’s GDP in 2010-11, so it is not a sector the government there can afford to alienate.

Taxation of Global Mining Sector Companies Reaching a “Tipping Point”


The report highlights that taxation as a government intervention strategy works to raise immediate government revenue, but this simultaneously reduces overall mining profitability. Taxation as a government intervention initiative affects mining companies operating in Australia, Canada, Africa and Peru.

In Canada, for example, each province taxes mining companies at different rates, which indirectly creates strong national competition.

Nationalisation and Indigenisation – Uncertainty Limits Investment Interest

Nationalisation, the takeover of a private company’s assets by the state and indigenisation, increasing local participation in or ownership of company assets, are government intervention options which result in broad range of implications and perceptions for investors and country alike.

“In extreme cases, third-party investor interest could be entirely wiped out,” says Kilfoil.

Nationalisation is highlighted in the report as South Africa’s primary issue affecting the mining industry in South Africa.

“Our research indicates that while many analysts worldwide agree that some sort of reform is needed in South Africa, most argue that full-blown nationalisation will be detrimental,” he warns. “From an investor perspective, interest in mining assets is likely to diminish in the face of this uncertainty.”

For the companies involved, they may reach a point where their valuations are so negatively affected, and the landscape in which they operate is so unclear, that they simply walk away in the search for more competitive jurisdictions or asset classes.

The research report recommends that governments work to limit or end policy and taxation uncertainty. They need to resist targeting mining as if it were an endless revenue stream and recognise that excessive intervention stifles investment and exploration.

“Otherwise, there is a real threat that mining operations will vote with their feet and simply cease to operate in their jurisdictions, which will have knock on effect on their economies,” says Kilfoil.

“I would urge mining companies around the world to ensure that their financial plans and strategies factor government intervention possibilities into multiple scenarios, and that their key risks are articulated to investors,” Kilfoil concludes. It is with statements like these that show how the global mining sector is coming under increased pressure.


 
 
 
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