Govt. intervention threatens global mining-Grant Thornton
"Government intervention-unchecked and independent of broader government and sector strategies-poses a real threat to mining," and may hinder overall financial global recovery, says a new report.
Posted: Friday , 19 Aug 2011
RENO, NV -
"The shadow of higher taxes, restrictive regulation and indigenization looms large over an industry already grappling with the risks normally associated with exploration and extraction," a Grant Thornton International report warns.
"Government intervention includes direct and indirect taxes, royalty arrangements, nationalization and economic empowerment policies, as well as regular compliance with environmental and other government standards and business criteria," the international accounting and consulting organization contends.
The three key intervention areas identified by Grant Thornton include taxation, nationalization/indigenization, and environment.
In an analysis published Thursday, Grant Thornton International observed, "From a likely windfall level in Peru, through to potential mine nationalization in South Africa, a wide variety of government interventions pose a real threat to commodity prices, corporate valuations and, most critically, investment in the global mining sector." The report asserts that these interventions are motivated by financial and political pressure.
Meanwhile, devastating incidents, such as the BP oil spill in the Gulf of Mexico and the dramatic rescue of the Chilean miners, have provided an opportunity for governments to increase development of environmental legislation with numerous regulatory frameworks all around the world.
"Organizations that have ‘jumped ship' from their home tax jurisdiction looking for a more relaxed set of rules must now contend with an uncertain future, particularly in Africa," Grant Thornton observed.
In their analysis, Grant Thornton identified mining's tipping point "as the point where the government's aggregate ‘take'-corporate taxes, sales taxes, payroll taxes, royalties and special costs associated with doing business in a particular jurisdiction-exceeds 50% of profits."
"At worst, companies and investors may reach a tipping point, where they see taxes reducing their potential returns to the point that they may simply walk away and search for more competitive jurisdictions."
The accounting and consulting firm suggested taxation can also disrupt the demand for minerals "with customers stating they will not tolerate new levels of taxation," such as China's Iron and Steel Association which says Chinese steelmakers will not be able to accept rising costs from the Australia iron ore mining taxes. Downstream users, including automakers and home appliances manufacturers, will not absorb rising costs.
Grant Thornton praised the competition among provinces to attract mining companies to Canada, which now boasts four provinces in the world's 10 most attractive mining regions according to the Fraser Institute.
NATIONALIZATION AND INDIGENIZATION
Nationalization, the takeover of a company's assets or operations by the state, and indigenization, increasing local participation in or ownership of company assets, have varying implications and perceptions, according to the report.
"Nationalization is arguably the number one issue affecting the mining industry in South Africa, a move which will be causing concern among investors. With the ruling African National Congress part debating state participation, analysts agree that reform of some sort is needed, but most argue that full-blown nationalization will be detrimental," said Grant Thornton.
Meanwhile, indigenization is in the spotlight in Namibia and Zimbabwe, which has one proposal calling for the disposal of 51% of mining companies' shares to indigenous Zimbabweans, which would apply to nearly all mining companies.
The stream of stories about big business environmental disasters provides "interest groups with the ammunition they need to mobilize the public," the report noted. "Governments around the world remain acutely aware that the green agenda is increasingly important, and that tightly legislating the mining sector is a political necessity as well as an ethical imperative."
For example, Germany's decision to close all nuclear power plants over the next 10 years is at least partly due to the incumbent government's need for Green Party support to stay in power.
The foul-up of the Canadian federal government denying environmental approval of the Prosperity Mine, which was approved by a province, has renewed complaints "that the process is complex, time consuming and too political," said the report.
KEEPING THE MINING SECTOR STRONG
Grant Thornton suggested government work to end policy and taxation uncertainty, and create a stable legislative environment that enables operations, planning and investment in mining.
Governments should also "resist targeting mining as if it were a limitless taxation/revenue stream," the report advised, and learn to "understand and appreciate the many positive aspects that mining can and does bring to your economy."
Grant Thornton also urged government to "seek environmental protection without complication" and also "work to streamline the compliance process.
Meanwhile, mining corporations should ensure that their financial plans and strategies "factor government interventions into multiple tax and environmental scenarios," the report suggested.
Mining companies should also ensure that investors understand key risks, as well as "consider your investors' tipping points carefully; when and where will their cost of doing business outweigh the profit or benefit," Grant Thornton advised.