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Sep 2011 - The Devil you...

...than the one you don't, or so the saying goes

You have to wonder whether Australia's proposed introduction of the RSPT has awakened a sleeping dragon with many countries applying new taxes and announcing mining restrictions since then. Even the individual states of Australia are applying increased royalties.

It was with dismay at Paydirt's annual Downunder Conference, that the delegates heard a list of what appeared to be 7 new requirements that mining companies have to adhere to in South Africa, and the JSE (Johannesburg Stock Exchange) spokesman stated that "Nationalism on the agenda doesn't mean that it is going to happen".

Operating in South Africa appears to be becoming significantly harder, with Platinum Australia stating that the 25% increase in electricity prices that has occurred for the past two years appears to becoming an annual event for many years to come for what South Africa needs to be financed to meet its power requirements. And there are strikes over higher wages with the higher commodity prices in the face of reputedly ~15% inflationary pressures, a new mineworkers' union and new labour laws.

While the Australian mining industry is facing mining labour shortages, South Africa is also facing significant emigration of its skilled labour force overseas due to internal pressures.

Zimbabwe gave a presentation welcoming investment in Zimbabwe provided that the local partner has 51% majority control of the venture that the investor finances. They did state that it was negotiable citing an example of an Indian company that is starting with 54% control, but has a procedure to reduce to 49%.

Should the local holder have insufficient funds then it appeared that the investor was expected to finance their portion for them.

The Zimbabwean representatives also stated that what you read in the press is often biased and not true. However, there is apparently provision for licences to be withdrawn and companies fined if they fail to transfer ownership to local black Zimbabweans (within 2 weeks?) under the indigenisation programme. In such cases of failure to meet requirements, the ownership can be transferred to companies or countries that are willing to meet Zimbabwe's indigenisation and economic empowerment programme.

It was very reminiscent of how Zambia took control of NCCM (Anglo American's Nchanga Consolidated Copper Mines on the Zambian Copperbelt) and renamed it ZCCM in the mid to late1970s. Anglo gave Zambia interest free loans to buy a 51% interest in their NCCM company. The loans entered into a grey area as to whether they were eventually paid or not.

In their presentation, the Botswana trade minister stated that companies needed to recognise that Botswana no longer needs aid or help. For companies wanting to invest in Botswana it has to be a "win-win" in which Botswana can elect to have a holding in the investing company and/or a holding in projects outside of Botswana that the investing company has.

Recently there have been articles that PNG is considering moving the ownership goalposts again, and that Indonesia (7 Sept 2011) is considering imposing a tax on exports of mineral ores and concentrates such as nickel, copper and iron ore before their shipment in non-processed form is banned in 2014, which could affect all the porphyry copper-gold producers located in Indonesia.

Even in South America, the goalposts are moving with Venzuela apparently intending to nationalise its gold mines (17 August 2011), and comments about increasing taxes in Peru and possibly also Chile.

And yet countries like Turkey, Thailand and Burkina Faso currently appear to be welcoming overseas mining investment.

It would appear that the more mature a country becomes from mining investment that it then starts to look at ways of increasing its revenue "take" through additional taxes or holdings. As in when countries are in their mining infancy (from an investment viewpoint) they welcome companies with open arms and provide incentives to start mines. However, once the monies have been spent and the country begins to thrive, it appears that means are looked at to increase the "take".

Australia has come under quite a lot of criticism for increasing mining taxes or considering doing so, and implementing a Carbon tax. And that has resulted in some project funding going offshore. However, at least you know the situation (or think you know the situation) in Australia, whereas in other countries the rules can change significantly, affecting ownership as well as higher taxes.

It comes down to the Devil you know....and hence probably favouring mining investment in Australia.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

  • Written by: Keith Goode
  • Thursday, 01 September 2011