Turbulent Times on the International Mining Scene – by Paul Stothart

Paul Stothart is vice president, economic affairs of the Mining Association of Canada. He is responsible for advancing the industry’s interests regarding federal tax, trade, investment, transport and energy issues.

Times remain quite good within the global mining industry. There is no shortage of challenges to be sure, ranging from a dearth of workers to mounting social license issues. Nonetheless, the enduring strength of mineral prices continues to drive the industry. Nickel prices grew from $3 per pound in 2002 to $17 in 2007, and copper from 70 cents to over $3. Gold and silver are at prices not seen in decades. The result is record mineral exploration spending, high capital investment, and buoyant stock prices and mergers and acquisitions activity. Demand from emerging economies will continue to drive strong mineral prices in future years.

In this context, a key challenge for the industry worldwide relates to increased international turbulence as governments of many countries aim to capture a larger share of the overall mining revenue streams. Towards this end, governments in many regions are taking a range of actions and, in some cases, following questionable processes. For example:

  • Ecuador cancelled 88 per cent of concessions, suspended mining for 180 days and imposed a 70 per cent windfall profit tax. These actions affected hundreds of mining concessions and negatively affected the prospects of companies such as IAMGOLD.
  • Mongolia has introduced windfall profit taxes on copper and gold and amended its mining law to allow the government to back into strategic mines with a majority stake. This affected the Oyu Tolgoi development and firms such as Rio Tinto and Ivanhoe.
  • Zambia is considering increasing its windfall tax on copper exports, in order to generate $400 million in additional government revenue. The Democratic Republic of Congo is examining 61 mining contracts with the aim of increasing the government share.
  • Argentina has imposed a tax increase on exports — an action which may lead to lawsuits from several mining firms. In Venezuela, spending by the world’s exploration firms has declined by 60 per cent in response to the nationalist Chavez revolution. In turn, neighbouring Bolivia has spoken of a desire for “nationalization without expropriation.”
  • The governments of Uzbekistan and Russia have presented numerous tax and equity control challenges to foreign investors in recent years. The Kyrgyz government has proposed new taxes and possible state consolidation affecting many investments, including Cameco’s Kumtor gold project.

Beyond these proposed and enacted government changes, other risks continue to emerge in important mining countries. For example, Chile has mounting concerns over the availability of water and aims to more actively monitor water extraction levels associated with specific mine sites. Concerns also exist regarding the availability of energy in northern Chile, given reduced natural gas imports from Argentina. South Africa has also encountered significant electricity supply problems — uncertain supply is hindering the ability of mining companies to operate at normal levels of production.

It is critically important for countries that wish to attract business investment to maintain an attractive investment climate — with transparent and stable rules and a modern and efficient infrastructure. While governments are certainly entitled to their fair share of revenues on behalf of their citizens, it is important that any revenue changes be made with fairness and consistency and in full consideration of the fact that global business costs for capital, labour and equipment have increased sharply in recent years. Mineral prices have climbed — so have the costs associated with accessing and processing those minerals.

As a general principle, members of the Mining Association of Canada support open flows of direct investment — inward and outward — as these enhance access to new technologies, concepts, markets and production chains. Mining companies will continue to invest around the world in order to acquire reserves and landholdings and broaden their technical skills and ability to find more deposits.

The Canadian government can help mitigate the risks associated with these business investments abroad by negotiating bilateral investment treaties, double-taxation agreements and free trade agreements. For their part, global companies must continue to invest in the legal and financial protections that they need to operate successfully in turbulent times.