Integrated Annual Review 2012 Annual Financial Report 2012 Mineral Resources and Mineral Reserves Regional overview  
 

3.1.2 Issue 2: Resource nationalism

Issue

Resource nationalism remains one of the key risks for the global mining industry. At one end of the spectrum, it includes outright and/or creeping expropriation – at the other, the imposition of higher fiscal imposts (including ‘windfall taxes’), interference in project management, mandatory social investment requirements and local content requirements. The fact that resource nationalism poses a genuine risk to mining companies is well recognised. For example:

  • Ernst & Young identified resource nationalism as the number one risk facing the mining sector in 2012 to 20131
  • Deloitte identified resource nationalism as the number five issue facing the mining sector in 20132
  • KPMG identified resource nationalism as its number two risk facing the mining sector in 20123

Drivers

Current drivers of resource nationalism include, amongst other factors:

  • Mineral prices: Consistently high mineral prices that give the impression that extracting companies are making excessive profits
  • Misperceptions around costs: Related misconceptions around the costs involved in the extraction of gold. A failure by gold mining companies to report their ‘true’ costs in terms of Notional Cash Expenditure (NCE) margin has been detrimental in this respect
  • Macro-economic difficulties: Economic shocks – whether caused by global economic conditions or government mismanagement – can create serious public revenue shortfalls. The mining sector represents an obvious source of additional income due to the national ownership of mineral assets, allegedly excessive profits, voter sentiment and inherently strong government leverage
  • Populism: Populist politics can often focus on the short-term redistribution of wealth from mining operators to citizens. This can be intensified by recent democratisation, poor socio-economic conditions and perceptions that companies enjoy overly beneficial terms

At root, mining involves the removal of finite national resources. In this context, it is understandable that governments – and the people that they represent – want to benefit from this in a meaningful way. What is more questionable is the way in which some governments seek to benefit from the extraction of these resources and whether this is the best means by which to secure long-term, sustainable development and share the benefits of mining.

Implications

Resource nationalism has the potential to introduce operational uncertainties and delay, escalate project costs, render project development or production targets unfeasible, and may even result in a loss of ownership or control.

Both governments and mining companies should pursue equitable and mutually beneficial contractual and fiscal arrangements that recognise the important role mining has to play in promoting development. But this should not be done in isolation from the economic and operational realities facing the mining sector. These include:

  • The ‘true’ costs of extracting minerals (which many companies are poor at reporting)
  • The need for predictable, stable fiscal arrangements for projects and removing uncertainties about ownership of mines
  • The considerable challenges involved in project development – and the corresponding need to stick to highly detailed planning models and development schedules
  • Investor uncertainty with respect to the impact of resource nationalism on extractive projects – and corresponding difficulties in the raising of capital finance

While policies driven by resourcenationalism may generate short-term benefits for governments and (potentially) society, in the longer-term they can have the opposite effect. Poorly modelled government imposts have the potential to materially undermine the economics of existing or new operations. This can force the suspension or closure of production and/or development work – with serious impacts on local employment, revenue generation, socio-economic development programmes and other forms of shared value. Even if such imposts are commercially endurable in the short term, they can introduce a degree of uncertainty that investors will generally eschew – with long-term consequences for host countries.

Strategic approach

We believe it is right that our host societies benefit from the gold in their ground. Indeed, we are proud of our role in converting national gold resources into meaningful development through the agreement of balanced, sustainable commercial and fiscal arrangements – as well as our ongoing delivery of shared value. This includes, for example, the economic contributions we make to our host societies through:

  • The payment of wages and benefits to our employees – and the generation of related secondary economic impacts (p142)
  • The payment of taxes and royalties to our hosts governments, which can then be used to pursue national socio-economic development objectives (p143)
  • Our use of local suppliers, which helps establish thriving, diversified and sustainable local economies (p144)
  • Ongoing delivery of our Socio-Economic Development contributions (p145)

Our total economic contribution is US$4.23 billion (Figure 3.1). When we look at the total shared value (including capital expenditure) that we distribute in the countries in which we work, our impact is even more significant at US$5.30 billion – or 95% of our total revenue (p141).

By generating – and effectively communicating – these contributions, we believe that we can address many of the drivers behind resource nationalism.

In many cases, it is not the extra costs associated with resource nationalism that necessarily have the largest deterrent effect on investors – but a lack of predictability about how major, long-term investments will be treated in future. As a result, we aim to work constructively with government to help find mutually beneficial outcomes based on the principles of predictability, sustainability and the optimal delivery of benefits.

In the longer term, we are pursuing an exploration-led growth strategy that – in addition to developing low risk, high-return growth opportunities:

  • Helps diversify our overall asset portfolio – and so limit the risk posed by resource nationalism in any one country
  • Develop new, cash-generating opportunities in lower-risk mining jurisdictions – to help reduce the overall risk profile of the Group at a time when the scarcity of known geological resources increasingly necessitates exploration in higher risk jurisdictions

Figure 3.1: Total economic contribution (US$m – pre-unbundling)

      2012   2011   2010   2009   2008  
  Operating costs (procurement and contractors)   1,940   1,851   1,924   1,479   1,395  
  Salaries and benefits   1,073   1,101   1,027   784   708  
  Payments to capital providers3   459   282   243   181   230  
  Payments to government   618   478   312   249   159  
  Social-economic development (SED) spend   136   54   67   11   14  
  Total economic contribution   4,226   3,766   3,573   2,704   2,506  

1 Ernst & Young, Business Risks Facing Mining and Metals 2012-2013, 2012 http://www.ey.com/Publication/vwLUAssets/Business-risk-facing-mining-and-metals- 2012-2013/$FILE/Business-risk-facing-mining-and-metals-2012-2013.pdf
2 KPMG, Business Risks Facing the Mining Industry, December 2011, http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/6104_ Top 20Risks 20in 20the 20Mining 20Industry_TL_web_v4 20(FINAL).pdf
3 Dividend and interest payments