mining tax

More mining tax, royalty hikes 'inevitable' – Control Risks

TORONTO (miningweekly.com) – More governments in Africa and elsewhere, especially newly elected ones, will likely look at raising mining taxes and royalties amid historically high commodity prices, Control Risks senior analyst for Africa Thomas Wilson said in an interview.

"I think it's inevitable. And it's always been like that, it's always followed the mineral cycle, he said on the sidelines of a MineAfrica seminar in Toronto.

"Governments look at commodity prices and say 'we should be getting more out of this'."

The trend is also a product of the changes in governments, particularly when more democratic regimes replace what may have been "more autocratic" previous governments, he said.

"So they come in on a popular mandate where they have made the electorate promises to look at contracts that were signed in the past with other governments that were potentially, I suppose, less scrupulous when it came to negotiating with foreign investors."

Mining companies and investors are increasingly edgy about potential changes in government policy in the regions where they operate, as nations seek ways to benefit more from record commodity prices.

A trend towards resource nationalism around the world is probably the biggest risk facing mining companies, Xstrata CEO Mick Davis said in December.

Last year, then-Australian Prime Minister Kevin Rudd proposed a 40% resources super profits tax, and although the country backed off the plan it has now released draft laws for a 30% tax on coal and iron ore miners.

Also this week, reports emerged that the Tanzanian government is planning a windfall tax on the mining industry, sending shares in LSE-listed African Barrick Gold lower.

And Mining companies operating in Peru also declined sharply on Monday after left-leaning Ollanta Humala, a military officer who had talked about making sure Peruvians benefit more from the country's mineral wealth, was elected President.

Guinea, under new President Alpha Conde, has also said it will relook at the country's mining code, followed by a review of all existing mining contracts.

Reviews of outdated laws and a push by governments to be more active in their resources sectors are not necessarily a bad thing, Wilson commented.

"But they must resist the temptation to turn reviews of laws and contracts into a purely revenue generating exercise."

DEALS TO SURVIVE

Mining companies operating in higher-risk areas are also not helping themselves or their shareholders by squeezing all possible concessions out of governments when negotiating mining contracts and agreements, Webber Wentzel partner Nkikia Moshesh said at the same event.

Agreements that seem skewed in the foreign investor's favour might look good on paper but run the risk of coming under fire from future governments and their voters, she commented.

Regimes change, commodity prices rise, "and people end up saying 'we are not extracting enough value from this company'," Moshesh said.

"Mining projects are intended to be of a long term nature. You want to conclude agreements that are going to survive, and preferably will survive changes in government, changes in political thinking."

ALMIGHTY STINK

African Barrick Gold, the biggest producer in Tanzania, and South Africa's AngloGold Ashanti both insisted this week that their tax positions in the country are protected by existing mineral development agreements, and could not be affected by a new windfall tax.

But there few new mines coming onstream in Tanzania and there is relatively little exploration investment as well, commented Africa mining consultant with political risk consultancy Menas Associates Christopher Melville.

"If the government is serious about the windfall tax it can have no other targets than the producing mines operated by the big players," he said.

Although the tax reports could just be "smoke and mirrors" related to internal party politics, it is also possible that the government is trying to use the threat of an imposed tax to persuade mining companies to renegotiate contracts voluntarily, Melville suggested.

"Trying to push it through...would cause an almighty stink with the majors given the stabilisation clauses in their development agreements.

"The government surely has no stomach for such a stink and may rather hope that unsettling announcements will be enough to encourage the companies to renegotiate voluntarily."

Either way, this week's reports are clearly negative for investor interest in Tanzania, he said.

"The government cannot afford to kill the goose."

Edited by: Creamer Media Reporter

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