GRACELIN BASKARAN: With the rise of resource nationalism, miners are not the only losers

Mining is an inherently risky sector: exploration often does not turn into production, prices are volatile, and there is a constant tug-of-war to ensure mining-generated benefits are equitably distributed. 

Globally, a wave of weak policies has been rolled out to enable governments to capture a larger share of mining benefits. Instead, these policies have had the effect of keeping investors out of lucrative mining jurisdictions.  

Risk has become increasingly complex to assess. There are, of course, the standard suite of political, economic and security risks. There are also geological risks, including the quantity and quality of ore and the difficulty of extraction (deep versus superficial deposits); infrastructure risks, the cost and reliability of security and intermediate inputs such as water and electricity; social risks such as the delicate tension with surrounding communities; and demand risks associated with changing technological trends, recycling and other schemes.  

Rapidly skyrocketing global demand for high-value commodities such as lithium, rare earths, cobalt and copper offer an excellent economic opportunity for countries with rich resource reserves. For some of the countries experiencing deteriorating fiscal conditions, these resources can offer a reprieve and a source of foreign exchange earnings. 

But a wave of rising resource nationalism, which has taken hold in a number of jurisdictions, threatens to undermine any economic benefits. Chile, the world’s second-largest lithium producer, is one such example. The two largest Chilean lithium firms, Albemarle and SQM, have lost $8.5bn in the span of a few months since it was announced that the government would take control of all lithium mines.

In essence, the government would secure 51% majority shares of existing lithium mines in the country. Such behaviour is becoming more common in Latin America. Mexico and Bolivia are also seeking to exercise greater control over their resources. Nevertheless, investors are looking to identify jurisdictions that are resource-rich and amenable to investors. 

On the surface it appears that investors bear the risk when governments impose ownership, content and beneficiation requirements. But in reality governments bear as much — if not more — risk. If an investor pulls out, the government derives no benefit from its resources. Indonesia offers an interesting example. In 2009 the Indonesian government passed a law that required mining companies to develop local processing facilities for bauxite or face a ban on mineral exports within five years.  

But local beneficiation was not commercially sensible in Indonesia, so mining firms divested and went exploring elsewhere. The West African nation of Guinea became the biggest beneficiary — foreign direct investment flooded in and mining exports increased 79% year on year in 2017. To this day bauxite remains a centerpiece of the Guinean economy. 

There are three main ways to reduce sectoral risk in an increasingly complex global landscape. The first is to develop a strong social labour plan (SLP). Effectively executing a SLP can reduce overall commercial risk by building consensus between companies, communities and governments on key social matters, and also deterring future social unrest. It is a trade-off, because increased SLP spending can also reduce the internal rate of return. In the case of SA, modelling shows that spending 1% of revenue on the effective implementation of an SLP would reduce the internal rate of return by 2.7 percentage points, and 5% would reduce it by 4.1 points.  

The second is to develop and maintain stable policies on taxes, local and state equity and mine tenure. Mining investments are inherently long-term and the life of a mine generally ranges from 25 to 80 years. Upon an inkling that governments may not honour the agreements they have made with firms, investments can dry up. 

And finally, to create an enabling environment for the private sector to provide intermediate inputs, such as water and energy. Many developing countries struggle to provide a stable supply of intermediate inputs, but it is a gap the private sector will fill if it enables it to do business. The SA government’s decision to lift the licensing threshold for private power generation certainly has reduced the mining sector’s risk exposure to Eskom’s vulnerabilities.  

SA mining firms have become accustomed to managing their risk exposure over the past 15 years, particularly to labour unrest. After the 152-day strike in 2014 took 400,000oz of platinum out of production and cost the three largest platinum producers about R24.1bn in annual revenue, several firms sold off their labour-intensive operations and bought or expanded mechanised operations. It was a calculated decision to ensure production was not beholden to labour unrest. 

In the not-so-distant future, as risks rise effective risk management may be the difference between long-term profits and losses for the sector. 

• Dr Baskaran (@gracebaskaran), a development economist, is a bye-fellow in economics at the University of Cambridge.