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Better together

Portland International’s Erin Godbold looks at the new partnerships that could shift the balance of power between governments and business in the resources industry.

The potential Glencore-Xstrata merger to create the world’s fourth biggest resource company has left competitors and commentators puzzling over what this might mean for the future of the industry. No integration of a mining company and commodities trader on this scale has been attempted before though similar models have dominated the oil industry for years.

If the venture is seen as a success, it could trigger a wave of consolidation, potentially increasing the position and power of the industry across all markets. This may not come a moment too soon as, across the world, we are seeing Governments begin to flex their muscles in their relationships with the mining companies which operate within their borders.

This is a particularly visible trend in Africa. Governments and political parties are seeking a greater share of the country’s abundant mineral wealth as they need the revenue to meet the many challenges they face. They are also aware, at a more tactical level, of the boost to voter popularity from taking on the big corporations.

As calls for greater African sovereignty grow, is the balance of power in these relationships tipping in favour of the governments here? On the face of it, this certainly looks the case.

Ghana’s abundant gold resources may soon be subject to a corporate mining tax of 35% (up from 25%) and a new 10% windfall tax on ‘super profits’. The IMF reportedly advised Tanzania’s government to tax mining operations to help meet spending commitments. New exploration in Namibia will be handled by a state-owned company. Zambia, one of the world’s biggest copper producers, recently doubled its copper royalties to six per cent and is planning a full scale audit of the mines with a goal of claiming $1billion in back taxes.

Despite these moves, resource companies do not yet appear overly spooked by these plans. Zimbabwe’s indigenization policy, forcing foreign investors to relinquish 51% of their operations to locals, has not caused the predicted exodus of investment from the country. Oil companies continue to invest in Uganda despite new taxes.

This is partly because similar moves are being taken right across the world. Chile and Peru increased mining royalties in the past year and India, Russia and Kazakhstan all introduced new export duties. China recently raised taxes to help conserve resources, including raising the tax rate on iron ore from 60% to 80%. It is also, of course, because the potential of vast resources outweighs irritation about new taxes or political posturing.

But we are beginning to see a backlash against so called ‘resource nationalism’. The continued unpopularity of Australia’s governing Labour Party has been fuelled by concerted opposition to increased taxes on mining. Media commentary highlights the predicted losses to Australia’s economy, where mining makes up nearly ten per cent of GDP.

Given the trouble these plans have caused Prime Minister Julia Gillard and her predecessor Kevin Rudd, it is ironic that Australia has been sharing tips with several African nations on how to get more out of their resource sectors. They are offering best practice models, which hopefully include advice on where government communications can be improved.

In South Africa, too, the resource industry appears to have successfully stopped a campaign, led by former ANC Youth League President Julius Malema, for sweeping nationalisation of the mines to benefit black majority. This was well received by the unemployed youth of the country but not by the upper echelons of his party or by foreign investors.

The ANC’s recently published study concluded that nationalisation would be unjust, unconstitutional, unmanageably expensive and potentially disastrous for future foreign investment. A 50% resource rent tax is recommended instead (with a promise of no ‘surprise’ taxes), aiming for a more sensitive balance between short term domestic benefit and maintaining the longer term appeal of South Africa as an investment destination.

This elusive balance is one that governments and foreign mining companies will have to work together to strike. It will require careful negotiation and adapting to the shifting balances of power and trust between politicians and international businesses. Expectations, too, that resource companies will invest in local communities and host countries with jobs, infrastructure, training and even new sports teams, will certainly grow greater and become harder to meet.

Increased industry consolidation, along the lines of Glenore and Xstrata, could strengthen the hand of companies against governments that are newly determined to extract greater social and economic benefits from mining. But the evidence also shows the increasingly vital importance of companies, separately and together, communicating their views to an advancing, and increasingly demanding, range of stakeholders.

In particular, if resource companies can consolidate their communications efforts and speak as one industry, rather than as disparate companies lobbying around individual cases, they stand a far greater chance of influencing audiences from the grass roots to the highest political levels.

Productive, positive, and mutually beneficial relationships between resource companies and the countries they operate in is still the ultimate aim. Ensuring that all parties listen to each other, trust each other, and respect the new balances in their shared relationship will be the challenge.

Erin Godbold is a Senior Account Manger in Portland’s International team.