Resource nationalism was the biggest risk for mining companies operating in Africa, Ernst & Young said yesterday in its Business Risks in Mining and Metals 2012/13 report.
“Resource nationalism continues to be the number one risk facing mining and metals companies as governments go beyond taxation in seeking a greater take from the sector.
“The uncertainty and destruction of value caused by sudden changes in policy by the governments of resource-rich nations cannot be under estimated,” the report says.
According to the report presented in Johannesburg, a number of governments are pushing mining companies to add value to minerals mined in the country before these are exported. South Africa, Zimbabwe, Indonesia, Brazil and Vietnam are among the countries that have announced beneficiation strategies.
Mandatory beneficiation will change risk profiles as it entails the high cost of establishing refineries or smelters, and the provision of low-cost power and infrastructure for beneficiation plants – both of which are in short supply in these countries, according to the report.
The consequences of the forced beneficiation strategy include the concentration of investment risk, higher taxes on value-added products, less integration with supply chains and threats to existing business models where the mining companies will be forced to move.
“Typical of the reaction to mandated beneficiation came from one company which made the following comment on the changes to the Indonesian export regime: while they were happy to commit $500 million (about R4 billion) to Indonesia for a mine, they were not happy to commit $1.5bn for a mine and a smelter, as the returns did not justify that much exposure to the country.”
Corlie Hazell, the director for tax at Ernst & Young, told journalists that while the nationalisation debate in South Africa would be finalised in December, investors were looking for certainty now.
“(Nationalisation) is not an emotional debate, it is a numbers game, and return on investment. Often governments talk about investors being emotional, but at the end of the day you can talk these things away as much as you want to, Moody’s or investors are going to go through an unemotional process to get to an answer to say this is what I want to do.“
Other top 10 risks in the Business Risks in Mining and Metals 2012/13 survey were skills shortages, infrastructure access, capital project execution, social licence to operate, price and currency volatility, capital management and access, sharing the benefits and fraud and corruption.
According to the survey, there is a risk that insufficient skills may limit current and planned output.
It also said that companies would be hit hard with cost inflation over the next few years, due to a number of factors including increased labour and energy costs and decreasing ore grades.
For example, in May AngloGold Ashanti approved capital investment for the Kibali mine in the Democratic Republic of Congo, which it is developing with Randgold Resources. The capital expenditure for the project rose to $2bn from the 2010 feasibility study which estimated $1.4bn, the report said.
According to the Ernst & Young Africa Attractiveness Survey 2012, the number of foreign direct investment (FDI) projects in Africa grew 27 percent between 2010 and last year. It also said South Africa was the most attractive destination for FDI in Africa between 2003 and 2011, attracting 16 percent of new projects, followed by Egypt, Morocco, Algeria and Tunisia.
The survey said that Intra-African FDI had grown at a compound rate of 42 percent over the period.
The report was optimistic about Africa, saying that a third of the top 30 economies that improved the regulatory environment for business over the past five years were mostly from Africa.