Resource Nationalism In The Mining Industry

The mining and metals industry endured a raft of tax increases from 2003-2008 as governments of mineral rich countries sought a larger share of profits from the commodities price boom.  This ended abruptly after prices collapsed following the global financial crisis.  But, in spite of the current high volatility in commodity prices, it has again become a target for governments, giving rise to a new wave of what is now referred to as ‘resource nationalism’.
 
Over the past 12-18 months, at least 25 countries have either announced an intention to increase the government’s tax take from mining or have done so already, whilst other governments have been looking to increase local equity participation in projects or to renegotiate signed mining agreements ¾ a trend that is likely to continue, although facts show that most countries are slow to implement such announcements. 
 
However, in order to generate confidence among mining companies operating in any jurisdiction (or considering doing so), contracts entered into and licences granted by a host government need to be honoured and the local regulatory regime must remain stable.  Acts by a state against investors’ interests jeopardise prospects for continued investment in the development of that state’s resources.
 
A number of large mining companies refrained from investing in the Democratic Republic of Congo until pioneer companies proved that their projects were secure.  However, in 2009, in the context of a review of mining contracts entered into with state-owned mining companies, the Kolwezi tailings project under construction by First Quantum Minerals was cancelled and seized, as was the case a few months later with the company’s other mines in the country.  Around 60 contracts were renegotiated in the process.   In September 2011 the state-owned mining company Gécamines announced that it is starting another ‘audit’ of its mining joint ventures, although the government insists this is not a full-blown contract review and that little progress has been made since in advancing that audit.   However, a review of the 2002 Mining Code is currently taking place, which could result in contracts being re-examined again to bring them into line with any changes made to the Code.  
 
In Guinea, since the death of long-standing President Lansana Conté in 2008, a number of mining contracts have come under scrutiny.  President Alpha Condé was elected in 2010 under promises to review existing mining contracts and develop a new mining code, which was promulgated in September 2011.  This code takes a much stronger stance in favour of the state, in terms of the balance between the rights and obligations of mining investors including the state’s shareholding in mining projects, approval of changes of control and taxes.  The government has announced a renegotiation of mining conventions entered into under the old mining code, under the threat that any conventions deemed unfair or entered into without transparency could be cancelled.
 
Zimbabwe’s Indigenisation and Economic Empowerment Regulations of 2010 require all businesses in Zimbabwe with a net asset value of $500,000 or above to dispose of 51% of equity to ‘indigenous’ Zimbabweans.  The legislation contains provisions for shares in affected companies to be transferred to state-owned entities or employee share ownership schemes.  The mining sector was subject to further obligations in April 2011, when a notice under the 2010 Regulations extended the disposal requirements to include foreign mining projects with a net asset value of only $1.  The 2011 notice also set a six month deadline for compliance with the divestment requirements, which has been ignored by the majority of companies.   Despite questions over the legal validity of the notice on the grounds that it is unconstitutional and goes beyond the remit of the 2010 Regulations, the indigenisation minister, Zanu-PF’s Saviour Kasukuwere issued a further notice in April this year informing all non-complaint mining companies that they were now deemed to be 51% owned by the Zimbabwean government.   This was immediately rebutted in a statement from the Prime Minister Morgan Tsvangerai that the notice was not sanctioned by the government and is of no effect, highlighting the struggles in the coalition government over the issue.   While the uncertainty over compulsory divestment continues, in June, President Mugabe (likely with an eye on up-coming elections this year or in early 2013) announced that no new licences will be granted to foreign miners.
 
In Asia, revised equity divestment obligations were introduced in Indonesia this year: foreign investors may own 100% of projects initially, but must divest at least 51% after ten years to central or regional government, state enterprises or domestic private companies (compared to the 2009 regulations which required a 20% divestment after 5 years).  Indonesia has also introduced a new 20% tax on mineral ore exports, with a planned ban on raw mineral exports coming into effect in 2014.   Quotas for mineral exports are also expected to be applied this year.
 
Foreign investors operating in Mongolia became concerned by the recent announcement by the government that it wanted to bring forward the timeframe set out in the Oyu Tolgoi Investment Agreement for the government’s interest to increase to 50% although it subsequently announced that it will stand by the terms of the agreement.  The agreement review was called for by members of parliament, in the run-up to general elections in June.   In May, parliament approved a new foreign investment law, which requires foreign investors to seek government approval for investments in strategically important industries, such as resources.
 
The decision epitomises the balancing act that is seen in many countries that are heavily reliant on the natural resources sector.  Oyu Tolgoi is a project that could only be developed by a major mining company so attracting foreign investment is essential; and yet, as a project with the potential to change the fortunes of the whole country, keeping value in the country is critical. 
 
There are steps that investors can take to minimise resource nationalism risk, including fostering transparent relations with the host country and the local communities and seeking to address their expectations.  Whilst this engagement is essential, legal protections are equally so.  At the outset, the existence of a valid mining title is paramount; any short-cut taken in securing legal title and any irregularities in developing a project may jeopardise the enforceability and validity of titles and contracts and may be exploited by a host country seeking to re-open arrangements.  Tax stability clauses may be included in investment or mining agreements, as is the case with international arbitration clauses, a key feature provided that the host country is a signatory of the New York Convention on the recognition of foreign arbitral awards.  Bilateral investment treaties between the host country and the country of the investor can also offer very valuable protections. 
 

Yves Baratte is a partner at Simmons & Simmons in the Paris office of the firm’s energy and infrastructure group.  He has expertise in advising international corporate clients on complex power, water, mining and infrastructure projects internationally, with a particular focus on France and North and Sub-Saharan Africa.  Yves joined Simmons & Simmons in September 2001 and is a French qualified lawyer.  He graduated from the Paris Business School (ESCP-EAP) in 2000 and is also a post-graduate in private law from the university Paris X.
 
Yves Baratte can be contacted by calling +33 1 5329 1614 or alternatively via email at yves.baratte@simmons-simmons.com.
 
Iain Duncan is a Partner based in the London office of international law firm Simmons & Simmons LLP. He has extensive experience of advising on transactions around the world in the mining sector.  He advises on M&A, project development (including joint venture and offtake) arrangements and various forms of financings in the mining sector.  Iain regularly speaks at or chairs major mining conferences such as Beijing Mines & Money 2011 and has written for publications such as the Mining Journal.  He also sits on the Council of MinSouth (the London based Society for the Institute of Materials, Minerals and Metals).
 
Iain Duncan can be contacted by calling +44 20 7825 3137 or alternatively via email at iain.duncan@simmons-simmons.com.