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States looking to tax, nationalize assets threaten global mining

Locals block the road to the Desaguadero international bridge, linking Bolivia and Peru, during a protest against a mining project by a Canadian subsidiary, on May 16, 2011, in Desaguadero, 112 km west of La Paz. Both in Bolivia and in the Peruvian southeastern department of Puno, locals held the road blockade stating that the mining project will pollute the Desaguadero river and the Titicaca Lake.


As Glencore International prepared its public listing, the world's largest commodities trader warned the market that the Bolivian government was trying to wrestle more control of its mines.

The Bolivian government, under socialist President Evo Morales, is overturning mining and investment laws to increase state control over its economy. The government wants to renegotiate contracts with companies such as Switzerland-based Glencore and give state mining company Comibol a controlling role in joint ventures, forcing companies to return concessions, according to Bloomberg News.

Bolivia, which has also seized oil and gas assets since the current government took power in 2006, is just the latest in a growing list of nations revising laws to squeeze more profits from resource extraction within their borders during times of spiking commodities prices. Many are taking a larger grab through increased taxes and royalties. Some are using more extreme measures, like nationalization or expropriation of assets.

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The trend is taking place in both developed and emerging nations. Each country has a goal of finding new sources of income to pay down rising debt and costs from inflation. Governments are burdened with debt after spending billions on stimulus packages following the recent global recession, making resource nationalism a tantalizing option. It's made doubly appealing by the price of coal, copper, gold and silver, which have been trading at record highs, all driven by demand from rapidly industrializing nations such as China and India.

Resource nationalism is one of the most important issues facing the mining industry today, according to Chuck Jeannes, chief executive office of Goldcorp Inc., the world's second-largest gold company with mines across North and South America.

Miners making record profits on surging prices for their metals and minerals are targets for cash-strapped governments.

"It's not surprising and it's something that certainly has our attention," Mr. Jeannes said.

Even Canada, considered a country friendly to international investment, has joined the ranks of the resource nationalists. Last fall, the Canadian government decided to block BHP Billiton Ltd.'s $38.6-billion (U.S.) takeover of Potash Corp. of Saskatchewan Inc. The decision was made after the province of Saskatchewan, which earns taxes and royalties from potash produced in the province, argued the company's fertilizer ingredient was too strategically important to the nation to be sold.

Other recent international examples include tax hikes imposed on mining profits earned by companies operating in countries such as Chile and Australia. The Namibian government also said recently it's proposing to give all mining permits to a state-owned company.

"There seem to be more examples every day," said Robert Mason, a partner in the business-law department at Gowlings in Toronto. "It's scaring a lot of companies."

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He also notes that it's those fears of expropriation and or higher taxes that are helping drive some commodity prices even higher.

If investors believe government intervention will create a shortage of a particular resource, particularly one in great demand, they will drive up the price of that commodity.

It happened with oil during the uprising in Libya earlier this year. Fears of oil shortages in one of the world's most prolific producing regions helped drive the price of crude past $100 (U.S.) per barrel.

"It's a bit of a vicious circle," Mr. Mason said.

Still, while companies such as Glencore warn of rising nationalism, they aren't about to walk away from countries imposing tighter restrictions.

Glencore vowed to keep operating its zinc, lead and tin mines in Bolivia, as well as operations in other countries, despite what it called in its recent prospectus document, "greater-than-average risk of overt or effective expropriation or nationalization." Glencore continued to operate in Bolivia even after having a smelter there nationalized in 2007.

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Miners have little choice but to manage the risk if they want to keep growing their operations and making more profit, which is what keeps shareholders happy. In fact, more miners are moving into riskier jurisdictions as they compete to secure what's left of the world's diminishing reserves and resources.

With years of historic examples to draw from, miners have come to accept there is a rise in resource nationalism when commodity prices increase.

However, companies also caution that higher taxes or the more extreme expropriation efforts can backfire for countries that impose them. Miners may need to find new sources of growth, but not at any cost, according to Tom Albanese, chief executive officer of Anglo-Australian mining giant Rio Tinto.

"The higher our returns, the higher our profits, the more governments will look to the resources sector to rebalance the deficits they are dealing with," Mr. Albanese said in an interview with The Globe and Mail recently.

"That may be politically opportune in the short term, but the risk is that it will have the effect of restricting capital flows in the long term. Our business is long term."

Rio, alongside other major miners such as BHP Billiton Ltd. and Xstrata, battled the Australian government's proposal last year to slap a 40-per-cent resource tax on miners. After months of lobbying, the tax was eventually reduced to 30 per cent on just iron ore and coal profits. The Australian government said this month the tax, scheduled to start in July of 2012, will generate $8.3-billion (U.S.) in its first two years.

Mr. Albanese said part of his argument to the Australian government was that for every dollar the company makes in the country, it invests "at least that" back.

"The profits that we make in a capital intensive business always get funnelled back into the ground," Mr. Albanese said.

The key for mining companies is to try to operate in relatively low-risk political jurisdictions.

Still, miners in those countries aren't immune. For instance Chile, considered one of the world's friendliest mining countries, recently raised taxes in part to try to help pay for damage from last year's devastating earthquake.

Goldcorp's Mr. Jeannes also believes the industry has a responsibility to educate governments on the impact higher taxes and nationalist moves could have on future investment into the area.

He also points to the benefits mines bring to countries through jobs and investment, which can have a larger economic impact than a hike in taxes or royalties.

"That takes a lot of work and it's something we all have to be better at as an industry," he said.

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About the Author

Brenda Bouw is a freelance writer and editor based in Vancouver. She has more than 20 years of experience as a business reporter, including at The Globe and Mail, The Canadian Press, the Financial Post and was executive producer at BNN (formerly ROBTv). Brenda was also part of the Globe and Mail reporting team that won the 2010 National Newspaper Award for business journalism. More

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