Resource scarcity, and the huge demand for raw materials generated by developed and developing economies, has given what's under our feet a strategic value attractive to citizens and politicians alike. To some, this is resource nationalism, to others, supply and demand economics and political posturing.
The long game
Resource nationalism is broadly defined as anti-competitive behaviour designed to restrict the international supply of a natural resource. This can take the form of several different policies, such as higher royalties and taxes, increased government participation, requirements for in-country beneficiation, local content laws and retention of profits. None of these are new policies (South Africa's Broad-Based Black Economic Empowerment legislation has demanded local content since 2003), but in a more populist and occasionally isolationist world, there seems to be something of a renewed appetite for such measures. The commodities and projects impacted have also varied over time, but tend to spike when there appears to be a strategic advantage for controlling supply, or where domestic demand (or the benefits of local employment/taxation) outweighs the importance of meeting existing contractual or trading relationships.
Regain Control
The narrative for countries to “regain control” from foreign investors is a powerful political message especially when it goes towards undoing a previous administration’s decisions. In particular, a number of African governments have looked to readdress contracts signed by previous administrations at earlier stages of certain economic cycles. The last decade has seen a marked increase in such changes with countries including Tanzania, Mali, Zambia and the Democratic Republic of Congo all introducing significant changes to their mining codes.
Higher royalties and taxes
The DRC is notable for an abundance of natural resources, however, it lacks political stability and critical infrastructure. The DRC supplies roughly around 60% of the world’s cobalt, used in many industrial and military applications. After seeing a rise in the prices of commodities, the DRC declared cobalt a “strategic” substance in December 2018 and tripled the royalty rate mining companies paid. This lead to commodity trading group Glencore closing its Mutanda mine in the DRC, which lead to 20% of the world’s cobalt production coming offline. In Tanzania, the gold miner Acacia only recently came to an agreement with the government over back-taxes, reducing a reported USD 190bn tax claim to a USD 300m payment and a restructuring of the ownership of the mines concerned.
International arbitration orders ignored
Being on the right side of international law won't necessarily offer protection. A recent example of this can be seen in Sierra Leone. SL Mining Ltd, part of the Gerald metal trading group, was awarded a large-scale mining license for iron ore in Sierra Leone for a term of 25 years in March 2017. After making significant investments and commencing mining operations, the government placed an export ban on the company in July 2019. After stockpiles reached more than 500,000 tonnes, SL Mining Ltd suspended its operations in September 2019. The government later cancelled the company’s mining license in October 2019. Despite SL Mining Ltd successfully appealing twice to international arbitrators, the government has so far refused to comply with the orders.
Supply chain impact
Interruptions to these projects can have strategically important impacts on supply chains. Much has been made of the long-term contracts secured by end users for lithium, for example, but the same applies for companies active in our sector. We have covered numerous smaller trading companies whose business is underpinned by a single project, with the latter projects often delayed and, occasionally, cancelled. Many of these major mining projects involve complex and long-term transportation and transshipment agreements, some for decades, and requiring significant investment by the project partners in unique equipment. Witness the 15-year contracts secured by Louis Dreyfus with Emirates Global Aluminium for lifting Bauxite out of Guinea (which adjusted its own mining code in 2011) , and the USD 15bn+ investment by the SMB Winning consortium for the much-disputed Simandou iron ore project in the same country (SMB Winning is estimated to invest USD 1.5bn in port facilities alone). All of these parties are relying on a return on investment over a very long period (SMB Winning is not expected by third parties to secure a profit until year 25 of its project), and are, in turn, reliant on a prolonged period of political stability.
Cases for optimism?
Not all is doom and gloom. There are some countries showing a reversal in their protectionist policies, albeit occasionally out of desperation, rather than securing a much-improved position for their population. One such country is Zimbabwe, which although a long way from becoming a stable investment destination has, under the leadership of President Mnangagwa, looked to court foreign investment and has pledged to curb indigenisation laws for foreign diamond and platinum miners. Similarly, Ecuador is reported to have made significant process following the transition of power from President Correa to President Moreno, regarded as heading a more moderate administration.
Where's the risk?
Dealing with perceived resource nationalism is a huge challenge. The term itself is riven with ambiguity, and impacted by factors often completely out of people's control, over a timescale where these factors can be difficult/impossible to forecast. However, as we have mentioned in earlier blogs, counterparty risk assessment, and perhaps even more importantly in these cases, understanding your counterparty's counterparty, is vital. Louis Dreyfus have probably regarded their contract with the UAE state-owned, USD multi-billion Emirates Global Aluminium as a safe bet, even if all the operations were in Guinea. SL Mining Ltd, currently embroiled in a USD 500m lawsuit against the Sierra Leonean government, has had no such reassurance.