As a general rule, the most successful man in life is the man who has the best
information
Country Risk -
Where the political
and economic stability of
the host country is questionable,
and abrupt changes in the business environment could adversely affect profits
or the value of the company’s assets.
Resource nationalism - The tendency of
people and governments to assert
control, for strategic and economic
reasons, over natural resources located on their territory.
The major benefit for developing
countries from natural resource development comes in the form of:
- Employment/wages
- Government revenues - taxes, royalties or dividends
There can also be
indirect benefits such as
knowledge and technology transfers. Foreign
investments can also involve infrastructure investments, sometimes on a
massive scale, like electricity, water supplies, roads,
railways, bridges and ports.
Today many
governments are looking at ways to get
more money from miners as
companies report record profits - the higher the returns and the higher the profits, the greedier
governments become. As commodity prices rise governments try to boost their share of the proceeds from their countries energy and mining sectors.
The
PricewaterhouseCoopers Mine 2011 survey highlights what governments across the globe
are looking at in regards
to the world’s top 40 miners:
- Achieved net profits of $110b last year
- Halved their debt
- Built cash reserves
of $105bn
- Announced capital programs of $300b for
2011
In 2011, Resource nationalism became the number one risk for mining companies.
Miners are an easy target as mining is a long term investment and one that is especially
capital intensive – mines are also immobile, so miners are at the mercy of the countries
in which they operate. Outright seizure of assets happens using the twin excuses of historical
injustice and environmental/contractual
misdeeds. There is no
compensation offered and no recourse.
“Resource nationalism
is taking other forms as well, including greater controls on foreign participation, mandated
beneficiation, use it or lose it demands
and mandated government
participation.” Ernst & Young Global Mining & Metals Leader Mike
Elliott
The result is a spate
of recent news regarding resource nationalism:
- A government
backed ouster of Brazilian mining giant Vale SA’s CEO,
Roger Agnelli. Brazil's government
is considering a proposal that would make it easier to raise or lower mining royalties - depending
on economic conditions and minerals
prices - as part of a broad
overhaul in Brazil's
mining sector which includes revamping the licensing process and boosting state
income from mining companies.
- Panama recently
repealed part of its
mining code allowing
investments from foreign governments.
- A handful
of African countries have also increased tax revenue from miners in recent years – ie Ghana
plans to double royalties on mining to increase government
revenues
- South Africa
is pushing to nationalize its mines and banks. The Youth League wants the government to take 60% of private mining assets without
compensation to distribute wealth
and create jobs. As part of an empowerment drive South Africa's
mining charter already
calls for 26 percent of the mining industry - in Africa's largest economy - to be transferred to black owners by 2014
- Papua New Guinea
introduced a plan to hand state ownership of mineral and energy resources to landowners - a move that may prove disastrous to foreign miners and their shareholders
- President Hugo Chavez nationalized
Venezuela's gold industry
- Peruvian president
Humala (recently elected) promised, during his election campaign, to initiate windfall taxes on
mine profits and to harden tax
and royalty regimes
- Australia and Chile are proposing
fresh tax or royalty regimes
- In the past
12-18 months at
least 25 countries have increased or announced intentions to increase
their government take from resources via taxes or royalties
- Zimbabwe now
requires foreign owned companies “indigenize” their operations in the country – by transfering at least 51% ownership to locals. Youth Development, Indigenisation and Empowerment
Minister Saviour Kasukuwere rejected a number of foreign companies plans
and set a 14-day ultimatum for the submission
of what he considers “acceptable" plans
“We know it’s
tempting, at a time when government debt is mounting
and metal prices are rising, for some governments to try to grab an even higher proportion of the revenue from
mining. But we urge governments to remember that the cumulative effect of these unreasonable tax hikes will
be to push up world prices
and slow global growth.” The Prospectors and Developers
Association of Canada (PDAC) President Scott Jobin-Bevans
Skills Shortage
A combination of mass retirements and increasing
natural resource demand from emerging
economies has created a crisis in the resource
extraction sector - one which
is definitely not on investor’s radar screens.
Increased resource
demand is driving demand for skilled workers. A shortage of skilled workers remains the second biggest business risk for mining in 2011 (as it was in
2010) and is forecast to be the number two risk for miners again in 2012.
Skills shortages
are global, shortages are happening in South Africa, Australia, Canada and
South America. A skills shortage slows growth and increases costs, projects are being deferred or even cancelled outright due to the inability to staff operations -
tighter labor markets also provide unions with greater bargaining powers when dealing
with companies over wage settlements and other disputes.
The Mining Industry Human Resources Council (MIHRC)
estimates that over
60,000 people employed in the mining
sector are expected to
retire by 2020 but that the industry
will need an additional 100,000 people just
to maintain current levels of production.
The Petroleum Human Resources Council of Canada warned
a severe oil patch labor shortage is looming and that the “patch” will
need to hire 24,000 new employees by 2014.
Weak metal
prices during the 1980s
and 1990s killed the resource
sector's intake of talent
- there's not many people
between 30 and 50 in mining
anymore.
The existing shortage of skilled personnel, the imminent retirement of so many baby
boomers (many are mid
level managers), the skills
supply gap in the 1980’s and 1990’s combined with the mining sector being in direct competition with the energy sector for people to train means
prospects are bleak for either
industry to obtain the necessary bodies and minds.
Analysts say
attracting and retaining increasingly scarce skills will:
- Accelerate cost increases
- Squeeze profit margins
- Threaten the viability
of some marginal projects
The pool of available skill sets, the mine executives/managers, the miners,
the engineers, drillers, geologists, mechanics, and other trades needed isn’t very deep. This labor shortage is going to increasingly
hurt the industry in the coming years.
Conclusion
Many governments
are reviewing old agreements and renegotiating contracts. There are now many places, and the number is seemingly growing every day, where shareholders
could, without warning, receive news that their operations have been taken over by the government
and/or its friends, or that permits are suddenly suffering delays or have been cancelled outright.
We’ve seen
far too many instances of
companies and their shareholders losing assets that were
lawfully theirs. If the
management side of the companies
we invest in is so important then maybe we
should start regarding the management of the country they operate in as at least as important?
Mining sector
employment trends are closely
connected to:
- Global economic
growth
- Commodity prices
- Intensity of exploration and or production levels
- State of mineral
reserves
Currently many
mining companies are having trouble finding skilled workers - there is a “massive
talent gap.” And it’s going to get worse - the oldest baby boomers are turning 65 years old in
2011 – and the global mining industry is experiencing
the biggest wave of workforce retirements in 70 years.
In the next five years one-third of the mining workforce will be eligible for retirement. According to the Mining Industry Human Resources (MiHR) Council’s latest labor market information
report, “Canadian Mining Industry
Employment and Hiring Forecasts 2010” the mining
industry will need approximately 100,000 new workers by 2020.
As if the mining sector didn’t already have enough to worry about.
Mine production
of many metals is showing a
number of similarities:
- Slowing production and dwindling reserves at many of the world’s largest
mines
- The pace of new elephant-sized discoveries
has decreased in the mining
industry
- All the oz’s
or pounds are never recovered
from a mine - they simply becomes too expensive to recover
Increasingly we
will see falling average grades being mined, mines becoming deeper, more remote and come with increased political and nationalization risk.
Extraction of metals from
the mined ore will become increasingly more complex and expensive, even more so when one considers the effects of Peak Oil – the cost of technology innovation to power mining
will be very high.
Broad spectrum peak commodities is a cause for concern over the longer term.
In the shorter to medium term there are several serious concerns in regards to
global resource extraction that
we need to consider:
- Resource nationalism
- Country risk
- A looming
skills shortage
Junior resource companies with fully staffed,
secure projects in safe, stable countries should be on every investors
radar screen. Are they on
yours?
If not, maybe they should
be.
Richard Mills
Aheadoftheherd.com
If you're
interested in learning more about the junior resource market please come and
visit Richard at www.aheadoftheherd.com. Membership is free, no credit card or personal
information is asked for.
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