MINING, MINERALS & NATURAL RESOURCES
Glen Ireland Christopher Langdon glen.ireland@lw.com christopher.langdon@lw.com +44 (0)207 710 1120 +44 (0)207 710 4720
Mining and the Many Faces of Resource Nationalism The tendency of host governments and local communities to assert greater control over their natural resources has come to be known as ‘resource nationalism’. In its many forms, resource nationalism presents clear and long-term challenges for private companies engaged in mineral exploration and mining. Modern resource nationalism can be traced back to the 1950s, when countries such as Iran and Saudi Arabia (and later Kuwait, Nigeria and Libya) took steps to assert
greater control over, and acquire direct ownership of, their petroleum resources. However, resource nationalism emerged as a dominant theme in the mining sector only the 1990s, in the midst of the so-called commodity ‘super cycle’ (which ended abruptly with the 2008 financial crisis). Despite the collapse in metals prices during the financial crisis, the momentum behind resource nationalism appears undiminished. If current trends continue, the mining sector might, within a period of 20 years or so, begin to resemble the modern oil and gas industry. Currently, the world’s 13 largest companies, in terms of petroleum liquids reserves, are all governmentcontrolled national oil companies (NOCs). ExxonMobil, the world’s largest publically traded independent (i.e. non-NOC) oil and gas producer, holds the 14th position. The world’s five largest non-NOC oil and gas producers hold, collectively, only 3.8% of the world’s petroleum liquids reserves. Commentators, investors and other participants in the mining sector sometimes assume that resource nationalism is a phenomenon restricted to developing countries, where respect for the rule of law and sanctity of contracts is often perceived to be low. However, the reality is very different. Elements of resource nationalism can today be found in virtually every country that is blessed with abundant natural resources, including many OECD (Organisation for Economic Co-operative
Development) members. Resource nationalism has many faces. While some countries still engage in ‘old school’ tactics of nationalisation and direct expropriation, such examples are becoming less common. Instead, host states have begun (often with the assistance of international legal advisors) to deploy a sophisticated ‘playbook’ designed to achieve greater control over, ownership of, and economic participation in, their mineral resources. The tactics include some or all of the following: disruption or denial of access to key rail, port or energy infrastructure; failure to provide security; allegations of breaches of environmental, fiscal or other laws; enhanced compliance activity and audits; allegations of breaches of concession or development agreements; refusal to grant, or revocation of, operating, environmental or other key permits; use of discretionary powers; changes to laws to impose additional economic or administrative burdens; and withdrawal from international treaties designed to protect foreign investors. In recent years, host states have begun to propose the formal renegotiation of mining rights with greater frequency and increased forcefulness, often in the context of an alleged contractual breach but sometimes with no legal basis whatsoever. Such proposals present mining companies with a difficult choice – engage in a process that may not be entirely consensual and will almost always lead to value-destroying changes (with little legal recourse available), or decline an invitation to renegotiate and risk irreparable damage to their government relations or retaliatory measures. The appropriate course of action is not always obvious, and must be considered and managed carefully. By way of example, in 2007, the Democratic Republic of the Congo (DRC) initiated a review of mining licenses granted during the period of civil war (1998 to 2003). Freeport-McMoRan chose to engage with the government and, after protracted negotiations that lasted more than a year, reached an agreement in which the state increased its ownership of Freeport’s Tenke project and the project became subject to a more onerous fiscal regime. First Quantum, by
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comparison, maintained that its contracts with the DRC were legally binding and fair, and declined to consider amendments. By 2010, First Quantum had lost virtually all of its mineral rights in the DRC, and was forced to seek redress through international arbitration. States are now routinely passing legislation mandating direct state ownership and/or control of new (and sometimes existing) mining projects. Occasionally, such legislation is accompanied by proposals to form or expand the operations of a national mining company that is owned or controlled by the state. For example, the Republic of Guinea recently adopted a new mining code under which the state is entitled to a 15% free carried interest in mining projects, and has an option to acquire a further 25%. When states enact such laws, affected private holders of mining rights are often forced to provide soft loans, guarantees or other financial support, to enable the state to acquire its interest following delicate and time-consuming negotiations. These private/ public structures can result in significant value leakage for private participants, and can throw up significant challenges in the context of arranging project financing for mine development projects. In response to strong commodity prices and robust corporate profits, a number of governments have sought in recent years to introduce ‘super-profits’ or ‘windfall’ taxes, royalties and other fiscal measures designed to give the state a greater economic interest in their domestic mineral resources. In 2010, Prime Minister Kevin Rudd of Australia proposed the introduction of a 40% super profits tax on mining companies, arguing that “all Australians own these resources and deserve a fair share”. This provoked a furious response from the mining industry, including from Tom Albanese of Rio Tinto who felt that the proposed tax came “close to nationalisation and expropriation”. BHP Billiton’s Chairman, Jac Nasser, complained that the “proposed super tax fundamentally, abruptly and unfairly changes the rules of the game”. While the subsequent political fallout led to the Prime Minister’s political demise, elements of the proposals continue to form part of legislation currently working its way
through the Australian legislature. These types of measures are not new and can be traced back to the Crude Oil Windfall Profit Tax Act passed by the United States Congress in 1980, which imposed an excise tax on oil in response to record-high prices. However, what is new is the proliferation of these types of taxes around the world. In recent years, we have seen minerals-related windfall taxes imposed (or debated at the highest political levels) in several developing countries, including Zambia, Peru, Ghana, South Africa and Mongolia. While some countries, including Zambia, have adopted and subsequently turned away from windfall taxes, the trend of governments taking an increasing share of the value of mineral resource production shows few signs of abating. Another aspect of resource nationalism involves the introduction of restrictions on foreign control of mineral properties, or the use of anti-trust or other laws to achieve a similar result. In May 2008, Russia introduced significant limitations on the ability of foreign investors to acquire control over ‘deposits of federal importance’, and the government-approved list of such deposits includes virtually all significant mineral projects in the country. Earlier this year, Indonesia introduced a law requiring foreigners to ensure that they do not hold more than a 49% equity interest in mining operations following the tenth year of production. Similarly, OECD countries have not been above using their laws to prevent foreign control of natural resources. In 2010, the Canadian and Saskatchewan governments effectively thwarted a proposed bid by BHP Billiton for one of the world’s largest producers of fertilisers, PotashCorp. Prior to that, the Australian government and foreign investment authorities, on grounds of national security, blocked China Minmetals’ $1.7 billion bid for Oz Mineral. Mining companies need to adapt to the current political and legal environment, by developing strategies for mitigating the risks associated with resource nationalism. Such strategies will generally involve an integrated risk-mitigation plan that incorporates: structuring investments to ensure the strongest possible legal protections; where possible, entering into a robust concession or development agreement with the state;
and lastly, managing relations with the host government and local communities to minimise risk on an on-going basis. Investment protection should be one of the main considerations when structuring a new investment (alongside tax, financing and regulatory considerations), especially in a country deemed to be high-risk. In particular, consideration should be given as to whether an investment can benefit from available bilateral investment treaties (BITs). Treaty protections are separate from the contractual and legal rights an investor may have under a concession or development agreement. BITs add an extra layer of protection and can be used to protect investors from interference from local courts and, in some circumstances, to assist in the enforcement of arbitration awards. Significantly, many BITs grant foreign investors a right to enforce BIT protection directly against the State in a binding international arbitration (usually under the auspices of the International Centre for the Settlement of Investment Disputes). Of course, BITs and development agreements are not the only sources of protection against the forces of resource nationalism. An integrated strategy can also incorporate some or all of the following elements, as appropriate: obtaining financing from local financial institutions and investors; obtaining financing from export credit agencies and/or international financial institutions; inviting the state to take equity participation in the mining project; encouraging the development of local downstream businesses; promoting local beneficiation; political risk insurance; and lastly, ensuring positive relations with the host government, both at a national and local level. Therefore, perhaps the best strategy for protecting against resource nationalism is to ensure that each mining project is positioned in a way that fairly balances the economic benefits to foreign investors, national and local governments, and the community of which it forms a part. One-sided mining concession or similar agreements invariably become a source of simmering resentment, and can serve as a catalyst for resource nationalism in its many forms. Glen Ireland, Christopher Langdon and Victoria Salem, Latham & Watkins LLP July 2012 • Global Business Magazine • 19
