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Business risks facing mining and metals 2011 - 2012 - 1. Resource nationalism - EY - Global

Business risks facing mining and metals 2011 - 2012

1. Resource nationalism

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“Resource nationalism has become a contagion impacting the mining & metals industry across the globe. The industry needs to become more engaged in the analysis and management of this risk which can place a heavy burden on existing operations and influence future decisions on where to invest.”Andy Miller, Global Tax Leader — Mining & Metals, EY

Summary: As many governments struggle with deficits or hold concerns over the effects of a two speed economy, the continuing boom in commodity prices has seen the mining and metals sector targeted as an area in which they can raise revenue. Governments are continually assessing the fiscal terms of the economic rent for mining and metals projects in their countries in order to obtain their share of higher mineral prices via taxes or royalties.

Resource nationalism is the biggest risk in 2011 and 2012. Because the mining and metals sector rebounded quickly from the global financial crisis, it became an early target to help restore treasury conditions. In a number of producer nations, concerns over ‘Dutch disease’ or two speed economies have led to plans to tax mining more heavily, and provide tax relief to other sectors.

From the outset of 2011 we have seen numerous countries changing their fiscal environment (taxes, royalties), and some have invoked ‘use it or lose it’ clauses. Governments worldwide have also been looking to increase local participation in projects and we think that this trend will only increase. South Africa’s new royalty regime came into effect on 1 March 2011, Ghana plans to double royalties on mining to increase government revenues, and the Australian Government’s proposed Minerals Resource Rent Tax is still on track with its draft legislation.

Steps mining and metals companies can take to respond to this risk:
  • Investing in transparent relationships with host governments to foster a greater understanding of the value of the project to the host
  • Aligning with the host government's long-term economic and political incentives and thereby become an invaluable part of the infrastructure in the host country
  • Focusing on generating direct and sustainable benefits for the host community through pro-active and well organized social and community development programs

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