Non-financial metrics are becoming increasingly important to CFOs - Strongly agree or agree
Base: All (247) ANZ (111) Asia (136)
The DNA of the CFO wheel
“With the massive increase in resource nationalism, comes an increased need for tax directors to be more involved in strategic risk decisions.” Andy Miller
Global Mining & Metals Tax Leader, Ernst & Young
Resource nationalism retains the number one risk ranking with many governments around the world going beyond taxation in seeking a greater take from the sector, with a wave of requirements introduced around mandated beneficiation, export levies and limits on foreign ownership.
The uncertainty and destruction of value caused by sudden changes in policy by the governments of resource-rich nations cannot be understated.
We are observing three key trends of resource nationalism:
- Imposition/increasing of royalties or mining taxes
The announcement in 2010 of a proposed new ‘super profits’ mining tax in Australia had a significant ripple effect around the world. Many mining and metals jurisdictions announced increases in taxes and royalties during the course of 2011–12 and many looked at Australia’s action as commercial cover for proposed changes.
Amendments to mining and tax laws can result in changes to capitalallocation based on a weaker risk/reward profile.
- Mandated beneficiation/export levies
Many governments are now seeking to have minerals beneficiated in-country prior to export. South Africa has announced a beneficiation strategy, as has Zimbabwe, Indonesia, Brazil and Vietnam. In order to better ensure in-country beneficiation, governments are imposing new steep export levies on unrefined ores.
- Retaining state or national ownership of resources
Governments are also seeking to ensure that they retain ownership of their minerals, which is not a new phenomenon. These changes in ownership laws can have a significant impact on the reward miners’ expect to receive for the risk they have taken as they have paid for 100% of the investment but will receive only a percentage of the future investment return.
There is no doubt projects around the world have been deferred and delayed, and in some cases investment withdrawn altogether because of the changed risk/reward equation.
Miners should continue to engage with governments to foster a greater understanding of the value a project brings to the host government and be better able to negotiate appropriate trade-offs that preserve the value to both mining and metal companies and governments.
This includes encouraging governments to take a broader view of the return from natural resource development, as well as negotiating tax incentives and offsets.
Steps mining and metals companies can take to respond to this risk:
- Invest in transparent relationships with host governments to foster a greater understanding of the value of the project to the host
- Align with the host government’s long-term economic and political incentives and thereby become an invaluable part of the infrastructure in the host country
- Focus on generating direct and sustainable benefits for the host community through pro-active and well organized social and community development programs
- Align with multi-lateral agencies, such as the World Bank, to achieve a ‘prominent victim’ status in the face of mounting resources nationalism
- Partner with state owned enterprises that have strong Government-to-Government relationships
- Encourage direct government participation
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