The extractive industry has become very emotive the world over. It has becomes so to the extent that even the first world economies such as Australia that would naturally be mistaken to have soft and liberal investment regulations and taxation have taken aggressive steps towards claiming a larger share of from the extractive industry. On 19 March, the Australian Parliament, amid protests from the big mining companies, passed a mineral resource rent tax that will hit hard on coal and iron ore miners, their biggest exports. At 30% of profits, the new taxation laws are expected to rake in $11 billion for the next three years for the Australian government.
Nigeria, faced with unstable exchange rate at a time its crude oil exports are expected to hut 2.1 million barrels per day starting May, is mooting renegotiating contracts of oil mining companies. The government believes that it is not getting the best value and renegotiating the terms would improve the fiscal revenue for the West African country that is mired in growing conflict over the distribution of oil windfalls. Ghana, which produced 2.97 million ounces of gold in 2010 and is the second biggest producer of gold in Africa, will this year see its gold miners paying corporate tax at 35% from 25%. An additional 10% tax on windfall profits will be charged.
Those countries with monopolies on certain commodities have equally joined the fray. Guinea is home to the world’s largest bauxite reserves, and has an estimated 4 billion metric tonnes, which is about half the estimated global reserves. In September 2011, its legislative body approved a new mining code that sees mandatory nationalisation of a 15% shareholding in mining projects, with the government still having an option to buy an additional 20%. The accompanying increases in royalties will see bauxite miners now paying up to $14 per tonne from around $3.
Zambia, which expects to export copper worth $8 billion in 2012, resolved to double royalties on copper exports to 6%. Julius Malema and his nationalisation anthem may have been discarded from mainstream politics of South Africa, but his scent still pervades the corridors of power, with debates now centering on a proposed 50% windfall tax on super profits, among other proposals such as the 50% capital gains tax on sale of mining claims. Zimbabwe has stuck its guns on 51% shareholding on all mining activities, with the biggest mining companies such as the mining giant, Zimplats, reported to having complied with the directives. Alluvial diamond mining in Zimbabwe has been solely reserved for the state. The rationale behind these moves by the various countries to gain a bigger share from the exploitation of natural resources is understandable, and to a larger extent, justified.
The race for global supremacy has, until recently, been championed by technological advancement. Economies that ran ahead the pack with advanced technologies in production of good and services became wealthier and exerted more influence on global order. Commodities, on their own without much value, became very valuable when processed into final consumer and industrial goods. And those countries with advanced technology that could turn commodities into usable consumer and industrial goods enjoyed massive economic growth that transformed societies into what today is referred as the highly industrialised world. That was the industrialisation race. The period spanning between 1990s and 2000s has dramatically changed the shape of global influence as rapid technological advancement and adaptability, combined with the ease of labour mobility have all combined in stealing the competitive advantages of economies such as Japan, the US and Britain, among others, that had run ahead of the pack because of technological advantages.
Companies in the West and US, have now relocated overseas to position themselves in close proximity to resources and cheap labour. Apple has moved its factory to China in search of cheap labour. Countries endowed with natural resources now understand that they can extract more benefits from whoever is extracting them, and that those companies extracting the resources have little choice but to comply with whatever laws are put in place. This has created a huge opportunity for resource rich countries who now can load huge taxes on mineral exports. The mining companies such as Rio Tint and Xtrata in Australia, Konkola Copper Mines in Zambia, Gold Fields Limited in Ghana, Zimplats in Zimbabwe, among others, have little choice but to mourn and eventually comply.
On a related note, Zimbabwe recently mooted plans to compel mining companies to bank locally, and as expected, there are divided opinions. The mining companies are not happy, and they are right. Coercing mining companies to bank locally may not achieve the desired results on its own. Mining sector requires long term capital that is reasonably priced, especially at a time as now when some mining companies in Zimbabwe missed out on a global commodities boom that ran for seven strong years to 2007. This was again a time when a global liquidity glut saw easy credit becoming easily available, and indeed the mining industry in Zimbabwe missed both ends due to non-progressive exchange control regulations that disincentivised production.
Today mining companies need long term capital that is not available locally as bank loans rarely go beyond one year. Moreso, the dollar cost of capital in Zimbabwe is 3 times more expensive compared to the global average. The mining companies therefore desperately need their offshore accounts to secure offshore loans and embark on production. On the other hand, the Zimbabwean government has not been very clear regarding its policy position on the tenure of the multiple currency regime. Long term loans need predictability especially on the currency of settlement. It would be disastrous for mining companies that would have plunged into huge long-term loans to then realise they cannot meet their debt obligations after a currency may affect their ability to get foreign currency on the open market to settle their obligations. It has happened before and the risks recount fresh memories of the serious foreign exchange challenges that this country faced in the five years to 2008.
But a closer look at all these problems facing the mining sector reflect again the behaviour of economic agents, and indeed policy makers need to start correcting the fundamental policies for a sustainable future. The banking sector, sitting on only $3.3 billion, is impoverished liquidity wise because the mining companies, among others, have chosen to bank offshore. Zimbabwe mineral exports are in excess of $2 billion annually, and most of it never comes back. The only way to harvest these outflows and create a robust financial market is to compel the mining companies to bank locally. Zambia has a similar challenge. It exports over $6 billion worth of copper annually yet its financial markets sit on only $3.8 billion worth of deposits. And because of this, it has always fought battles with a volatile exchange rate and very high cost of credit above 25% per annum.
These fundamental challenges need to be addressed in many African countries rich in mineral endowments, and compelling mining companies to bank locally in Zimbabwe is a step in the right direction. The decision however has to balance with other objectives that should ensure that the mining companies retain part of their proceeds to meet external loan obligations since the domestic financial markets, at least for now, remain weak to fund the mining sector
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