A new wave of resource nationalism in the mining & metals industry | White & Case LLP

As governments around the world pursue revised mining fiscal policies and more aggressive enforcement, investors need to prepare for an active phase of resource nationalism.

Analysts are predicting the emergence of a new commodity super-cycle fueled by the economic recovery and the energy transition narrative. The mining and metal industries may face another phase of intense resource nationalism.

Given the gaping budget deficits in the wake of the COVID-19 pandemic and fueled by rising commodity prices, resource-rich countries will inevitably demand more from investors in this sector. In fact, 2021 has already seen a spate of proposed and actual fiscal measures, with governments around the world pursuing revised mining fiscal policies and more aggressive enforcement.

Countries around the world are placing new tax demands on investors in the mining sector

The factors supporting this trend are showing no signs of slowing in the short term. The challenge for governments is to develop a sustainable fiscal system that will help increase revenue at high prices without discouraging investment in the sector. For their part, investors must prepare for an active phase of resource nationalism.

View the full picture: Chilean gross debt vs. copper price, 2015-2021 (PDF)

82%

In Chile, under the proposed bill, investors could pay a tax burden of 82 percent in royalties and taxes on sales of more than 12,000 tons of copper and 50,000 tons of lithium per year, compared to 40.3 percent.

A predictable trend

The current trend is the result of combining two strong factors.

The first factor is the upswing in commodity prices. Compared to most sectors, the mining industry has weathered the global economic downturn well. Commodity prices – especially copper, iron ore, silver and gold – have either stayed high or increased sharply.

The recession triggered by the pandemic has pushed gold prices to new heights, although the market has since weakened. Industrial metals were buoyed by government incentives as well as deficit and infrastructure spending. Crucially, pressures on green energy and electrification have seen copper prices soar to their highest levels in years, while demand for battery metals like nickel, lithium and cobalt has increased.

The second strong factor supporting the current trend is the financial crisis that many countries are facing. While governments typically respond to rising commodity prices with increased taxes, calls for tax increases are more pressing today as governments around the world have given up their fiscal caution and freely spent to prop up their economies.

The result is predictable. Since the prices of some commodities are cyclically high, governments in trouble will one way or another demand a larger share of the natural resource. The signs of an emerging wave of resource nationalism are already clear.

The challenge is to develop sustainable fiscal policies that can adapt to the commodity cycle, expand the tax base with new projects, and provide the security the industry needs

Redeeming copper

At the forefront of this trend are the copper-producing nations of Latin America. May 2021, the Chilean Chamber of Deputies, the lower house of Congress, passed a bill introducing a new license fee for copper and lithium sales.

Chile is currently taxing most of its mining operations at a flat rate under agreements that expire in 2023. The new draft law provides for a basic fee of 3 percent. For copper, a windfall income tax would start at marginal rates of 15 percent of sales at a price of $ 2 to $ 2.5 per pound and rise to 75 percent of additional income on sales of more than $ 4 per pound.

It is estimated that under the proposed bill, investors would face an 82 percent tax burden in royalties and taxes on sales of more than 12,000 tons of copper and 50,000 tons of lithium per year, compared to 40.3 percent.

According to the president of the industry association Sonami, Diego Hernández, the new legislation would force 12 of the 15 largest miners in Chile to work at a loss. While the bill has yet to be passed in the Senate, some companies appear to be rethinking their investment decisions.

For example, Lundin Mining, which operates one of the largest copper mines in Chile, is reportedly rethinking its plans to expand its Candelaria mining complex for $ 600 million in favor of a project in Argentina.

Chilean developments have been confirmed by other governments across the region. In June 2021, the Peruvians elected the leader of the left-wing Free Peru Party, Pedro Castillo, as president. As a candidate, Castillo supported plans to raise taxes on mining profits, drawing inspiration from Chile. Although Castillo said he did not intend to nationalize mining projects, he made it clear that he would try to tax mineral profits to fund social expenses.

Some in the industry are hoping the new government will ease their positions in office, but the global trend towards more aggressive fiscal policies is a cause for caution.

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The state of Nevada approved a proposal to impose a 0.75 percent consumption tax on gold and silver miners with gross sales between $ 20 million and $ 150 million

A series of regulatory reforms

The trend is not limited to Latin America. From Burkina Faso to Zambia and from Mongolia to the Philippines, countries across Africa and the Asia-Pacific region are placing new tax demands on investors in the mining sector. These have taken the form of proposed random and profit taxes, higher excise taxes and increased royalties, or simply more aggressive enforcement.

May 2021, Madagascar’s Mining Minister Fidiniavo Ravokatra renewed his call for a revision of the country’s mining law. Key provisions proposed include increased royalties – from 2 percent to 4 percent for base metals, gold, and silver, and up to 8 percent for raw gems and raw fine gems – and allocating 20 percent of mining output to the state .

While the industry has resisted loudly and the move previously rejected by the presidency, the divergence between commodity prices and tax revenues is fueling the case for reform.

Many measures have been adopted at the local level. In Brazil, the federal government is considering increasing taxes on the mining sector, the northern state of Pará introduced increased tariffs on iron ore, copper, manganese and nickel production in April 2021.

The trend is not limited to emerging markets. On June 1, 2021, the state of Nevada approved a proposal to impose an excise tax of 0.75 percent on gold and silver miners with gross sales between $ 20 million and $ 150 million and a tax of 1.1 percent to raise those who generate higher sales.

In many jurisdictions, investors are also faced with increased enforcement of existing tax laws. In May 2021, the Democratic Republic of the Congo announced that it would take action against companies that it believed to have paid incorrect tax amounts and called for huge adjustments.

The Kyrgyz state tax service has meanwhile revived tax claims that it had previously terminated against Centerra Gold for the period 2011 to 2017. A few weeks later, Kyrgyzstan took over Centerra’s flagship Kumtor gold mine. Elsewhere, copper producer First Quantum Minerals is embroiled in international arbitration proceedings with Zambia and Mauritania over controversial license fees and taxes.

View the Full Picture: At a Glance: Global Tax Changes in the Mining and Metals Sector (PDF)

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Madagascar proposed new provisions for the country’s mining law, including an increase in royalties from two to four percent for base metals, gold and silver

A fine balance

Whether the legislative measures currently being considered in Chile and elsewhere will ultimately be adopted, the direction of travel is clear. Increased fiscal pressure on mining projects will come in one form or another, be it through new taxes or the aggressive enforcement of existing ones.

While high commodity prices may initially cushion the impact on projects, governments need to strike the right balance between increasing revenues without stifling investment. The challenge is to develop a sustainable financial policy that moves with the commodity cycle, increases the tax base through new projects, and provides the security the industry needs.

Unfortunately, as in previous cycles, there is a clear possibility that some governments will fall victim to nationalist policies and abuse, threatening the project economy and future investment.

In this environment, mining investors are well advised to evaluate their positions. In particular, investors should carefully examine the contractual arrangements under which projects are carried out.

Fiscal stability deals will prove invaluable. These agreements are usually enforceable in local courts or international arbitration tribunals and also provide useful leverage when negotiating with tax authorities.

In the current environment, projects that benefit from stability agreements are more attractive. Sponsors of new projects should make securing stability agreements a high priority, and operators of existing projects that benefit from such agreements should be particularly careful not to let them expire.

In addition to contractual protection, investors should also reassess project holding structures to ensure the best possible coverage through investment agreements for their foreign assets. Investment treaties offer comprehensive protection to foreign investors, but not all agreements are created equal.

For example, some treaties provide for tax measures, so investors have limited protection in the face of increasing tax pressures. Demanding investors are increasingly planning their investment structures with a view to optimal protection through investment contracts. Many contracts do not contain substance requirements, which allows investors to gain protection by simply adding special purpose vehicles to their holding structures.

While “contract planning” is generally acceptable, it must usually be done before host country governments take adverse action. With the signs of a new wave of resource nationalism, now is the time for investors to reassure themselves that their home is in good order.

Taha Wiheba (White & Case, Law Clerk, New York) contributed to the development of this publication.

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