8 December 2011, Ed Stoddard
Mining companies risk facing ever stronger waves of nationalism in Africa if they fight off current government moves to force them to pay more taxes and reveal more information on local operations, industry consultants and some executives say.
At a time when metals prices are high, companies that were granted tax concessions to invest are now on the firing line as African governments face heavy grassroots pressure for mining ventures to provide concrete benefits to the population.
Some executives and analysts advise that miners pay more now or face a bigger political backlash down the road.
“If we as an industry succumb to our natural instincts to rigidly resist any increased state intervention, we will be inviting enforced value transfers that will prove much more costly,” said Brian Menell, chief executive of Kemet, a private company that invests in resource projects in Africa.
“In my view, the winners and the losers in our industry over the coming decades, will be distinguished between those that embrace this process now, and those that put their head in the sand and hope that it will go away,” he said in a presentation this week at a Mines and Money conference in London.
Current moves to hike mineral royalties and taxes could even lead to long-term improvements in political risk and the business climate.
“Any resource firm operating in Africa is going have to say that we have to accept we have had a good bargain for a long time. Countries that had terms skewed in favour of the investor are now looking to rectify this,” said Gary van Staden, a political analyst with NKC Independent Economists.
“What we have here is a process that can improve the investment climate, provided it is dealt with properly by both parties,” he added.
Africa has enjoyed brisk economic growth over the past decade in large part because of a commodity boom, but resource wealth has largely failed to translate into broad prosperity.
Miners have become targets because their have been paying low taxes or conducting business in an opaque manner.
“The mining sectors have not managed regulatory risk well enough to avoid making their tax rates conspicuous targets for reformers,” said Paul Bugala, senior sustainability analyst for extractive industries with U.S.-based Calvert Investments.
“African leaders understand past tax rates have left money on the table and their tax rates are artificially low and have been due for a correction,” he said.
Africa’s push to collect more mining revenues coincides with U.S. and European legislative measures to require more transparency in extractive industries. The Wall Street Reform Act of 2010 will require mining and oil companies with U.S. listings to disclose their payments to foreign governments.
Heather Lowe, director of government affairs at watchdog Global Financial Integrity, said such initiatives had “created both the pressure on governments to seek better agreements and the environment in which they are able to do so”.
Zambia is a telling example. Africa’s top copper producer doubled its royalties on the metal to 6 percent from 3 percent.
But that came off a very low base — it was just 0.6 percent in 2008 — and the previous government was auditing the country’s main mining houses. The view that miners were not paying their fair share and in an open manner was a key reason behind the electoral victory of populist President Michael Sata.
Sata’s government has pointedly backed down from re-imposing a windfall tax — but his working class base will expect him to deliver on his promises of increased aid to the poor.
Ghana has raised corporate taxes on miners to 35 percent from 25 percent and introduced a windfall tax of 10 percent.
Gold mining communities in Ghana complain they have yet to feel the full benefit of their resources.
“Communities on the ground want to see some visible return. They want to see direct benefit,” said Martin Bauwens, managing director of mine consultancy MJB Consulting.
Companies say they have done their share.
Gold Fields, the world’s fourth-largest gold miner, has said $1 billion worth of planned expansions in Ghana are at risk because of the tax hike.
“We’ve had a constructive and close engagement with the government of Ghana for many years. We contribute more taxes than anyone else in the country,” CEO Nick Holland said at a presentation for investors on Monday.
“I don’t know what is motivating this, but it could be the notion that gold companies are making a lot more money.”
Zimbabwe followed the examples of Zambia and Ghana and raised royalties in its budget.
Tanzania has proposed a mining “super tax” to fund development; top world bauxite exporter Guinea is seeking changes to its mining code; a new revenue management bill for resources is in the offing in Liberia; and Niger has said it may renegotiate uranium contracts.
But aside from Zimbabwe, which has also been forcing foreign miners to surrender majority stakes, analysts say many of the moves should not be crippling to industry.
“None of the measures outside of Zimbabwe are draconian,” said Van Staden.