Nationalism Rises in Struggle to Control Natural Resources Sector

The BRICs have led the way in imposing or reimposing government dominance of massive natural resources producers (primarily oil and minerals). Other countries are taking note and following suit. With the IMF's announcement yesterday that some forms of protectionism are permissable, the trend is clearly towards defending one's own resources until the global trade imbalance is sorted out. Corporations must proceed on the assumption investments and contracts in this environment can always be renegotiated at the host government's command.

Robert Guy Matthews reports in the Wall Street Journal:

"The government-led ouster of the CEO of Brazilian mining giant Vale SA follows a string of moves by national governments to intervene in their countries' highly profitable and highly coveted natural-resources concerns.

Some of those moves have included rejections of efforts by foreign companies to gain big stakes in local mining and resource companies. Big miners who have sought global acquisitions, including BHP Billiton, Rio Tinto PLC and Xstrata PLC, had no new comment on the trend following the change at Vale, where Brazilian President Dilma Rousseff forced out CEO Roger Agnelli. The big miners said they didn't expect the Vale move to alter their investment or expansion plans, which have already factored in the rising tide of nationalism and efforts by governments to extract higher taxes.

Indeed, many miners are pulling back or reducing the target size of foreign acquisitions to avoid defensive moves by governments. In some cases, they are abandoning huge exploration projects, which are costly and may end up benefiting the local governments rather than shareholders or customers.

"All this volatility is a deterrent to making big investments," says Francisco Blanch, a commodities economist for Bank of America Merrill Lynch. "Many miners are wondering, ' Why should I make this big investment?' The result is that we (governments) are discouraging the much-needed investment in commodity markets to get a stable supply of steel and coal and copper and oil."

Rio Tinto, the world's third-largest miner said it would limit its investments to smaller to midsize acquisition projects that would cost less than $10 billion. It noted that governments are pursuing higher taxes and royalties and that larger projects can be riskier and costly given the tax uncertainty.

Commodity-rich Latin America has been a leader in extending government control over natural resources, such as oil and other raw materials, in recent years. Venezuela and Bolivia nationalized oil and gas assets, while Ecuador started taxing what it considered windfall oil profits at a 70% rate. After Brazil discovered enormous deep-water oil fields off Rio de Janeiro, the South American country rewrote the rules for rights auctions to give its state oil company, Petroleo Brasileiro SA, the lion's share of the business. In many cases the moves were a turnaround from the 1990s, when the mostly cash-strapped nations opened up their industries to foreign investment, prompting a boom in exploration.

But the protectionism extends to other countries. BHP Billiton, the world's largest miner, has already seen several of its mining projects thwarted by foreign government. Last year, Canada nixed BHP's planned $38 billion acquisition of Potash Corp., and Australia put up so many blocks between a planned joint iron-ore venture with Rio Tinto months earlier, the two miners quit that project.

BHP said it had no comment on the Vale developments and referred to comments made by its chairman last November.

"The world is changing," BHP Chairman Jac Nasser told shareholders shortly after the failed bid for Potash Corp last November. "Whether you want to call it protectionism or nationalism, there is certainly a trend towards a more difficult process when you're looking at larger cross-border transactions."

As the tension escalates between governments and miners over the development, sale and ultimately the profits from the world's underground resources, the future for a steady, reliable supply of these minerals and metals is looking murkier.

Copper is getting increasingly harder to find and more expensive to mine. Coal and iron ore, while relatively plentiful around the world, are seen as prime opportunities by governments to tax and regulate so as to fill local coffers with more mining-related dollars.

Foreign governments are recognizing that the rise in commodity prices is outpacing economic growth as a whole. "When commodity prices go higher, governments want to get their hands into the rising market," said Mr. Blanch.

South Africa, Zambia, Australia and Colombia have all recently put forth plans to increases taxes on metals and minerals mined within their countries.

Zimbabwe's government ordered Anglo Platinum, a unit of Anglo American, and other mining companies based outside the country to cede majority stakes to Zimbabweans on Friday. The government said in a decree that overseas mining companies had to explain within 45 days how they would cede 51% of their local assets to "indigenous" Zimbabweans.

"The move comes at a time when Australia, Canada, Chile, Venezuela, Peru and the Democratic Republic of Congo had considered raising taxes or taking stakes in mining companies to boost budget revenues," according to Toronto-based TD Securities, a commodities-research firm.