Resource Nationalization-Impact More than a Bigger Piece of the Pie

Emerson’s Douglas Morris, a member of the power and metal & mining industry teams, looks at the impact of when politics and business mix in the Mongolian mining industry.

Emerson's Douglas MorrisLast year I wrote about my trip to Mongolia and discussed the ongoing struggle for royalties between the local government and Turquoise Hill, the 66 percent owner of the Oyu Tolgoi (OT) mine in Mongolia. This week, I read an article, Mining wealth distribution at heart of Mongolia’s presidential elections, which highlights the continued struggle for royalties in Mongolia and how this topic impacted recent presidential elections. The commentary makes it pretty clear that the story of how OT’s profits will be divvied up is still being written.

Nationalizing assets is a topic that is top of mind for many in the resource industries, particularly in mining. In looking at a report from the consultancy Ernst & Young, it remains a top three, business risk for miners.

Source: Ernst & Young Global Limited, Business risks in mining and metals 2013-2014, http://jimc.me/13lTIP4

Companies do understand that countries want to share in the wealth of natural resources and, given the proper framework, these agreements are commonly worked out to benefit both parties. Where things get a little unsettled, though, is when the rules change after an investment decision is made. In the case of OT, Turquoise Hill based their investment decision on the agreement that was made with the government of Mongolia, but now the government wants to renegotiate for more.

The stance by the Mongolian government is, in fact, scaring off some investment as evidenced by the following World Bank chart. “The World Bank notes there has been a rapid slowdown in foreign direct investment (FDI) in recent months, which has become a significant downside risk to the Mongolian economy. In 2012, the net FDI inflow declined by 17 per cent, and continued to deteriorate sharply in the first months of 2013. The net FDI inflow for the first two months of 2013 amounts to only 42 percent of that in same period in 2012.”

Source: Economic Policy and Competitiveness Research Center, FDI in Mongolia, http://jimc.me/13lTYxz

The same is happening in other parts of the world where mining is a core industry. Case in point is the drawdown of FDI in Africa. From this article, “African governments should not be in hock to multinationals but decisions on mining should be taken competently and constructively. Otherwise, they risk losing the big mining investments which are vital to developing new reserves for the overall benefit of the economy.”

So what is the answer? To ensure a steady stream of FDI, there needs to be some semblance of political stability and regulatory framework. Mining projects require billions of dollars of capital and those locales that can provide certainty to mitigate some risk will continue to see investment when opportunities arise.

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