Resource Nationalization: We’ve Seen This Story Before

Douglas Morris Mining and Power Industries Sr. Manager

Douglas Morris
Mining and Power Industries Sr. Manager

Author: Douglas Morris

Mark Twain once wrote “History doesn’t repeat itself, but it does rhyme.” An article this week in the Financial Times reminds me of how resource nationalization in mining, when taken too far, tends to rhyme.

The FT article, Indonesia’s gamble on ore export ban starts to hit home, discusses how the law passed at the beginning January 12th of this year is adversely affecting the Indonesian economy. Government leaders issued an edict that disallowed the export of ore concentrate to China, but would allow companies to do so if they built smelters and associated equipment to refine ore within the country.

Their logic was that they wanted miners to add more value to the ore and capture this value add within their economy. Unfortunately, it’s expensive to add smelting capabilities and the market already has available capacity. The net effect is that some mines are laying off thousands of workers and, just this week, Newmont announced that it will reduce production at its Batu Hijau gold and copper mine beginning in June unless it’s allowed to ship concentrate again. In addition, Freeport McMoRan’s slowdown at its Grasberg mine has cost the government in excess of $1.6B in revenues.

This is a case where government intentions to benefit its people had the exact opposite effect. Not only is this law affecting the economy from a GDP standpoint (GDP is at its slowest growth since 2009), but also Foreign Direct Investment (FDI) has slowed because of the uncertainty caused by this legislation.

Sound familiar? Mongolia went through this beginning in 2012 with its battle for royalties between the local government and Turquoise Hill, the 66 percent owner of the Oyu Tolgoi (OT) mine in Mongolia. A recent FDI chart for the country shows how things dry up when there is a cloud of investment uncertainty.

Source: CEIC Data, CEIC News@lert: Mongolia’s Foreign Direct Investment at a Crossroads, http://jimc.me/1qw1tOc

Just this month, though, the Mongolian government announced that it will settle its dispute over the OT investment agreement and will settle disagreements over 100 other mining exploration licenses. From a government spokesman “Mongolia has learnt a good lesson . . . the important thing for us is to create good jobs and good revenues.”

Miners understand that it’s necessary to share in the wealth of natural resources and framework agreements are commonly worked out that benefit both companies and local governments. Balance is the key, though, and it’s likely that the Indonesian government will come to this conclusion before long.

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