How ‘contagious’ is resource nationalism in Africa?

Resource nationalism is infectious, and as more mining jurisdictions take resource nationalist measures, others come under domestic pressure to do the same, said Peter Leon, head of Africa Mining and Energy projects at Johannesburg-based law firm Webber Wentzel, during a presentation at the annual Prospectors and Developers Asso­ciation of Canada conference in Toronto.

Resource nationalism tends to arise during periods of high commodity prices, he noted, although it “has in fact resisted recent price downturns” while the mining industry’s “relatively quick recovery from the 2008–09 economic crisis made it a prime target for states seeking to boost weak balance sheets,” he added.

“It is quite contagious . . . especially around the contract review process,” he told The Northern Miner on the sidelines of the conference.

Many of the countries that are looking to renegotiate their mining contracts are those that “signed deals during a time of low market prices when there was less competition, and governments were in a weaker position to negotiate,” he continued.

Sierra Leone, Ghana and Guinea are all examining mining contracts. In Sierra Leone, the government’s newly built
National Min­erals Agency will review contracts this month to bring them in-line with “the best interests of the country,” Leon
explained during his presentation at Mine­Africa’s annual Investing in African Mining seminar.

In Ghana, the government established a committee to review its mine-development agreements with companies in February 2012, with the mandate of renegotiating agreements that are not in Ghana’s best interests. And in Guinea, government officials launched a review of mining contracts in September 2011 to “root out unconscionable provisions,” he added. 

But frequently, contract reviews are linked to drives for increased transparency and fairness in the mining sector, he said.  In Guinea, for example, the contract-review process is examining contracts that were signed when the military junta ruled the country from 2008 to 2010. And to improve transparency, Guinea has listed existing mining contracts on a state-run website.

Recent examples in Africa of resource nationalism span the Democratic Republic of the Congo (DRC), Tanzania, Ivory Coast and Ghana. In its 2012 national budget, for example, Ghana hiked the corporate tax rate to 35% from 25%, and cut capital allowances to 20% from 80% for five years.

A new draft mining code under discussion in the DRC, meanwhile, proposes a new tax on “super profits.” According to the recommendations, Leon said, “when mineral prices rise above 25% of a reference price projected in a project’s feasibility study, the state will retain 50% of this super profit.”

Tanzania is also considering the imposition of a windfall profit tax, according to Leon. And in the Ivory Coast the government has “recently reconsidered the imposition of a windfall tax on its gold mines, but has said it will focus instead on adjusting royalties to increase state revenue.”

At the same time, governments across Africa are looking at retaining ownership of their mineral resources through a free-carried interest or a contributed interest. (A free-carried interest refers to when the state acquires the share without any contribution, while a contributed interest occurs when the state pays for the share.)

In Guinea, under the new mining code published in September 2011, the state is granted an automatic 15% free-carried, non-dilutable interest in all new mining projects for bauxite, iron ore, uranium, gold and diamonds, Leon explained. Guinea also has the right to acquire an additional interest, on a fully paid-up basis, for up to 35% of the equity in the rights holder, across all mineral groups. “The 2011 code is under review,” Leon said, “but state participation rates are apparently unlikely to change.”

In the DRC, authorities are discussing a new draft mining code that proposes to give the government a minimum free-carried, non-dilutable, 35% share in all new mining projects. Under the country’s current law, there is provision for a 5% free-carried, non-dilutable share. And a number of other countries — including Botswana, Burkina Faso, Ivory Coast, Ethiopia, Senegal and Tanzania — also have legislation that entitles the state to a share in mining projects.

Resource nationalism can also adopt indigenization and local equity requirements, Leon explained. While sometimes this can ensure that local groups profit from mining revenue, it can also be “conducive to the enrichment of elites, and possibly a breach of the non-discrimination norm under inter­national investment treaties,” he said.

Examples of this trend include rules in South Africa mandating that mining com­panies are 26% owned by historically dis­advantaged South Africans by the end of 2014. “The shareholding is, in principle, to be paid for at market value,” Leon said. “Lack of necessary capital has, however, led to many trans­actions being vendor financed.” At the same time, black economic empowerment “has largely enriched a well-connected elite.”

Rules on indigenization and local equity can also be seen in Zimbabwe, where the government passed a law in 2010 that makes foreign companies transfer 51% ownership to a local partner selected by the state. In January, Impala Platinum signed a deal with Zimbabwe’s Empowerment Minister that will see the mining company vendor-finance the acquisition of a 51% shareholding in the company by black Zimbabwean groups.

In October 2012, government officials in Kenya gazetted mining regulations that make companies cede a minimum
of 35% of their equity to local investors, “without an indication of whether the cession will be compensated.” In this case,
however, the country’s attorney general has told mining companies that the regulations will only apply to mining licences that were issued after the regulations came into effect.

On the bright side, there is a willingness to engage the industry and discuss the issues, Leon said. “The environment is obviously challenging — but I don’t think it’s at a tipping point.”