What do apex silver Mines Ltd., Crystallex International Corp., Equinox Minerals Ltd. and Ivanhoe Mines Ltd. have in common?
All are North American mining companies with advanced projects in jurisdictions that have declared they would like a bigger share of mine revenue. And all these companies have watched their market capitalizations plummet in recent weeks, mostly as a result of those declarations.
Take Vancouver-based Ivanhoe. In mid-April, the company was trading at a 52-week high of $11.70 a share on the Toronto Stock Exchange, riding a wave of investor enthusiasm for the company’s Oyu Tolgoi copper/gold project in Mongolia — one of the most significant mineral discoveries of the past decade.
But that all changed in late May, when the Mongolian government voted to slap a “windfall” tax of 68% on foreign-owned mines when copper prices reach US$2,600 a tonne (US$1.18 a pound) and gold reaches US$500 an ounce. Both metals have been trading at well above those levels for some time.
Although Mongolia’s new tax rate is not yet written in stone and some fiddling may still be in the works to avoid killing foreign investment completely, Ivanhoe shares, trading at less than $7 a share in mid-June, haven’t recovered from the blow.
And even though some of the share decline can be attributed to a wide-sweeping correction in commodity markets, the government edict was the most significant spook factor for investors.
“Six months ago, Mongolia was one the hottest countries, in terms of new exploration and investor appetite, because it was perceived to be both geologically very prospective and attractive from a regulatory and business climate perspective,” says Alex Gorbansky, managing director of Frontier Strategy Group, a Boston-based risk-management firm that specializes in the resources sector. “That has changed. Many investors who had significant investment plans for Mongolia have put those on hold.”
But Mongolia is not alone in wanting a bigger share of resources revenue, and some investors fear that similar levels of taxation, or even outright expropriation, may become commonplace as developing countries rewrite their mining policies to take advantage of the commodities boom.
As tax and royalty levels rise, mining companies will need increasingly robust projects that can absorb the extra costs as well as any downturn in metal prices. “The question to ask if you’re an investor in the long term is: ‘When we start to see a dip in commodity prices, how will a company’s portfolio be positioned, given these new regulations?’” says Gorbansky.
Projects in parts of Latin America seem particularly vulnerable. Venezuela president Hugo Chavez, who forced oil companies to pay higher taxes and convert their operations into joint ventures, says he will force similar measures on new mining projects, such as Crystallex’s Las Cristinas gold project, the development of which is awaiting environmental permits. Toronto-based Crystallex was trading at slightly above $3 a share on the TSX in mid-June, down from an intraday high of $7.17 on April 10.
Bolivia president Evo Morales has gone a step further, deciding to take absolute control over his country’s fossil fuels; he has warned that he will do the same with other natural resources, such as Apex Silver’s San Cristobal project, one of the largest silver/zinc development projects in the world. Denver-based Apex Silver was trading at US$14.50 on the American Stock Exchange in mid-June, down from more than US$25 in April.
Terry Bell, vice-president of global mining for Salida Capital Corp., a private investment firm in Toronto, says he has become wary of investing in a number of countries in South America, including Bolivia, Venezuela, Ecuador and, to a certain extent, Peru.
Ecuador is demanding that foreign oil companies leave a larger share of their profits in the country; in May, it revoked a contract with Los Angeles-based Occidental Petroleum Corp. and seized its assets. And shares of Vancouver-based Corriente Resources Inc., which is moving toward construction at its Mirador copper/gold operation in Ecuador, slipped to $4.40 a share on the TSX in mid-June after completing a private placement at $6.50 a share just a few weeks earlier.
Meanwhile, in Peru, where there is a strong Canadian mining presence, investors are celebrating the recent election of Alan Garcia over the more leftist Ollanta Humala. But Garcia’s previous presidential reign in the 1980s was marked by hyperinflation, guerrilla violence, food shortages and allegations of corruption.
@page_break@“He is being welcomed and hailed by Western investors and free market thinkers, which tells you the state of the world we’re in,” says Gorbansky. “Compared to Humala, Garcia is a saviour.”
Whereas Humala would probably have imposed some form of nationalization, Garcia will take a more moderate approach to foreign mining projects by revising or cancelling the tax exemptions the sector now enjoys, he predicts.
Gorbansky believes that Chile, which has its own successful state-owned mining company, Codelco, combined with capital and technology from foreign investors, serves as a model for many countries that would like to capitalize on their own mineral wealth.
The change of heart toward foreign investment is driven, in part, by higher commodity prices and record revenue for mining companies, and partly by new competition from India and China — two countries desperate for raw materials to fuel their booming economies.
“Governments are no longer beholden to Western investors for capital investment and technology,” Gorbansky says. “The Chinese, in particular, are willing to invest at significantly different economic terms than Western investors, primarily because they are looking to secure access to minerals.”
Africa has not been immune to the profit grab. In April, Zimbabwe president Robert Mugabe declared that he would nationalize all 500 of the county’s mines under a joint-venture arrangement that would give the Zimbabwe government a controlling interest in the mines.
There is also speculation that Zambia is considering raising its mineral royalty to 2%-3% from 0.6%, more in line with what other mining jurisdictions charge.
But the new rate is unlikely to kill foreign investment in Zambia because, even at 3%, copper producers’ costs would only increase by about US8.5¢ per pound at recent copper prices, says TD Newcrest’s Greg Barnes in a recent report.
Barnes adds that, at 3%, the Zambian royalty would chop TD’s earnings per share estimates for Vancouver-based First Quantum Minerals Ltd., which mines copper in the country, by 5¢ per share based on the brokerage’s forecast copper price of US$2.27 per pound in 2007. First Quantum is expected to have an EPS of US$6.78 in 2007.
Salida’s Bell is also unruffled by the rumours coming out of Zambia. After meeting with the country’s minister of mines, he came away confident that the country has no interest in repeating the nationalization binge of the 1970s, when Zambia took a controlling interest in its copper industry.
But that hasn’t stopped the bleeding for Canadian companies operating there. First Quantum was trading at slightly more than $40 a share on the TSX in mid-June, down from a 52-week high of $64.54 in May. Shares of Toronto-based Equinox Minerals, which owns an advanced-stage copper project in Zambia scheduled for construction this year at a cost of $350 million, dropped below $1.40 a share on the TSX in mid-June after trading at a 52-week high of $2.35 in May.
“This is a global phenomenon,” says Gorbansky. “Governments are looking at Bolivia and Venezuela effectively renegotiating terms with foreign investors and saying, ‘Why can’t we do the same? Why can’t we extract a greater share of the profits ourselves?’”
It’s enough to make one retreat to the relative safety of Canada. IE
Third-World governments take a bite out of mining projects
Developing countries are wreaking havoc on resources company stocks after rewriting taxation laws and nationalizing projects
- By: Virginia Heffernan
- July 11, 2006 October 31, 2019
- 08:28