Tuesday, 18 December 2018

Mining and Geopolitical Risk: A Global Breakdown

Written by Cole Latimer and originally published on Australian Mining.

Australia has always had an insular view of the mining industry.

It is often forgotten that many of the mining companies that operate here have a large suite of overseas operations, or are simply headquartered here but operate solely overseas.

There is more to the resources industry than what is happening on our island tucked away in the corner of the Pacific, and the vagaries of overseas machinations that affect it.

Yet, the mining sector has always viewed itself as a global industry, and one of the most important aspects of maintaining its ability to operate is remaining closely abreast of the constantly changing geopolitical landscape.

However as Deloitte points out: “As the pace of change accelerates it’s getting harder to predict the impact of these (shifting geopolitical) trends.”

“It is becoming eminently clear that mining companies face rising regulatory, geopolitical, economic, and technological uncertainty.”

It goes on to state that despite best planning, much of the time miners will have to continue embracing uncertainty, essentially planning for the worst but hoping for the best.

“Given mounting levels of volatility and change, miners need to take a broader view of risk management and scenario analysis,” Deloitte Southern Africa mining leader John Woods said.

“This includes taking a much greater range of variables into account to inform their decision making,” he said.

There are four major international areas that Australian miners are looking to for growth opportunities and future development: Asia, Africa, South America, and Eastern Europe/CIS.

In our own backyard

Despite the mining boom coming off the boil and Chinese demand waning as its rampant growth levels off, Asia is still the major market for Australian resources ranging from iron ore and coal through to rare earth minerals, but the money that once drove it is no longer available.

According to Deloitte: “Chinese investment, which has long fuelled the resources sector, appears to be dwindling.”

“At the same time slowdowns in industrial production, fixed asset investments and retail sales are already threatening China’s 7.5 per cent GDP growth target, contributing to ongoing commodity price weakness.”

Much of this is driven by the nation’s shift from a ramp-up building phase into one of consumption, according to BHP CEO Andrew Mackenzie.

“We see a Chinese economy gradually shifting from construction to consumption,” he said

“We imagine we will continue to creep our exports of steelmaking materials like metallurgical coal and iron ore, but we’re much more likely to make major investments in what we feel are the next phase of China’s growth in energy and in food.

However he added that "China's urbanisation [still] has a long way to run," and the demand will still be there, albeit reduced.

But it is not just Australia that is feeling the pain.

“Failure of roughly 80 per cent of China’s overseas mining deals has seen the country pull back on resource investments in countries throughout Africa, South America, and the Middle East.”

And China’s push to be more environmentally sustainable, and tackle its massive pollution problem, will potentially hurt coal miners’ bottom lines.

Last month Chinese president Xi Jinping, as part of China’s National People’s Congress, outlined a plan to reduce thermal coal consumption by 160 million tonnes over the next five years.

China’s ongoing pollution and smog issues were the main focus of the NPC, with Xi Jinping stating that the government will be increasing focus on the nation’s environmental standards and regulations.

“We are going to punish, with an iron hand, any violators who destroy ecology or the environment,” Xi stated.

However according to the Minerals Council of Australia (MCA) these new stances are being interpreted incorrectly.

“China’s evolving environmental policies are being confused with a policy shift away from coal,” the MCA stated.

“Coal currently accounts for 80 per cent of China’s electricity output and all leading energy forecasting agencies analysts agree that ongoing industrialisation and urbanisation will drive robust coal demand for decades to come.” 

The International Energy Agency expects that coal will continue to dominate China’s energy mix to 2035, and that “China continues to import substantial amounts of coal, remaining a strong force in global coal markets”.

However this is likely to be further hampered by additional environmentally focused moves, with the country introducing import restrictions on ‘dirty’ coal.

Last year the Chinese Government announced a tightening of the quality of its coal imports.

China’s National Development and Reform Commission issued new proposed guidelines dealing with import restrictions at different coal quality threshold levels.

This move was first telegraphed in 2013, after China’s National Energy Administration drafted regulations to ban the import and domestic delivery of poor quality thermal coal to help curb its rampant pollution levels.

Under the initial drafts the regulations would ban coal with a net calorific value of 4540 kilocalories per kilogram or less, which would favour Australian coal at the expense of our main coal competitor Indonesia.

The government looked to limit the use of imported coal with more than 40 per cent ash and three per cent sulphur in from the start of next year.

Sources close to the matter also told Australian Mining that the quality restrictions were to be brought in for domestic suppliers as well.

On top of the quality thresholds there is also mention of slashing coal imports themselves by around 50 million tonnes over the coming year.

However these tariffs aren’t likely to affect Australian suppliers due to a Free Trade Agreement signed late last year.

Yet despite its slowing growth profile, China is still expected to become the world’s largest economy by 2025, according to Deloitte.

Bringing India under the umbrella of wider Asia, it may be financial salve for many coal miners who are feeling the double sting of lowered prices and lowered demand coupled with a market oversupply.

“Following a rocky year, India’s economy is finally stabilising; growth forecasts are up to 5.5 per cent from 2015, and as much as 6.5 per cent from 2015 through to 2018,” Deloitte stated.

In fact recent growth statistics pegged India as overtaking China for growth in the third and fourth quarters of last year, with the Indian Ministry of Statistics pointing to a growth of 7.5 per cent in GDP for 2014.

Although its GINI coefficient (a World Bank measurement of a nation’s rich-poor gap) has not been improving as rapidly, staying essentially flat.

However, India is still set to be a major consumer of Australia’s energy resources as the country increases the spread of its rapid industrialisation and rising middle class.

The electricity sector in India is the fourth largest in the world, with coal accounting for 60 per cent of its energy generation mix.

Woodside has signed a massive MoU with Adani to supply gas to India, which goes towards addressing this issue, and also demonstrates the ability of Australians to enter the market.

However corruption, and inflation, remain major issues in the nation.

Yet the situation is improving, with the nation improving its transparency year on year, sitting at 85th out of 175 countries, improving from the previous years, although it sits at the same level as Zambia, Burkina Faso, and the Philippines in terms of transparency.

To give a scale, Australia ranks 11th.

Examples of corruption levels diminishing and being addressed are typified by Indian authorities summons for Thiess head Bruce Munro over claims of bribery.

But it is not just these two giants that will play host to Australia’s mining future.

“The growth of other Asian countries cannot be discounted,” Deloitte said, both as a threat and an opportunity for Australian operations.

“Thanks to infrastructure investment, rising domestic demand and structural economic reform both Indonesia and the Philippines are forecast to grow by roughly six per cent annually over the next five years,” Deloitte said.

In regards to Indonesia, the newly elected government has instituted a drift away from the resources nationalism seen under the previous government.

“The nationalism ideals that were used in the 2014 elections are now largely muted and it can be expected that there will be no changes in the laws and regulations regarding foreign investment in the coal industry,” the World Coal Association’s former policy manager Aleks Tomczak said.

“The new administration [under Joko Widodo] has so far focused on economic and infrastructure development. On the energy front, one of the key aspects is a plan for considerable growth in power production based on coal-fired power plants.

“It is believed that domestic demand for coal will continue to grow, particularly in two to three years’ time when more new plants come on line,” to support its predicted increase in industrialisation.

“The new Government has also already relaxed the caps on coal production levels. The increase of mining royalties, as proposed but not implemented in 2014, is still being considered. However, the Government recognises that such increases at the present time may lead to more mine closure with resultant unemployment, and less value flowing to mining communities,” he said.

Malaysia and Thailand too have projected GDP growth rates of 5.1 per cent and 4.9 per cent respectively, according to Deloitte.

“While countries like Myanmar, Laos, and Cambodia are opening their economies to the outside world, heightening their appeal to foreign investors in the process.”

Deloitte went on to forecast growth rates of 6.8 per cent to 7.7 per cent for the three countries over the next five years, which would have the nations trending well above the global average.

Myanmar is seeing growth in its mining potential as a relatively underdeveloped region, while Cambodia most recently appeared on Australia’s radar in terms of a bribery scandal involving BHP, OZ Minerals, and the Cambodian prime minister.

However since that time the political regime has improved, as has its prospectivness, coming 81stout of 122 in the Fraser Institute global survey of mining companies and regions.

The survey also ranked it ahead of China in terms of political stability.

Closer to Australia, Papua New Guinea is setting a number of milestones globally in regards to seabed mining, and according to its prime minister Peter O’Neill likely to be one of the fastest growing economies in the world off the back of its LNG exports.

The country is forward-looking in regards to operating with miners and encouraging social and community focused partnerships with the resources companies and their local communities.

PNG is also trying to lure more resources investment by promising increased political and security stability, as well as reviewing the abandonment of the death penalty as a way to appear more progressive.

The new engine room

Focus will once more turn to Africa.

Speaking at the Sydney Mining Club only a few years ago, Anglo American CEO Mark Cutifani pointed to the diminishing role Australia will play in the global mining landscape compared to its recent role as a pillar of the sector.

Cutifani said this century will see China turn away from Australia and Brazil, and focus on the under developed resources that Africa has to offer.

"Everyone is predicting that this century will be the Asian century, the Chinese century, but to achieve this it will need a steady supply of materials, and this need will be met by Africa.

"I predict that this coming century will not be the Chinese century, but the Chinese/African century," he said.

This is especially the case for West Africa, however much of this hinges on the ongoing stability of these regions.

As Chinese funding and investment pulls out of Australia, what is left of it is now being funnelled to Africa.

“China is expanding its footprint in Africa, recently becoming the continent’s largest trading partner,” Deloitte stated.

Speaking at the Africa Down Under Conference previously, John Welborn, the chief of Equatorial Resources, a junior which runs Badondo and Mayoko-Moussondji projects in the Republic of Congo, said that a major part of the Chinese move is due to the fact that it is looking for alternate supplies of iron ore, even as consumption levels shrink.

He explained that more than 75 per cent of its seaborne iron ore comes from Australia, Brazil, and India, adding that it is suffering from the high costs and low profitability of buying from foreign miners.

This was supported by the Wu Xichun China Iron & Steel Association which stated that "by 2015 China wants to import 50% of its iron ore from Chinese owned mines elsewhere in the world".

Australian Mining has previously reported that "African countries are now in an advantageous position as more mining companies from developing countries like China, India and Brazil, have started to look at the under explored opportunities in a continent whose mining sector was earlier dominated by mining concerns from the developed world, such as the U.S.A., Britain, Europe, and Australia”.

(INFOGRAPHIC: www.visualcapitalist.comVisual Capitalist)

But it isn’t all smooth sailing.

For most, resources nationalism and indigenisation remains a major issue, apart from the ever-present problem of corruption.

Resources nationalism has been consistently ranked as one of the major issues for miners over the last decade, and in Africa this is particularly prevalent.

Australian Mining has previously spoken to Grant Thornton on this issue of rising resources nationalism and indigenisation.

At the time they explained that "increasing and unpredictable government intervention across the globe is adding further complexity to a sector that is already heavily laden with risk”.

"The shadow of higher taxes, restrictive regulation and indigenisation looms large for an industry already grappling with the risks normally associated with exploration and extraction,” the company stated in its report Facing an uncertain future: Government intervention threatens the global mining sector.

Zimbabwe has typified the indigenisation push, after threatening to kick out miners unless they handed majority control of the business to the government, announced plans to up mining fees between 500 and 5000 per cent, and refuse to issue new mining licences to foreign-owned mining companies.

Good governance was another major issue highlighted by Deloitte.

“Many African countries fall short in the areas of good governance and the consistent application of civil and tax laws.”

Burkina Faso and the Central African Republic were singled out by miners, with one stating that the government in Burkina Faso has been “taking leases off companies after exploration success and backdating radical tax increases”, while the CAR has “abusive fees for mining companies”.

The ever present spectre of corruption haunts Africa, and this was showcased by the ongoing Simandou case.

Rio Tinto took Vale and BSG Resources to court after it claimed the two miners bribed the Guinean Government and effectively stole Rio’s Simandou blocks 1 and 2, reportedly the most prospective of the tenement, from under it.

The miner went on to state that Vale and BSRG “entered into a conspiracy to misappropriate Rio Tinto’s Simandou rights” and used a campaign of bribery to do so.

It stated that Vale and BSGR then paid a $200 million bribe to the Guinean minister of mines, Mahmoud Thiam, for his assistance in “unlawfully securing Rio Tinto’s Simandou rights”.

While this is one of the more high profile cases on the continent, it is hardly unsurprising.

“Although mining companies have taken major strides in implementing anti-corruption programs, opaque government bureaucracies in key regions continue to hamper their ability to comply with increasingly stringent global regulations,” Deloitte stated.

Africa also has the unfortunate unique distinction of major health issues.

“The recent Ebola outbreak in West Africa has also injected a rising level of uncertainty into the viability of doing business in the region, at least in the short-term,” Deloitte said.

The deadly disease saw expat miners in Guinea and Sierra Leone pulled from the region as workers’ risk rose.

The African-Australian Mining Industry Group chairman Bill Turner said infectious disease risks in Africa posed unique legal and logistical challenges to Australian companies, and their directors, in providing a safe and healthy workplace.

“A recent briefing note provided by Clayton Utz, tells us that possible contraction by staff of the Ebola virus is a reasonably foreseeable risk for many, although particular circumstances will significantly affect the likelihood of that occurring,” Turner said, in a joint statement with conference convenor Bill Repard.

“Even where the risk may be remote for a particular operation, the consequences are almost always catastrophic.

“The briefing note points to the fact that Australian mining industry companies in Africa must carefully assess whether they require, and have in place, appropriate preventative and risk management measures tailored to address the particular risks to their workforce posed by the work environment and disease(s) concerns.

According to Clayton Utz, there is also risk of substantial penalties to apply to Australian companies and directors who fail to adequately assess the risks and take appropriate precautions.

Where failure to act on disease outbreak involved a risk of death, as with Ebola, maximum penalties were up to $600,000 for individuals and $3 million for companies, with up to five years imprisonment in more extreme cases.

A double blow for operators.

But not all countries can be tarred with the same brush of instability and anti-mining sentiment.

According to Deloitte: “Many countries in Africa have been working to attract mining investment.”

“In an effort to meet mounting demands for improved roads, railways, ports, electricity, and communications, countries across the continent are engaged in more than 330 new infrastructure construction projects, valued at approximately US$223 billion.”

West Africa, sometimes dubbed the New Pilbara, also presents a major opportunity, with increased infrastructure only aiding the already high mineral prospectivity of the area.

Some majors have already begun operations in the region, with Rio Tinto running the controversial and legally tied Simandou mine in Guinea, Vale in Liberia and Guinea, Arcelormittal and BHP Billiton in Guinea at the Nimba project, as well as BHP's interest in a mineral development agreement with the Liberian government and Xstrata carrying out feasibility studies at its El Aouj, Askaf, and Lebtheinia iron ore projects in Mauritania.

According to Vale the iron ore projects in Guinea are considered to be "one of the best underdeveloped iron ore deposits in the world in terms of size and quality".

On the other side of the continent Botswana has been recognised as very receptive to mining, and scored in the top ten in Fraser Survey for potential, only two spots behind Western Australia.

The Ivory Coast was lauded by one miner in the survey for its “strong efforts to re-launch mining exploration investment”

However with a continent so wide and varied, holding so many different countries as Africa does, it is difficult to paint a single picture for the nature of its general receptiveness towards mining as a whole, especially as much of the wealth does not transition to the wider economy in many cases.

South of the border

Much like Africa, the South American continent has a varied risk level when it comes to resources, changing from country to country.

While some such as Chile have been historically stable and welcoming of resources, basing much of their economy on it, others such as Venezuela and those in the Latin American region are less stable politically and economically.

Environmental concerns have been a major aspect of mining code development in countries such as Chile, with one miner stating in the Fraser Survey that “the environmental process is risk-based, using existing legislation…. [it’s a] very good framework”.

The creation of new mining regulations and taxes across the region is also raising concern, due to poor bureaucracy and avenues for informing mining companies, putting them at risk of ‘surprise’ taxes.

However there is a push for innovation in the region, yet much like Australia there is rising concern over sustainability.

CSIRO Minerals Down Under Flagship director Jonathon Law said “Latin America and Australia are natural partners around innovation in the mining industry”.

Law said that there are a number of issues frequently discussed at conferences, such as energy, water, human capital, declining productivity, community engagement, growing pressure on environmental sustainability, the need for economies to be resilient to changes in one specific sector, and new project opportunities.

“What’s not mentioned so often is the great impact that those issues have way beyond any single part of the business,” he said.

“It’s not enough to be economic, you have to bear in mind the geopolitical and social environment, and the environment itself in terms of national policy.

“In Chile, parts of these issues are largely driven by industry, and parts driven by national policy.”

Law said that energy costs around the world are growing, and in Chile the cost of electricity has substantially grown, about 53 per cent over the last five years, more than two thirds the cost of electricity in Canada.

“Other South American countries have lower costs, but they’re not necessarily sustainable in the longer term.”

Water demand for the mining industry in Chile is likely to double by 2020, thanks to focus on floatation for porphyry copper, the main commodity in Chile, which may put the mining industry on a conflict path with other potential water uses.

Law also said that Chile has a higher cost of human capital than other developing nations, thanks to a faster level of economic change.

There are also a number of positive and negative community impacts on the mining industry in Chile, similar to Australia.

“There are some quite surprising negative issues to do with the development of the mining industry, like overcrowding and drug use, which seem to be specific issues in mining districts in Chile,” Law said.

“However each country has its own culture and flavour that underpins the way the people look at our industry, and I think that’s an important opportunity.

Resource nationalism, in a similar vein to Africa, also presents a problem.

Venezuela, Bolivia, and Argentina have all nationalised resources companies in their country, while Ecuador has threatened to do so.

And similar to Africa, productivity levels at these operations also dropped soon after nationalisation.

Overall however, the region has improved in prospectiveness, but future political stability can not be ensured.

For Australian companies, there are opportunities, but these must be weighed up against national political or economic instability.

“These South American countries are looking for miners that interact with the local communities,” the trade commissioner at the Australian embassy in Peru, Dan Sullivan, told Australian Mining.

“People in Latin America are used to dealing with North Americans, so they typically find dealing with Australians a ‘refreshing change’ in terms of attitude, as they tend to not come with the same preconceptions of working in South America as other might.”

However this ‘refreshing change’ is unlikely to happen if the old perception of Latin America itself is not changed in Australia, from a series of unstable countries and governments to a region full of opportunity.

Not quite east, not quite west

While Australian miners are not heavily involved in Europe, there are emerging opportunities in the Commonwealth of Independent States region, or ‘the Stans’.

There has been a steady of stream of activity in terms of mining in Russia, with Australian operators opening offices in the country to take advantage of low entry costs and a market crying out for technology, and which is less regulated by the government.

However there is the potential that the country will bar further ‘foreign incursions’ in terms of actual mine operators, and is building upon its own strong traditions in mining to dig itself out of the current mining down turn.

Recently the nation opened a new 167 year life coal mine, as well as two new coal ports, signalling an intention to ignore the current oversupply problem facing the coal market.

Russia’s increasing ties with China, as it attempts to position itself as a closer and cheaper supplier of energy and move away from Europe, also creates a potential threat for Australian exports as the country looks to quadruple its coal output levels by 2030, dwarfing Australian production.

Unsurprisingly uncertainty is rising in Russia, but nations like Kazakhstan have demonstrated how nations can actively encourage investment and aid the growth of mining.

The nation has instituted a raft of new mining laws, allocated close to US$1 billion to aid exploration, and looked to develop mining codes similar to those found in Australia and Canada.

Other nations such as Krygzstan have attracted attention, though not all positive, with one Australian miner – Manas Resources – seeing its office attacked by nationalists, showcasing a growing state of unrest in the country and potential further political instability, highlighted by the dissolvement of the government mid-last year.

Navigating troubled waters

While mining companies cannot control political movements, and would not seek to dictate them, the operations can develop response strategies to navigate the issues.

“Executives do not set national policy, but they can help to [positively] influence them,” Deloitte stated, “in regions where civil and tax laws shift regularly, companies can work to build closer relationships with representatives at all levels of government in an effort to foster an environment that support consistent application of the laws”.

“For their part, governments eager to attract mining investment should aim to articulate clear policies and introduce incentives designed to welcome foreign investment.”

For the miners themselves, “they will need to step up their forecasting, scenario planning, and risk management capabilities if they hope to navigate the volatility augured in years to come”.

These steps include increasing the spread of ERM, which “should extend beyond the development of a risk management framework and methodology”.

In line with Rio Tinto’s push into Big Data through the opening of its new Analytics Excellence Centre, Deloitte recommend that miners integrate multiple management systems, and apply quantitative techniques to evaluate, measure, and monitor their operations, and associated risk.

“Using predictive analytics [such as those being developed by Rio Tinto], companies can improve decision making,” Deloitte said.

“Rapid geopolitical and regulatory shifts are difficult to predict, but they can still be planned for; with sound scenario planning methodologies mining companies can identify a wide set of divergent but plausible futures and devise strategies to respond to each scenario.”

The path is clear: be mindful of risk, plan ahead, and work with local communities and governments to ensure that operating overseas is as straightforward as possible.

This article was originally published by Australian Mining and is re-published here with permission.

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