A spiralling road cuts deeper and deeper into the face of the Kalahari Desert and along it trundles a big, bright-yellow truck. After it has descended to a depth of two Eiffel Towers, the truck pulls to a halt alongside a giant earth scooper. Desert rock is dumped unceremoniously into the back of the truck and it pulls away, beginning its long journey back to the surface.
The Jwaneng Mine in Botswana is the richest diamond mine in the world. In a 50-50 partnership with De Beers, the Botswanan government has chipped away at the precious seams for more than 40 years. And out of the desert rock come 10.6 million carats of diamonds every year.
The mine, one of the world’s “super-pits”, supports a local hospital, an airport and 4,000 jobs. It accounts for almost a third of Botswana’s gross domestic product. It has been hailed as one of the great tales of public-private partnership. For many governments and mining companies, it is a fairy tale.
But even this apparently happy relationship has been strained. In 2011, the government forced De Beers to move its diamond sorting operation from London to Botswana.
Such “resource nationalism” – protectionist moves by governments to exert greater control over their natural resources – is perhaps understandable. The resources are on their land and they are under a duty to exploit them as best they can for the benefit of their people.
The vast majority of resource-rich countries in the developing world have become increasingly keen to protect their deposits
The vast majority of resource-rich countries in the developing world have become increasingly keen to protect their deposits. Consultants Ernst & Young rank resource nationalism as the number-one risk for mining companies in 2013 – up from eighth place in 2009, when a skills shortage, industry consolidation and infrastructure access were the top concerns.
Five countries are perhaps keener than most to protect their resources, says Lee Downham, global lead in mining transactions at Ernst & Young: South Africa, Guinea, Indonesia, Mongolia and Zimbabwe.
In 2011, the Zimbabwean government increased the price of a diamond mining licence from $1 million to $5 million and a platinum mining licence from $200 to $500,000. In Mongolia, the government is trying to pass laws that give the state a free stake in many mineral projects and allow it to specify output targets. Miners would, in other words, be forced to maintain output in the face of falling demand.
The South African government recently signed off plans to impose export taxes on iron ore and steel, in a bid to force producers to sell locally. The country’s Trade and Industry Ministry also wants to impose export taxes on other minerals, to encourage domestic processing.
Although these moves might be well-intentioned, such blunt intervention may not serve the greater good. “When countries face economic problems during a period when global mineral prices rise, certain governments focus on mining companies as a means to counter a shortfall of tax revenue,” says Stephen Ralbovsky, head of global mining tax at PwC.
With globalisation, it is becoming more and more difficult for governments to exert control over resources. If a country moves to extract more money from mining – by bumping up the price of a mining licence, by imposing new export taxes or by demanding that miners refine their raw materials in the host country – it could restrict the profit margins of mining companies to such a degree that they turn their heads towards more welcoming jurisdictions.
“Ultimately, capital is mobile,” says Mr Downham. “While mines can’t be moved, the capital held by mining companies can. So when mining companies need to make a decision about where to spend their money, they’re less likely to risk it in countries where the business climate is harsh or ever-changing.”
Mining companies want access to the resources that governments seek to protect, and governments need the expertise and free capital offered by mining companies. According to industry estimates, just 1 per cent of exploration targets are developed into working mines and the total capital outlay on a super-mine can be up to $10 billion.
Companies must share the benefits of exploitation with those around them: creating jobs for locals, tying local companies into their vast supply chains, supporting local entrepreneurship, and investing in public services and infrastructure. To this extent, Anglo American has developed what it calls a “socio-economic toolbox” – a guide on how to interact with and help develop local communities in host countries.
Governments, meanwhile, must realise that increasing state control of mining brings increased risk to state finances: mines can collapse, coal seams can run out and resource prices can plummet. The key, therefore, is striking the right balance.
