TORONTO (miningweekly.com) – The increasing spectre of resource nationalism has again been flagged as the number-one risk facing mining companies, this time by Ernst & Young.

In its yearly report, 'Business risks facing mining and metals 2011-2012', the company said governments trying to secure a bigger piece of the pie had toppled capital allocation as the biggest threat to resource firms, with the skills shortage keeping its number-two position.

The tax consultancy said that, over the past year and a half, around 25 countries had hiked or announced plans to increase their tax and royalty regimes for the mining sector, citing the examples of South Africa, Ghana and Australia.

Companies have also bumped heads with the Zimbabwean government over the past few weeks as it seeks to force them to sell a 51% in their operations to locals, while Guinea shocked investors on September 9 in unveiling a plan to give the government a 35% ownership of mining operations in the West African country.

“What originally began as a way for mineral-rich countries to repair and replace lost revenue from the downturn has become a way for governments to manage the effects of a two-speed economy,” Ernst & Young Canada national mining and metals practice leader Tom Whelan said in a release accompanying the report.

The report was first published in August, but Whelan commented on it on Tuesday.

Resource nationalism was the fourth-biggest risk in the tax consultancy’s report last year.

Melbourne-based law firm Gilbert Tobin said earlier this month that other countries looking at options of nationalisition included China, India, Australia, Canada, the US, Brazil, Peru and Chile.

While the threat of nationalisation has been seen as the biggest risk to miners for at least a year, Ernst & Young’s latest report highlighted some new threats that had appeared.

These included capital project execution, interruptions to supply, and fraud and corruption.

“As the global economy has continued to recover, a large number of new mining projects, expansions and restarts have been virtually simultaneously announced,” the company explained in the report.

Capital escalation and shortages of input materials were causing problems for miners developing new projects, with capital costs increasing by over $2-billion in some cases.

Interruption to supply joins Ernst & Young’s list mainly as a result of the spate of natural and environmental disasters that have taken place over the past year.

Fraud emerged as the number-ten risk after companies started venturing into riskier destinations in 2010 and into 2011, and governments introduced new fraud and corruption regulations.

The places Ernst & Young sees as “riskier” includes West Africa, South America, and Asia — specifically Papua New Guinea and Mongolia.

Ernst & Young's 2011 top strategic business risks in the mining and metals sector:

1. Resource nationalism
2. Skills shortage
3. Infrastructure access
4. Social licence to operate
5. Capital project execution
6. Price and currency volatility
7. Capital allocation
8. Cost management
9. Interruptions to supply
10. Fraud and corruption

 

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