As governments around the world pursue revised mining tax policies and more aggressive enforcement, investors must prepare for an active period of resource nationalism.

Analysts are predicting the onset of a new commodities super-cycle, fueled by the economic recovery and the energy transition narrative. The mining and metallurgical industry could face a new period of intense resource nationalism.

Faced with yawning budget deficits in the wake of the COVID-19 pandemic and fueled by soaring commodity prices, resource-rich countries are bound to demand more from investors in the sector. In fact, 2021 has already seen a wave of proposed and actual tax measures, with governments around the world pursuing revised mining tax policies and more aggressive enforcement.

Countries around the world are imposing new tax requirements on mining investors

The factors supporting this trend show no signs of abating in the near term. For governments, the challenge will be to develop a sustainable tax regime that will help raise incomes when prices are high without discouraging investment in the sector, investors, for their part, must prepare for an active period of resource nationalism. .

View the full image: Chilean Gross Debt Relative to the Price of Copper, 2015 – 2021 (PDF)

82%

In Chile, investors could face an 82% tax burden in royalties and taxes under the sales bill exceeding 12,000 tonnes per year of copper and 50,000 tonnes per year of lithium, compared to 40.3% .

A predictable trend

The current trend is the result of the conjunction of two powerful factors.

The first factor is the rise in commodity prices. Compared to most sectors, the mining industry has weathered the global economic downturn well. The prices of raw materials, especially copper, iron ore, silver and gold, have either remained high or have risen dramatically.

The recession caused by the pandemic has pushed gold prices to new highs, although the market has since softened. Industrial metals were supported by government stimulus, deficit and infrastructure spending. Importantly, the push for green power and electrification has seen copper prices hit their highest levels in years, while demand for battery metals such as nickel, lithium and cobalt has increased.

The second powerful factor supporting the current trend is the fiscal crisis that many countries are facing. While governments typically respond to rising commodity prices with higher taxes, the case for higher taxes is now more pressing as governments around the world have abandoned fiscal prudence and spent freely to support their savings.

The result is predictable. With the prices of certain commodities being cyclically high, cash-strapped governments are bound to demand, one way or another, for a larger share of mineral wealth. The signs of an emerging wave of resource nationalism are already clear.

The challenge will be to develop sustainable tax policies that can evolve with the commodity cycle, broaden the tax base with new projects and provide the certainty the industry needs.

Collect copper

Latin American copper-producing countries are at the forefront of this trend. On May 6, 2021, Chile’s Chamber of Deputies, the lower house of Congress, passed a bill to introduce a new royalty on sales of copper and lithium.

Chile currently taxes most mining operations on a lump sum basis, under agreements set to expire in 2023. The new bill proposes a base royalty rate of 3%. For copper, a windfall profit tax would start at marginal rates of 15% of sales priced at US $ 2-2.5 per pound, reaching 75% of additional revenue on sales over US $ 4 per pound. .

It is estimated that investors would face an 82% tax burden in royalties and taxes under the sales bill exceeding 12,000 tonnes per year of copper and 50,000 tonnes per year of lithium, up from 40.3%.

According to the president of the industrial body Sonami, Diego Hernández, the new legislation would force 12 of the 15 largest miners in Chile to operate at a loss. While the bill has yet to be approved in the Senate, some companies already appear to be reassessing their investment decisions.

For example, Lundin Mining, which operates one of Chile’s largest copper mines, is said to be reconsidering its US $ 600 million expansion plans of its Candelaria mining complex in favor of a project in Argentina. .

Chilean developments have been picked up by other governments in the region. In June 2021, Peruvians elected the leader of the left-wing Peru Libre, Pedro Castillo, as president. As a candidate, Castillo approved plans to increase taxes on mining profits, taking inspiration from Chile. Although Castillo has said he has no plans to nationalize mining projects, he has made it clear he will seek to tax mining profits to fund social spending.

Some in the industry are hoping the new government will moderate its positions in power, but the global trend towards more aggressive tax policies calls for caution.

0.75%
The U.S. state of Nevada has approved a proposal to add a 0.75% excise tax on gold and silver miners reporting gross income between $ 20 million and $ 150 million.

A series of regulatory reforms

The trend is not limited to Latin America. From Burkina Faso to Zambia and Mongolia to the Philippines, countries in Africa and Asia-Pacific are imposing new tax requirements on investors in the mining sector. These have come in the form of proposals for profit and income taxes, higher excise taxes and higher royalty rates, or simply more aggressive enforcement.

On May 13, 2021, the Malagasy Minister of Mines, Fidiniavo Ravokatra, renewed his efforts to overhaul the country’s mining code. The main proposed provisions include an increase in royalties – from 2% to 4% for base metals, gold and silver, and up to 8% for rough gemstones and rough semi-precious stones – and the allocation of 20% of mining production to the State.

While the industry has clearly opposed the move and the Presidency has opposed it previously, the divergence between commodity prices and tax revenues is fueling the case for reform.

Many measures have been adopted at the local level. In Brazil, as the federal government plans to increase taxes on the mining sector, in April 2021, the northern state of Pará instituted an increase in tariffs on iron ore production. , copper, manganese and nickel.

The trend is not limited to emerging markets. On June 1, 2021, the U.S. state of Nevada approved a proposal to add a 0.75% excise tax on gold and silver miners reporting gross income between $ 20 million and $ 150 million. US, and a 1.1% tax on those with more gross income.

In many jurisdictions, investors also face increased enforcement of existing tax laws. In May 2021, the Democratic Republic of the Congo announced that it would crack down on companies it said paid incorrect tax amounts, requiring very significant adjustments.

Meanwhile, Kyrgyzstan’s state tax department re-launched tax claims it had previously overturned against Centerra Gold for the period 2011 to 2017. A few weeks later, Kyrgyzstan took over the flagship gold mine of Centerra, Kumtor. Elsewhere, copper producer First Quantum Minerals is involved in international arbitration proceedings with Zambia and Mauritania over disputed royalties and taxes.

View full image: At a Glance: Global Mining and Metals Tax Changes (PDF)

4%
Madagascar proposed new provisions in the country’s mining code, including an increase in royalties from two to four percent for base metals, gold and silver.

A nice balance

Whether the legislative measures currently under consideration in Chile and elsewhere are finally adopted, the direction of the journey is clear. The increased tax burden on mining projects is bound to materialize in one form or another, whether through new taxes or the aggressive application of existing ones.

While high commodity prices may initially cushion the impact on projects, governments must strike the right balance between increasing incomes without stifling investment. The challenge will be to develop sustainable tax policies that can evolve with the commodity cycle, broaden the tax base with new projects, and provide the certainty the industry needs.

Sadly, there is a distinct possibility that, just like in previous cycles, some governments fall prey to nationalist and overbroad policies, threatening the project economy and future investments.

In this environment, mining investors would be well advised to assess their positions. In particular, investors should carefully assess the contractual arrangements under which projects are executed.

Fiscal stability agreements will prove invaluable. These agreements are generally enforceable through local courts or international arbitration and are also a useful lever in negotiations with tax authorities.

In the current context, projects benefiting from stability agreements are more attractive. Promoters of new projects should focus on securing stability agreements, and operators of existing projects that benefit from such agreements should be extremely careful not to let them expire.

Beyond contractual protections, investors should also reassess project holding structures to ensure the best investment treaty coverage available for their foreign assets. Investment treaties offer broad protections to foreign investors, but not all treaties are created equal.

For example, some treaties provide for tax measures, leaving investors with limited protection in the face of growing tax pressure. Sophisticated investors are increasingly planning their investment structures to benefit from the optimal protections of investment treaties. Many treaties do not include substantive requirements, allowing investors to acquire protections by simply adding special purpose vehicles to their holding structures.

Although “treaty planning” is generally permitted, it must normally take place before adverse action is adopted by host governments. With the signs of a new wave of resource nationalism already here, now is the time for investors to make sure their homes are in order.

Taha Wiheba (White & Case, Law Clerk, New York) contributed to the development of this publication.

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