Resource nationalism: A very real risk for miners

Latin America’s mining industry is facing rising risks of resource nationalism, with the sector becoming a promising target for governments looking to fill financial holes created by the COVID-19 pandemic, Coeur Mining CEO Mitch Krebs tells BNamericas.

But authorities must tread a fine balance in their quest for cash to avoid undermining investment in operations and benefits for local communities, he adds.

Many key Latin American mining jurisdictions have seen a sustained negative shift in resource nationalism risk, according to London-based consultancy Verisk Maplecroft’s resource nationalism index, which monitors measures including tax and royalty hikes, demands for locally produced goods and services, along with direct expropriation of assets.

Mexico – where US-based Coeur’s largest silver-gold mine, Palmarejo, is located – has seen the sharpest spike in risk across the 198-nation index, dropping from a low-risk country in 2017 to the third-highest globally behind Venezuela and Tanzania.

“With resource nationalism, in a way it depends how you define it. If it’s an actual expropriation or taking of an asset, maybe it’s not so much of a challenge, although you see what’s going on in Peru, I guess it is more of a challenge, although it’s country-specific,” Krebs says.

“If you define resource nationalism as the risk of higher taxes, that’s very real.”

COVID-19 STRAINS

The upward risk trend has been accelerated by COVID-19, which has placed huge additional strains on economies globally.

“Everybody is dealing with budget deficits or bigger deficits than they had, based on the last year and a half,” Krebs tells BNamericas.

“Whether that’s at the state, local or federal level, governments are looking for ways to fill those holes, and mining and precious metals, gold, have done relative to a lot of industries, pretty well, so there is a bit of a bull’s eye on the industry’s back for some of those jurisdictions.

“That’s a definite challenge and something we’re working through at the local, state, federal level, everywhere.”

While mines in jurisdictions including Mexico and Peru were suspended early in the pandemic, assets across the region are back in operation, albeit under new COVID-19 health protocols and in some cases restrictions on the movement of people.

Profits in the sector have also been boosted by higher prices of gold and silver and many industrial metals, such as copper.

REGIONAL PICTURE

Across Latin America, the nature of the resource nationalism risk varies from country to country.

In Mexico, the rising risk has been driven by President Andrés Manuel López Obrador’s (AMLO) nationalistic policies in the energy sector, including a rollback of previous reforms and federal infringement on the independence of regulatory bodies.

This is likely to expand into mining in the second half of AMLO’s six-year term, according to Verisk Maplecroft, as signaled by a proposal – now stalled – to nationalize the emerging lithium mining industry.

But any overt resource nationalistic step could bring negative consequences.

“Mexico depends heavily on foreign investment, not only in mining but also in other key sectors of the Mexican economy,” John McCluskey, CEO of Toronto-based Alamos Gold, which has the Mulatos gold mine in Mexico, tells BNamericas.

“To discuss this subject [resource nationalism] at the congressional level would send a very negative signal to international investors that could be damaging to the Mexican economy.”

In Argentina, rising resource nationalism risk stems from President Alberto Fernández’s intervention across multiple sectors, including the nationalization of assets and economic measures such as price caps and higher tariffs.

Brazil’s rise in risk reflects regular interventions by President Jair Bolsonaro’s administration in the energy sector, while divisive elections and constitutional reform in Chile and Peru are likely to have significant repercussions on mining, according to Verisk Maplecroft.

COMMUNITY CONFLICT

Whatever the driver, local communities are one of the potential losers from the regional resource nationalism surge.

“Communities are seeking more from mining companies, which isn’t necessarily a bad thing,” Krebs says.

“We are mutually dependent on each other in so many ways. Communities and mining operations typically are in rural, remote parts of the world.

“There is a lot of interdependency. There is give and take, and sometimes one party is seeking more than the other.

“Governments asking for more, that’s tough, because when they do that they’re trying to change the rules in the middle of the game.

“It takes more away from the operation, which could be allocated to some of those community asks. That’s the fine balance.”