Global Mining Regulatory Outlook: Diverging Trends

BMI View: Global mining regulation is set for divergent trends on a country-by-country basis as governments face difficult questions over how best to regulate their mining sectors in a post commodity price boom era. Mineral prices have passed their zenith and as Chinese economic growth will continue to slow, the governments of mineral exporting countries will receive reduced tax and royalty revenues. We expect regulatory outperformers and underperformers to be spread evenly throughout the globe as we forecast an attractive regulatory environment to take hold in countries including Malaysia, Saudi Arabia, Angola and Ecuador; while we expect increasing challenges for mining sector investors in countries including Mexico, Tanzania, Kazakhstan and India.

Of the 58 countries we cover for mining across the globe, 14 scored ' Positive' for their 12 Month Regulatory Outlook, 16 scored ' Negative' and the remaining 28 scored ' Neutral'. Reasons for a positive score included improved licensing and permitting arrangements, reduced bureaucracy, greater openness to foreign investment and tax breaks for mining companies. The reasons behind a deteriorating outlook were more diverse, including increasingly stringent environmental law, tax hikes, greater beneficiation requirements, complex bureaucracy, licensing bans and governments taking larger stakes in mines.

Improving Regulatory Environment: Key Themes

Losing Shine
Gold Prices & % Growth

BMI View: Global mining regulation is set for divergent trends on a country-by-country basis as governments face difficult questions over how best to regulate their mining sectors in a post commodity price boom era. Mineral prices have passed their zenith and as Chinese economic growth will continue to slow, the governments of mineral exporting countries will receive reduced tax and royalty revenues. We expect regulatory outperformers and underperformers to be spread evenly throughout the globe as we forecast an attractive regulatory environment to take hold in countries including Malaysia, Saudi Arabia, Angola and Ecuador; while we expect increasing challenges for mining sector investors in countries including Mexico, Tanzania, Kazakhstan and India.

Of the 58 countries we cover for mining across the globe, 14 scored ' Positive' for their 12 Month Regulatory Outlook, 16 scored ' Negative' and the remaining 28 scored ' Neutral'. Reasons for a positive score included improved licensing and permitting arrangements, reduced bureaucracy, greater openness to foreign investment and tax breaks for mining companies. The reasons behind a deteriorating outlook were more diverse, including increasingly stringent environmental law, tax hikes, greater beneficiation requirements, complex bureaucracy, licensing bans and governments taking larger stakes in mines.

Global - Positive Mining Regulatory Outlook
Region Country 12 Month Outlook Rating Comment
Africa Botswana Positive 82 The government cut taxes in 2012 and maintains a pro-business approach to mining taxation. Plans are underway to enhance the minerals legislative framework to attract non-diamond miners into the sector.
Asia Australia Positive 75 Well-defined regulatory framework despite imposition of MRRT and carbon taxes. The mining tax, at this stage, affects only iron ore and coal. And companies need to make a profit of at least $75 million before that tax kicks in.
Asia Malaysia Positive 70 Government adopted a range of initiatives to entice investors away from Indonesia. These include the provision of 100% foreign ownership, tax holidays, centralised licence granting, low levies and no import duties.
MENA Saudi Arabia Positive 65 The government is looking to open up its mining sector to foreign investors.
MENA Turkey Positive 65 Relatively low tax burden and attractive investment tax credits.
Asia Vietnam Positive 65 New mining law enacted in July 2011. The law took a tougher stance on illegal mining, provides for longer exploration licenses and a subsequent priority right in mining licenses
Africa Angola Positive 62 In Q113 the Angolan government announced a reduction in mine taxes to 25% to attract more investment into the sector.
Africa Mozambique Positive 61 A new mining code, set to be implemented in the near future, promises to streamline licencing procedures and minimize bureaucracy. However the exact date of implementation remains unclear.
Asia Myanmar Positive 60 Foreign companies would be able to own 100% of mining assets, take leases of up to 50 years and enjoy tax holidays during the first five years of operation.
Europe Russia Positive 60 Legislative amendments hint at an improving outlook for foreign investment and participation in the mining sector.
Americas Ecuador Positive 55 New mining law designed to attract investment by reducing permitting time and bureaucracy.
MENA Iraq Positive 53 The semi-autonomous Kurdish region in Iraq is looking to reduce regulation and taxation to attract investment. The rest of the country remains off-limits to mining companies due to the dire security situation.
Americas Colombia Positive 50 Reversion to previous mining code. This will come as a relief for miners, however the government will have to deal with the problem of illegal mining.
Americas Honduras Positive 40 New mining law implemented in Q113 to attract investment. However this has sparked unrest among environmental groups and local populations due to fears over open-pit mining.
Source: BMI

Improving Regulatory Environment: Key Themes

Tax Breaks

Topping our regulatory table, Botswana and Australia both maintain an attractive regulatory environment, reflected by their high rating scores, and have a positive regulatory outlook for the coming year. Botswana's government is providing tax incentives for investment into the non-diamond segments of the mining sector in an effort to diversify away from diamond dependency. Similarly in Malaysia, in order to compete with Indonesia, low levies and tax holidays are likely to be key features of regulatory development over the coming year. In a similar vein, Turkey is adding investment tax credits to its already relatively low taxation scheme. Angola also falls into this group as the government announced a reduction in mine taxes to 25% in Q113, significantly boosting the outlook for investment into the sector.

Losing Shine
Gold Prices & % Growth

Minimizing Bureaucracy

Cutting licensing times and reducing bureaucracy will be key features of regulatory development for Ecuador, Iraq, Mozambique, Colombia and Malaysia. Mozambique is developing a new mining code which promises to streamline the cumbersome process of setting up mining operations in the country. Ecuador's new mining law implemented this year has been designed to reduce permitting times. A centralised process for licence granting will be a new feature for both Colombia and Malaysia, which will iron out bureaucratic inefficiencies in local licence granting. In Colombia particularly, increased use of technology and database enhancements look set to reduce bureaucracy significantly.

Opening Up To Foreign Investment

Saudi Arabia, Russia, Myanmar and Iraq owe their positive regulatory outlooks largely to increased openness to foreign investment in their mining sectors. As part of a broader move to open up the economy, we expect Saudi Arabia's mining sector to become more accessible to foreign companies as the government is keen to diversify the economy away from dependency on oil exports. In the relatively stable region of northern Iraq the Kurdistan Regional Government is keen to attract FDI to develop the economy. However it is important to note that the rest of Iraq remains off-limits to mining companies due to the security situation.

Russia has perhaps surprisingly gained a ' Positive' regulatory outlook for the next 12 months. Russia strictly limits foreign participation in mining as the state considers mineral resources to be of strategic national importance. That said, recent legislative developments highlight a relaxation of this policy as Russia aims to attract much-needed investment into the sector. Both Federal law No.160-FZ On Foreign Investments in the Russian Federation (July 9, 1999); and Federal law No.57-FZ On the Procedure for Foreign Investment in Companies which are of Strategic Importance for National Defence and State Security (April 29, 2008) have been modified in recent years to allow acquisition of shares in strategic companies to be no longer subject to government approval.

Global - Negative Mining Regulatory Outlook
Region Country 12 Month Outlook Rating Comment
Americas Canada Negative 75 Quebec is seeking to raise mining taxes, though the national government remains favourably disposed to mining development. Permitting times can be quite long.
Europe Czech Negative 70 Bill under discussion to amend the Mining Act to better compensate citizens living in the vicinity of coal mines.
Americas Mexico Negative 65 Proposed tax hike to 7.5% on mining earnings.
Europe Kazakhstan Negative 60 Stricter environmental regulation ahead.
Americas Brazil Negative 60 Government has proposed royalty hike to 4% and new concession-granting system.
Africa Namibia Negative 53 The government scrapped plans for a tax hike to 44% but the mining sector remains a key target for government revenue.
Africa Zambia Negative 52 In Q413 the government announced a 10% export duty on semi-processed base metals.
Africa Tanzania Negative 49 The government is pushing for greater local ownership of mining projects.
Americas Argentina Negative 45 Capital controls, high inflation, and local content requirements make operational environment very difficult.
Africa Congo, Dem Rep Negative 42 Higher taxes on copper and cobalt concentrates. Ongoing uncertainty due to the government's history of cancelling licences with little notice.
Asia China Negative 40 A wave of increased mining taxes imposed over the past year in a bid to curb environmental pollution and conserve resources for long-term use.
Asia India Negative 35 Complex bureaucracy, frequent land and environmental disputes, prevalent corruption, ongoing ban on iron ore mining in Goa and Karnataka.
Asia Indonesia Negative 30 20% export taxes imposed on 64 minerals ahead of export ban in 2014. Foreign investors required to divest at least 20% and 51% of their stakes in mining companies by the fifth and tenth year, respectively.
Africa Zimbabwe Negative 30 The government threatens to seize assets without compensation if miners do not comply with indigenisation policy.
Asia Laos Negative 25 Government banned all new applications on mining investment until 2015, in a bid to diversify the economy away from the resources sector.
Americas Guatemala Negative 25 Goverment has proposed a two-year moratorium on new mining licences to calm unrest among indigenous groups opposed to the industry.
Source: BMI

Deteriorating Regulatory Environment: Key Themes

Tax Hikes & Rising Royalties

Increased tax burden accounts for a number of countries finding themselves with a ' Negative' regulatory outlook for the next 12 months. The governments of Quebec, Mexico and Brazil have lead the way in hiking taxes or raising royalties on their mining sectors. Although the Canadian government remains favourably disposed towards mining, the proposals for mining tax increases in Quebec account for its negative 12 month outlook score. Mexico's proposed tax hike to 7.5% was met with arguably the greatest backlash of all regulatory developments, with major producers including Goldcorp and Grupo Mexico threatening to leave the country altogether. Brazil's royalty hike to 4% was met acquiescence as miners had feared an even worse outcome.

Weaker Chinese Demand Story
Iron Ore Prices & % Growth

Greater Beneficiation

Government requirements for greater beneficiation of extracted minerals is a development we expect to see play out mainly in specific African and Asian countries. Zambia's regulatory environment is currently in turmoil with the government announcing in Q413, the abolition of the 10% export duty on unprocessed metals. However, shortly after this announcement the move was repealed by the President and replaced with a 10% export duty on semi-processed base metals. We expect shifts in regulation such as this to make investors increasingly cautious as uncertainty prevails. Moreover, Zambia's chamber of mines said the new export duty would substantially raise costs for miners thus threatening investment at a time of weakening copper prices.

Democratic Republic of Congo also falls into this category as the country recently implemented higher taxes on copper and cobalt concentrates. Greater beneficiation of cobalt is seen as crucial in pushing exports up the value chain and solving local unemployment problems. Finally, the Indonesian government's drive for greater beneficiation will continue to limit exports of raw minerals, notably affecting the global tin market.

Boom Era Over
Copper Prices & % Growth

Environmental & Social Impact Law

We expect environmental and social impact legislation to gain traction in particular countries over coming years, which accounts for the negative scores attributed to Kazakhstan and the Czech Republic. The Czech government has debated proposals to better compensate those who live in the vicinity of coal mines. The burden of this compensation is likely to be passed onto miners themselves. Greater social impact assessments will be a particularly European regulatory trend. Although Sweden gains a 'neutral' score, we expect social impact issues to climb higher on the Swedish government's agenda due to rising public pressure.

In Kazakhstan, popular concern about environmental degradation will lead to tighter regulation over the coming year. As Kazakhstan's mining sector expands and new territory is explored, greater regulation will be necessary as the government is keen to prevent harm to the environment. We also expect China to enact more stringent environmental legislation affecting miners over coming quarters as water and soil pollution pose a serious threat.

Difficult Decisions
12 Month Regulatory Outlooks By Category

Greater Government & Local Ownership

Tanzania, Zimbabwe and Indonesia gain a ' Negative' outlook rating on the back of increasing local and government stakes in mines. The Tanzanian government is keen to encourage greater local ownership of projects and for miners to list on the local stock exchange, while the situation in Zimbabwe and Indonesia is much more severe. Under Zimbabwean law, mining companies are likely to be requested to cede 51% of operations to local ownership. In Indonesia foreign investors are required to divest at least 20% and 51% of their stakes in mining companies by the fifth and tenth year, respectively. In extreme cases governments will potentially revoke mining licences with little notice such as in the Democratic Republic of Congo, or grab land with no compensation as has been threatened in Zimbabwe.

Licensing Moratorium

Sitting at the bottom of our global regulatory table are Laos and Guatemala. Both countries have a moratorium on new mining licences. Laos implemented its ban on new applications in the hope of diversifying the economy away from the extraction industry. In Guatemala the President, Otto Perez, proposed a moratorium in Q313 as a measure to defuse the potentially explosive domestic unrest against the mining industry.

Global - Neutral Mining Regulatory Outlook
Country 12 Month Outlook Rating Comment
Finland Neutral 80 Strict environmental protection laws.
Sweden Neutral 80 Strict environmental protection laws and social impact assessments.
United States Neutral 70 Stable macro and regulatory environment, though permitting times among longest in world
Germany Neutral 69 Stable regulatory environment with no major signs of change.
Ukraine Neutral 69 Low tax and royalty rates.
Bulgaria Neutral 68 Low tax rates favourable for foreign miners.
Slovakia Neutral 68 Corruption remains a concern.
Poland Neutral 66 Taxes on silver and copper are based on average LME monthly metal prices and the dollar exchange rate. No plans to increase mining taxation for the foreseeable future.
Chile Neutral 65 Numerous legal/environmental challenges, though still major copper producer
Peru Neutral 65 Local protests frequent, but national government favourable to mining.
South Korea Neutral 65 FDI is welcome. Allow for 100% foreign ownership.
Ghana Neutral 60 A review of the mining code is underway, the outcome of which is uncertain. The government has stability agreements with major miners to shield them from any changes in mining taxation law.
Philippines Neutral 60 Lifting of two-year ban on new mining permits to ignite investment. Increases in mining taxes will not significantly deter investors given similar increases in much of Asia.
Mauritania Neutral 58 Tax regime designed to provide incentives for direct investment into the mining sector.
Romania Neutral 58 Large state share in all mining projects.
Mali Neutral 56 The new government is conducting a complete inventory of the mining sector and will review all contracts. However the government is keen to reduce corruption and attract foreign investment into the mining sector.
Côte d'Ivoire Neutral 55 New mining code to boost government revenue from the sector. However specific large players have been given exemptions. The government is in talks to harmonize mining regulation with other West African producing countries.
Dominican Republic Neutral 55 Government is allowing the sector to develop and seeking to speed up permitting times, though Barrick/Goldcorp have seen exports delayed by customs due to disagreements over revenue sharing with government.
Panama Neutral 55 Government remains favourable to mining development, though has imposed restrictions on some indigenous areas as a compromise solution
Sierra Leone Neutral 54 Conducting a review of mining revenue and contracts. The government is in talks to harmonize mining regulation with the other West African producing countries.
Egypt Neutral 54 Political risks and the uncertain trajectory of the government will deter investment.
Guinea Neutral 53 Government has reduced taxes and royalties on the sector but now takes a 15% stake in projects with option to purchase up to 20%. The government is in talks to harmonize mining regulation with the other West African producing countries.
Japan Neutral 50 Mining Amendment Act came into force on January, 2012. Imposed tougher restrictions and greater scrutiny on mining operations.
South Africa Neutral 50 The government is having second thoughts about implementing a new mining code which would increase taxes on the sector and demand greater beneficiation. The outcome of this is uncertain.
Iran Neutral 48 The possibility of reduced sanctions could herald a mining boom in Iran.
Thailand Neutral 40 Complex bureaucracy, only grant mineral rights to foreign miners under a special agreement or if the project is promoted by the Board of Investment.
Mongolia Neutral 35 Mining contracts prone to political wrangling and frequent renegotiation.
Cuba Neutral 35 Minimal foreign investment.
Source: BMI

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