The real threat of resource nationalism should never be far from a speculators mind. Time and again we read about top explorers and producers in faraway lands such as Ecuador and Indonesia who get roasted by greedy, ill-prepared, irrational governments. The latest resource nationalism attack has come against First Quantum (FM: TSX) and its massive copper mines in Zambia. The headline this morning said it all:
“Zambia Hands First Quantum $7.9 Billion Tax Bill After Audit”
First Quantum had a market cap of about $12 billion Wednesday morning. So, Zambia effectively wants taxes worth more than 50% of the entire enterprise. Bloomberg was quick to publish a follow-up article titled,
“First Quantum `Completely Refutes’ Total Zambia Tax Claim: CEO”
Meanwhile, First Quantum’s stock has been in free fall.
The major mining company’s shares lost over 5% in the three days leading up to the announcement. Then lost a whopping 12.37% yesterday the day of the news. Finally, its shares closed up 3% today – after being down nearly 10% earlier in the session. A few billion have been wiped off of First Quantum’s valuation in the past half-dozen trading days.
The richest grades or the lowest all-in sustaining costs cannot save a company from surprise audits and windfall taxes.
Probably the most legendary windfall tax happened in Ecuador a few years ago. We recently wrote about Kinross’ Fruta del Norte project and the misery that ultimately enveloped it:
“Kinross poured hundreds of millions into the project before the Ecuadorian government demanded a punitive 70% windfall profits tax. Kinross refused, and eventually sold the project for a significant loss…
One of the world’s largest producers took a US$720-million write-down on the asset; and then sold it to Fortress Minerals Corp., a member of the Lundin Group of Companies, for US$240 million. The breakdown consisted of US$150 million in cash and US$90 million in Fortress common shares.”
Click here to read, Fruta del Norte Turnaround Story Continues as Lundin Gold Moves Closer to Production.
Resource Nationalism | On the Horizon for Some Time in Zambia
“Last year Zambia cut power to mines, including the Kansanshi pit owned by First Quantum, and two operations held by Glencore Plc, after a fight escalated over tariffs.”
Resource nationalism can strike almost anywhere, but happens largely in developing or third world markets.
Financial Post wrote that,
“For example, countries such as China, Ukraine and Argentina responded to the surge in food prices in 2008 with taxes or controls on the export of grain.”
Bernice Lee at Chatham House in London commented,
“When countries and governments think they may be running out of cheap resources, they try to keep more for themselves.”
For that reason, developed nations also partake in resource nationalism. In 2012, Australia’s Mineral Resource Rent Tax (MRRT) came into effect. The MRRT imposes a substantial additional profit-based tax on upstream iron ore and coal operations. The Canadian Mining Journal highlighted Canada’s own brand of resource nationalism writing,
“…the Quebec government raised the tax rate of its mining duties to miners in 2010 and the recently elected PQ government has indicated that they plan to further increase this and impose a 5% mining royalty. An example in a developing country this year is the Indonesian government establishing rules capping foreign mine ownership at 49%.”
So, Canada will not likely be implementing any wind-fall taxes or asking for back taxes in the many billions, resource nationalism is a factor speculators cannot forget. Investors in First Quantum will be awaiting clarity on the tax bill put forward by the Zambia government. The lesson is never to be overexposed to anyone miner who is dependent upon a government or regime who can change the rules of the game at any time.