We recently published our annual Mining Market Review in which we consider some of the key challenges facing the global mining industry in the year ahead. The report focuses on seven leading issues which I aim to share in short blog installments over the coming weeks.
I’ll begin by discussing the rise of resource nationalism and suggest the types of political risk insurance that are most relevant to mining projects today.
Resource nationalism is nothing new, but resource-rich countries are increasingly wising up to new forms of intervention in order to gain a greater share of the proceeds from strategic projects. In the past two years alone, 20 countries have announced or implemented plans to increase the government’s percentage of the profits from mining projects by increasing taxes or royalties. It is no surprise then that Ernst & Young’s Business Risks Facing Mining & Metals Report 2012-2013 states resource nationalism as the number-one risk for mining and metals companies around the world.
Previously, resource nationalism has been linked to the rise and fall of commodity prices. Trends suggested that when prices fell governments tended to loosen their control in an effort to encourage foreign domestic investment and then in times of prosperity, governments would reverse their actions, adopting a more protectionist stance in order to gain a bigger slice of the resource pie. However, the latest increase in resource nationalism would deem this theory outdated, as our Market Mining Review outlines:
Resource nationalism is now on the rise even though commodity prices have begun to slip. Where once expropriatory acts may have been driven by purely nationalistic policies that appeased the electorate, the resurgent resource nationalism of the 21st century now has wider political and social drivers in addition to the traditional economic ones.
Political Risk Insurance
The right type of insurance can provide long-term security for both mining investors and operators. In the Mining Market Review we have highlighted five key types of political risk insurance that mining project leaders and financers should be aware of, these are:
- Confiscation, expropriation and nationalisation – The central pillar of cover, offering protection against acts of a foreign government that could deprive the project sponsor of its ownership or equity in the project company, its right to extract the resources, remove the extracted materials or use its equipment to operate the project facilities.
- Embargo – To protect the project company against the introduction of any law, order or decree which prevents or delays the import or export of goods and services into or out of the host country.
- Political violence – To protect against losses resulting from the damage of project assets due to events such as civil war, riots, strikes and terrorism.
- Currency inconvertibility / exchange transfer – Cover against the inability of the project company to convert local currency into freely convertible currency such as US dollars.
- Breach of contract – Cover against the breach of specific contracts by host governments such as a joint venture agreement.