Faced with labour unrest in major mining economies and governments demanding a larger share of revenue, companies look to ensure predictable profits.
Evaluating political risk is becoming increasingly complex for mining companies operating in Africa. They have to consider the potential impact of a bewildering number of risk factors on their operations and profit margins.
The crucible of the continent's mining industry, South Africa, continues to be rocked by wildcat strikes and mass sackings following the massacre by police of 34 striking miners at Lonmin's Marikana mine in August.
Stocks of strike-hit miners such as Anglo American Platinum have plummeted (see graph).
"There is a risk that the whole collective bargaining agreement the industry has could be dis- mantled and replaced by a far more anarchic labour relations system," says Sven Lunche of Gold Fields, which has lost billions of rand in revenue because of strike action. "New unions in themselves are not a threat, but they need to be involved in collective bargaining and respect its outcomes, which is not happening at the moment."
Lunche said Gold Fields is aware that part of the appeal of the new mining unions and breakaway fac- tions is their promise to secure higher wage increases than collective bargaining agreements are ever likely to deliver. "We know that their appeal lies outside this agreement, and that is a risk to us."
According to labour mediator John Brand of law firm Bowman Gilfillan, collective bargaining is a big part of the problem, resulting in what he has said are over-centralised negotiations between unions and employers, and increasingly bureaucratic and wealthy union negotiators with a weak grasp of the real concerns of the workers they claim to represent.
Nationalisation, which is advocated by the African National Congress Youth League but has been rejected by mines minister Susan Shabangu, also remains a worry to mining companies. According to Lunche, the bigger risk is regulatory uncertainty.
"We have a mining charter, but now there's talk of changing it, and the government is talking about a new windfall profit tax and maybe changing the targets for black ownership in the mining sector. Plus carbon taxation may be coming. And the issue of nationalisation has still not been fully laid to rest. It's certainly not a welcoming environment either for new or existing investors," he says.
Unsurprisingly, many foreign investors in South African min- ing reduced their holdings in 2012, and some have exited altogether. US-based hedge fund manager John Paulson reduced his firm's positions in AngloGold Ashanti and Gold Fields in the second quarter, before the events at Marikana. There is nervousness about the future.
Fund managers and shareholders were reportedly behind the resignation of Anglo American CEO Cynthia Carroll in October.
Mining companies are required under law to provide succinct statements in their company filings on the political risks they face. Detailed models projecting expected cash flows over many years are pre- pared to work out the internal rate of return. Companies will expect to earn a higher rate of return on projects with higher political risk.
WEIGHING THE RISKS
Sometimes the combination of political risk and questionable demand can cause companies to pull back. In late October, Brazil's Vale announced it had put development of its $5bn Simandou iron project in Guinea on hold. Mining policy has been a constant political battleground there since a new government took over in 2010.
Heightened political risk can also be a boon for companies looking for cheap assets. In August, Toronto and Australia-listed Endeavour Mining swooped in to buy Avion Gold Corporation, which owns 80% of the Tabakoto gold mine in western Mali near the Senegal border.
Neil Woodyer, chief executive of Endeavour, says that the company had looked at Avion before but could not afford to buy it. Following the early 2012 coup and ensuing rebellion in the north, he says the slump in Avion's share price presented "an opportunity to ac- quire a very good asset".
Endeavour is already producing from two mines in Burkina Faso and Ghana, with production due to begin at another in Côte d'Ivoire at the end of 2013.
"By going into Mali we haven't put all our eggs into one basket," says Woodyer. There was over 90% approval from shareholders at both Avion and Endeavour for the deal, which will increase Endeavour's 2012 gold output by 50%. It will enable it to complete the mill expansion that was suspended when the coup happened and the main contract- ors pulled out.
Miners in Mozambique such as Vale, Rio Tinto and Nippon Steel are facing uncertainty as the government draws up the draft of a new law to regulate the sector. Changes are expected in taxation, capital gains and the duration of mining titles.
The government is expected to use the state-owned Empresa Moçambicana de Exploração Mineira to take stakes in mining operations. It bought a 5% stake in Vale Mozambique in April and could look to up this to 10% in 2013.
In the Democratic Republic of Congo (DRC), regulatory uncertainty is also a major headache for mining companies. A revised mining code is due to be released in 2013. The mines ministry is under pressure from the ministry of finance, headed by prime minister Augustin Matata Ponyo, to deliver much higher revenue from the sector, and it is pinning its hopes on the revised code.
It is likely to come down heavily against the many special arrangements between investors and the government, and will seek to replace them with a more uniform structure that delivers significantly higher income for both the government and state-owned joint- venture partners.
Auditors for state-owned copper and cobalt miner Gécamines are scrutinising the company's joint-venture operations with companies such as Freeport-McMoRan and Eurasian Natural Resources Corporation to check if they have delivered everything they promised.
The likely answer in many cases will be 'no,' resulting in demands from Gécamines that the companies pay more, and further law suits and arbitration.
Popular unhappiness with the government runs high in the DRC and armed rebellions have taken hold not just in the troubled Kivu provinces and the Ituri district of Orientale Province but also in previously more stable places like northern Katanga.
The copper-and cobalt-producing areas of southern Katanga, however, have remained calmer and are less likely to see significant labour unrest.
Some tin and tantalum mining companies have been mitigating the impact of conflict on their business by implementing Organisation for Economic Co- operation and Development due diligence guidelines on 'conflict minerals,' enabling them to comply with rules stemming from the 2010 Dodd-Frank Act in the US.
The rules require companies to determine whether they are using 'DRC conflict minerals' in their products and report about it to the US Securities and Exchange Commission (SEC).
A law suit launched in late October by the US Chamber of Commerce and National Association of Manufacturers arguing that the rules are too expensive to implement has brought further confusion.
Companies are uncertain whether they should ignore the rules and risk punishment if the law suit fails, or implement them and risk losing market share to less scrupulous competitors●