The mining industry is likely to bear the brunt of rising nationalism in countries with economies reliant on their resources, according to a report by global risk analyst Verisk Maplecroft. The report cites 34 countries where resource nationalism has surged, with cost implications for mining companies.
The report draws on its proprietary Resource Nationalism Index in ranking the top countries: Venezuela, the Democratic Republic of Congo, Russia, Zambia, Zimbabwe, Kazakhstan, North Korea, Tanzania, Bolivia and Papua New Guinea, with those in sub-Saharan Africa and Latin America also representing the greatest increase in risk in 2020.
Resource nationalism refers to moves by the governments to centralise control of natural resources to within the jurisdiction. The Verisk Maplecroft index measures these defining parameters
- risk of expropriation
- imposition of more stringent fiscal regimes
- pressure for companies to source goods and services from local providers.
This surge is partly attributable to the economic impact of COVID-19 which has aggravated an already growing tendency towards isolationism in the natural resource sector. These countries' governments can be expected to pursue increasingly controlling policies over the next 2 years as they try to compensate for pandemic related economic impacts.
How conditions may change for miners as a result of rising nationalism
Indications of another boom in mining are likely to heighten this tendency, with jurisdictions in Africa and Latin America, including copper and iron ore producers, presenting the biggest risks. These could include direct expropriations without adequate compensation. Such moves in Zambia have already triggered an unresolved legal dispute in relation to liquidating Vedanta Resources’ copper mines.
Other countries may take a more indirect approach, such as demanding increases in local quota requirements and reviewing existing contracts in order to divert more revenue to government coffers, increasing regulatory requirements and hiking operational costs. Operators should prepare for these types of indirect actions to overtake classic methods of resource nationalism as the more common type of state interventionism over the coming decade.
In Latin America these moves may be driven by ideology (Mexico and Argentina) or community pressure (Colombia and Chile) including the interests of indigenous peoples and water rights, or structural shortcomings in government or the need to maximise resources revenue.
The report identifies countries predicted to present increased indirect risks to mining companies as major mineral producers such as Mexico (ranked 14th highest risk globally for resource nationalism), Liberia, Colombia, Mauritania, Mali, Chile and Canada, while this had already occurred in 2019 in Brazil and Peru.
Strategies for responding to increasing risks in overseas jurisdictions
Miners are advised to closely monitor environmental, social and governance factors to stay ahead of local developments, as issues such as income distribution, poverty and access to healthcare and education may become factors that increase demands on the state. Pressures may come from affected communities, the country itself or international stakeholders such as investors.
The ability to respond early by adapting investment strategies and exploration portfolios to mitigate exposures in the countries where the nationalism risk is most pronounced and moving fastest will be critical. Prioritising investment in countries where mining companies can be part of the solution may also help secure long term supply.
The role of insurance in mitigating risks for miners
The impact of unforeseen political and financial events can be mitigated with political risk insurance (PRI). Having the appropriate PRI program in place can be an enabler that allows lenders and investors to forge ahead with confidence rather than relegate opportunities in the ‘too hard’ basket.
Gallagher has extensive experience placing PRI policies worldwide for mining project developers and their financiers.
“Political risk insurance is more accessible than many organisations realise and forms a proactive aspect of any corporate governance and international risk management strategy.”
Racheal Tumelty, National Head of Trade Credit, Surety & Political Risks
These programs can be tailored to meet client needs and offer protection against a range of major risk perils including
- government expropriation
- political violence
- selective discrimination
- forced abandonment
- license cancellation
- inability to convert or transfer currency.
Please feel free to contact our experienced political risk insurance team at Gallagher to learn more about proactively protecting your interests in offshore jurisdictions.
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