Governments Are Biggest Risk to Miners, Ernst & Young Says

The push by governments to raise taxes and impose stricter ownership controls is the biggest business risk to global mining companies, said Ernst & Young LLP.

“Over the past 15 to 16 months, resources nationalism has really bitten,” Mike Elliott, Ernst & Young’s Sydney-based sector leader for global mining, said in a phone interview on the release of a risk report. “Almost everywhere you look there’s an increase in what governments take.”

At least 25 countries, including Australia and the U.S., boosted or announced increases to mining taxes and royalties during 2010-2011, Ernst & Young said in its annual mining business risk report. This raised the average tax rate about 5 percent as prices for iron ore, copper and coal rose to records.

“Resource nationalism has become a contagion impacting the mining and metals industry across the globe,” Andy Miller, global tax leader for mining and metals for Ernst & Young, said in the report.

Skills shortages and access to road, rail and ports are the next biggest risk for mining companies, leading to project cancellations and cost inflation, the report said.

“The tight labor markets also provide an environment for greater industrial disputes as organized labor seek to increase wages,” it said. “A lack of sufficient rail networks appears to be the largest global bottleneck.”

In Australia, the biggest exporter of coal, iron ore and alumina, there are a record A$174 billion ($182 billion) of minerals and energy projects at an advanced stage of development, according to government forecasts from June.

Rio Tinto Group, the second-largest mining company, last week reported first-half profit that missed analyst estimates, partly because of cost inflation as mining companies battle rising wages, raw material and energy costs.

“Cost overruns haven’t reached a peak yet,” said Elliott. “Equipment shortages haven’t really bitten yet in the sector.”

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net.

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