Mining at ‘Breaking Point’ as Investors Flee, Gold Fields Says

The mining industry is at a “breaking point” as calls from governments and workers for a greater cut of profits hasten an investor exodus, Gold Fields Ltd. (GFI) said.

“Governments in particular are seeing mining as a means of putting more into their central coffers,” Chief Executive Officer Nick Holland said today in a speech in Johannesburg. “A lot of it has come about because of the metal boom that we’ve seen.” The “equity model is at breaking point,” he said in an accompanying slide show.

Australia, Namibia and Zimbabwe are among nations that have sought to expand their share of profits from natural resources in the past three years by raising mining taxes or favoring state control of projects. In South Africa, where Gold Fields is based, labor unions, companies and the government are vying for a larger share of revenues even as commodity prices slide.

The infighting will encourage investors to flee, causing the industry to shrink and hurting all parties, Holland said. Protecting investor rights will help countries make the most of their resources, he said.

The HSBC Global Mining Index has lost 29 percent since the start of 2010, while the Dow Jones Industrial Average (INDU) is up 47 percent and the FTSE 100 Index (UKX) 22 percent. While the financial crisis in Europe and a sell-off in gold are partly to blame, resource nationalism has also spurred investors to sell mining stocks, according to Holland.

Investor Frustration

“Equity investors are frustrated,” he said. “We’ve spent a lot of their money and given them very little back for it. They keep reminding us of that.”

The world’s biggest mining companies are cutting costs, selling assets and scrapping expansion plans to counter lower prices. Investors have pressured new CEOs at BHP Billiton Ltd. (BHP), Rio Tinto Group and Anglo American Plc (AAL) to boost returns to shareholders and defer new mines amid waning commodity demand.

“There are many hundreds of billions of dollars not being spent,” Holland said. “We haven’t yet seen the impact that that’s going to have on economies going forward. You’re going to see it in years to come.”

Anglo is among companies operating in Zimbabwe, where President Robert Mugabe this month reiterated his determination to take a 51 percent stake in foreign-owned projects for the state or for black Zimbabweans.

Mine Nationalizations

Elsewhere in Africa, Tanzania and Namibia have studied imposing a “super-profit tax” on mines, while in South Africa, former African National Congress youth leader Julius Malema in July formed a political party that favors nationalizing mines. In Australia, the government last year passed laws to place a 30 percent tax rate on iron-ore and coal-mining profits.

While it’s governments’ “duty” to maximize the benefits of their natural resources for their people, investors must also be allowed to make returns, according to Holland.

“We need investors,” he said. “There’s a lot of capital needed to build these operations. The lead times are long and the risks are high.” They need a “reasonable rate of return,” he said.

One mining job supports 27 other people, either dependents or other workers, Holland said. Each 1 percentage point increase in mining growth adds 2.6 percentage points to countries’ gross domestic product due to the industry boosting other parts of the economy, he said.

Companies are partly to blame for the assault on profits by states and workers by failing to report costs transparently, according to Holland, who is promoting a new accounting method for “all-in costs” that includes capital spending.

Companies must work with governments, workers, investors and communities to expand the industry rather than fighting over profits, Holland said, citing Peru, Chile, Botswana and Zambia as nations where cooperation has been successful.

The industry can either take the high road and start collaborating and forming partnerships, which will increase investments, he said. “Or we can keep on fighting each other for a higher share of a diminishing pie.”

To contact the reporter on this story: Kevin Crowley in Johannesburg at kcrowley1@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

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