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Growing Resource Nationalism Deters Mining Investment, E&Y Says

Countries’ rising demands for higher mining taxes and royalties, led by Australia’s efforts to take a greater share of the profit from its minerals, deters investors from committing to projects, according to Ernst & Young.

“What’s probably more of an issue here is how much slowing down there will be in those yet-to-be approved projects,” said Michael Elliott, covering mining and metals for E&Y in Sydney. Projects scheduled for development from 2014 will probably be abandoned in nations that boost taxes and royalties, he said.

The so-called resource nationalism is the top concern for mining companies, along with skill shortages, infrastructure access and costs, according to an E&Y report released today.

Australia, the biggest coal and iron-ore exporter, passed a law this year to reap about $11 billion in tax in three years from companies including BHP Billiton Ltd., Rio Tinto Group and Xstrata Plc and bring the government budget into surplus. That followed the ouster of Prime Minister Kevin Rudd in 2010 after mining companies campaigned against his planned 40 percent tax.

The Treasury said in May resource industries will grow at an annual 9 percent pace, compared with 2 percent for the rest of the economy in the next two years. Mine and energy companies will invest a record A$120 billion ($122 billion) in the fiscal year that began July 1, up 150 percent from two years earlier, under a A$450 billion resource investment pipeline, it said.

Share the Benefits

“Australians know how important the mining industry is but they also know that we can only dig up and sell the resources once,” Prime Minister Julia Gillard and Treasurer Wayne Swan said in a joint statement in March. The tax is “an historic reform to share the benefits of the mining boom” that only “super-profitable mining companies” will pay, they said.

The Democratic Republic of Congo, Ghana, Mongolia, Poland, Peru and the U.S. are among those that proposed or imposed tax or royalty gains in 2011 or the first half of 2012, E&Y said.

“This is the sector that has become quite a soft target because it’s providing much higher returns than many other sectors,” Elliot said. Australia “gave a lot of other resource producing countries cover to look at similar policies.”

South Africa, Indonesia, Zimbabwe, Brazil and Vietnam have also sought to discourage ore exports and increase processing in-country to get more value from their minerals, according to the report. Indonesia, Southeast Asia’s largest economy, in May taxed exports of 21 metal ores and concentrates at 20 percent.

“Indonesia is a good case study,” Elliot said. “A lot of those value-destroying policies are actually present.”

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