Land Disputes Seen Raising Mining Companies’ Financial Risk

Land-right disputes are creating financial risks for mining companies and investments including hydropower plants and palm-oil plantations, according to analysis by consultancy Munden Project.

Companies investing in land with insecure property rights may face rising operating costs or be forced to abandon running operations due to local opposition, Munden wrote in a report for Rights and Resources Initiative, a Washington-based group that seeks to improve land rights for local communities.

Investor interest in land was triggered by a 2007-08 jump in food prices, and long-term trends driving deals are rising commodity prices and growing demand for biofuels and timber, the Land Matrix research group wrote in an April report. International investors are focusing on the poorest countries with weak land-rights security for deals, the group said.

“Land acquisitions are being announced at a breakneck pace as companies look to produce more food, wood fiber, minerals and energy,” wrote Munden, which has offices in New York. “Our initial examination shows the potential for bottom-line financial damage to investors.”

Financial risks include construction delays, loss of insurance coverage and cash flow loss due to suspended operations, according to Munden. Disruptions such as road blocks and occupations may hurt the commercial viability of projects, while governments may rescind companies’s access to land as a result of popular pressure, it said.

Real Risks

“The assumption that there’s very low counterparty risk means these major mining companies have access to low-cost capital,” Andy White, coordinator of the Rights and Resources Initiative, said by phone. “If the real risks were factored in, that would result in higher costs of political-risk insurance and higher cost of capital.”

Most parts of the developing world have customary tenure that pre-dates the modern nation state and has functioned for many generations, according to Munden. Emerging markets are a “mixed bag” regarding land rights and record keeping, and in most cases public records of property ownership contain little or no reference to customary arrangements, it said.

Land rights in many emerging markets are “dysfunctional to the point” that ownership may be granted to an investor without the knowledge of tens of thousands of people who live and depend on the land, according to the analyst.

“External claims to land can ignite conflict if local constituencies feel that their property rights, whether considered in legal or customary terms, have been ignored or abrogated,” Munden wrote. “Losses really pile up however when discontent is left to fester, leading to mass actions like roadblocks, repeated sabotage and increasingly violent conflicts.”

Emerging Markets

The financial risks may be significant enough to change the cost-benefit analysis for investments in emerging markets, according to Munden.

Munden calculated the costs of delays or project withdrawal at the construction or operational stage for investments ranging from $10 million to $3 billion.

For a $10-million project with a three-year duration, abandoning the investment during the operational phase could increase costs more than 25 times, the consultancy said. For a $3-billion investment over 15 years, delays could double the cost, while withdrawal from an operational investment might increase costs fivefold.

Munden performed five case studies, including on the shutdown by Vedanta Resources Plc of its aluminum smelter in India’s Odisha state after the government rejected the company’s plans to secure bauxite from the Niyamgiri hills, citing concerns it would affect local tribes and wildlife.

The consultancy also studied a hydropower investment in Chile that was abandoned following opposition by local people, including the shooting of a subsidiary manager, and an investment to develop land in Liberia for oil-palm and rubber plantations that has been repeatedly disrupted by land disputes.

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