Corporate Foreign Policy

Blackrock, the world’s largest money manager, today warned that “resource nationalism” was a growing trend, on the rise globally. Their investment chief for natural resources, Evy Hambro, particularly singled out the regimes of Robert Mugabe in Zimbabwe and Hugo Chavez in Venezuela as extreme examples of government intervention, ultimately hinderances to foreign investment.

“We’re seeing a trend around the world of resource nationalism with governments that are short of tax revenue… whether it’s by personal taxation levels or extending into corporate or other ways,” Hambro said at a media briefing, while discussing the company’s investments in mining accounts (totaling $35.75 billion).

“Obviously, you want to stray away from indigenization, which is being proposed by Mugabe in Zimbabwe or Chavez in Venezuela on one end of the extreme,” Hambro said.

Continue reading.. ›

One doesn’t often associate the term “corporate social responsibility” with Chinese state-owned businesses, but it would be a mistake to assume that an unguided or less regulated set of standard operating procedures would necessarily produce a competitive advantage.  In a number of African nations, local communities are beginning to experience a backlash against their new investors from the East, based on a number of tragic accidents, worker abuses, and the influx of substandard manufactured goods.

Case in point, Human Rights Watch has just come out with a new report on the rising level of human rights abuses occurring in the Zambian mining sector attributable to Chinese-owned copper mines.  According to the report,

…safety and labor conditions at Chinese-owned mines are worse than at other foreign-owned mines, and Chinese mine managers often violate government regulations in their treatment of Zambian workers. These violations include poor health and safety conditions, regular 12-hour and even 18-hour shifts involving arduous labor, and anti-union activities, all in violation of Zambia’s national laws or international labor standards. The four Chinese-run copper mining companies in Zambia are subsidiaries of China Non-Ferrous Metals Mining Corporation, a state-owned enterprise under the authority of China’s highest executive body. Copper mining is the lifeblood of the Zambian economy, contributing nearly 75 percent of the country’s exports and two-thirds of the central government revenue.

Continue reading.. ›

To describe the recent discovery of natural gas deposits off the Southern coast of Mozambique as “transformational” might be an understatement.  Until recently, this East African country of about 23 million people had a paltry annual GDP per capita of $1,000 with 70% of the population living below the poverty line.  Now, with the announcement made on October 20th by the Italian energy company Eni that more than 22.5 trillion cubic feet of natural gas can be produced, Mozambique’s future is looking suddenly brighter.

To put it in perspective, Mozambique may be able to provide four times the annual consumption of the world’s largest importer, Japan – a truly staggering quantity of gas.

Continue reading.. ›

Reuters has a very interesting interview with Evy Hambro, investment advisor at BlackRock Inc., who says that issues of resource nationalism, state intervention, and expropriation are continuing to create increasing risk to the value of some of the world’s leading mining companies, passing costs all the way down to the consumer.

Resource nationalism in producer countries, whether it is the urge to demand a larger share of mineral wealth via company ownership or through taxes, has become a growing problem for the industry as governments face tight budgets in the aftermath of the financial crisis.

“We’re seeing a general trend around the world of resource nationalism with governments that are short of tax revenue… whether it’s by personal taxation levels or extending into corporate or other ways,” Hambro said at a media briefing.

Continue reading.. ›

Some interesting analysis from Seeking Alpha takes a look at how the rising risks of resource nationalism are having an impact on many companies’ share values.

A developing nation’s natural resources are both a source of pride and an important economic asset. Resource nationalism is the term used to describe the policy of governments to assert greater control over its natural resources, mostly from foreign companies that have made the significant and desperately needed investments to make those resources extractable. Once the facilities are complete and extractions are about to begin, governments step in to take a greater share of the cash flow, whether it is through new taxes, export quotas, enlargement of ownership, or outright seizure.

The windfall tax is a particularly popular tactic. It is levied by governments against specific industries during times when those industries experience record profits, such as now for miners when the prices of metals are rising, or for oil companies back when oil peaked.

Continue reading.. ›

Though much of the article contains practical, obvious advice for seasoned investors, Jim Jones has an interesting piece in Business Times on the tactics of managing political risk for mining in Africa.

The choice of country is clearly defined by geology. But, as Leon pointed out, mutual security depends on legal structures. He said Botswana ranks highly in the Fraser Institute’s analysis of jurisdictions that are fair and favourable to foreign investment. Botswana’s mining laws afford little in the way of discretion to ministers or the officials who administer them.

Discretion is the keyword. Ministerial or administrative discretion can (and often does) open the door to corruption.

Smaller companies are particularly vulnerable to demands for bribes or “facilitation fees” to speed up administrative processes.

Continue reading.. ›

Some important information from Mining Weekly on the uptick in acquisitions being made by China in shareholdings of foreign mining firms, including a special interest in precious metals:

Strategic Capital & Intelligence Group (SCIG) CEO Jack Slibar expected the pace of Chinese investment into foreign mining firms to pick up significantly over the next two or three years.

Continue reading.. ›

According to a recent piece published in the Financial Times, oil production in Angola has struggled to keep up pace, dropping to 1.65 million barrels per day, down from 1.85m b/d in 2010.  Although the African nation makes up only 2% of global oil production, back in 2008 Angola became the largest supplier of crude oil to China, marking a major milestone in Beijing’s expansionist foreign policy.

Despite lending Angola nearly $15 billion since 2002 to develop oil production, and purchasing about 45% of the country’s output, some observers believe that Beijing’s political influence, or “soft power,” has failed to gain traction, as the majority of jobs created in the industry were given to imported Chinese workers.

The fall in production, which is apparently due to several offshore blocks going off and failures to get other projects online, has prompted China to pursue larger purchases of Nigerian crude usually exported to Europe, pushing the price of the Brent further up.

This dip in production should be temporary with a number of major projects coming online, but given how active Brazil has become in building ties with Angola, the competition in this market could be heating up, indicating that China’s influence is likely to face a serious challenge in coming years.

It’s become a familiar exercise in many Sub-Saharan resource states – a popular leader comes to power by coup, revolution, and sometimes, by vote, promises sweeping social change and the eradication of poverty by tapping a greater share of the resource wealth, revokes and reissues a variety of licenses and rights, hangs onto power for a number of years while corruption cripples the economy, and is then replaced by another who promises the same.  The underdevelopment and social crises of these countries are genuine, but the balance of resource nationalism to positive investor relations is often tragically mismanaged.  This may sound like an overly cynical appraisal, but there are only a few exceptions of successful public policy and governance in these areas of Africa which have allowed the extractive industry sector to flourish in the long-term, recognizing the long time horizons required for stable conditions for foreign investment, production, and economy to begin gaining traction.

Hopes are high that this pattern of conflict can be broken with the election one month ago in Zambia, when the veteran opposition leader Michael Sata won the election, ousting the incumbent President Rupiah Banda.

Continue reading.. ›

Russian Prime Minister and soon-to-be-President-again Vladimir Putin may be booed as a villain during visits to some countries, but when his plane touches down in Beijing, they roll out the red carpet.  During Putin’s most recent visit to Russia’s looming neighbor to the East, his Chinese hosts expressed confidence in deepening their strategic alliance with Russia, most notably by contributing $1 billion to the state-run Russian Direct Investment Fund, and signing a raft of agreements to expand trade ties, form joint ventures, and establish a special economic zone.

The optimism of the latest state visit builds on what we viewed as the most important event in Chinese-Russian relations from a couple years ago, when Transneft and Rosneft negotiated a $25 billion loan from China in to finish building the first pipeline link to supply Beijing with 300 million tons of crude over 20 years.

No doubt bolstered by their common interests in blocking humanitarian intervention at the United Nations arising out of the Arab Spring (building upon their shared rejection of the Color Revolutions), Chinese President Hu Jintao welcomed Putin as “an old friend of the Chinese people.”  With the two governments pledging to raise bilateral trade to $70 billion annually, this is a relationship that investors cannot afford to ignore.

Continue reading.. ›