The Rising Tide of Resource Nationalism
You know the old film The Treasure of the Sierra Madre? Three men set off into the hinterlands of Mexico to strike gold. They find it, but then greed sets in and they start to mistrust each other. Things go badly from there.
I am really simplifying a great movie, but I couldn’t help but think of the film after reading the papers. The confluence of headlines and stories pointed to the dangers of setting off to find great deposits in relatively unexplored parts of the world. It is already inherently fraught with risk. And then there are many more stories of promising ventures that went nowhere than there are of successes.
But should you actually find something valuable, you have new risks, more like the ones faced by the three men of the film. The danger is that you might actually find gold. You might even go through all the hard work of delineating it and even building it…but can you keep it?
Increasingly, miners face risks that they won’t be able to reap the full benefit of their work. Under the banner of resource nationalism comes many efforts by national governments to intervene or take back resources leased out to foreigners.
Latin America is the global leader or resource nationalization/confiscation. There is Venezuela, of course, which nationalized its oil and gas industry. Bolivia did the same thing. Ecuador instituted a 70% tax on oil profits. All of these governments changed the rules of the game – after the fact – and investors lost lots of money.
Brazil is another one. You’ve probably read the ongoing drama over Vale and its CEO. Vale is a big Brazilian miner. It’s been extraordinarily successful over the years. But the government wants it to expand into steel and shipbuilding to help boost Brazilian employment. The old CEO didn’t want to do that. So the Brazilian government pushed him out. The Brazilian government denies it, but it seems pretty clear to everyone else that that’s exactly what happened.
Now investors worry that Vale will put the government’s social agenda ahead of what’s good for shareholders. Maybe it will pursue some money-losing projects to keep the government happy.
There are many more examples of governments looking to change the rules. South Africa, Zambia, Australia and Colombia are all looking to increase the taxes on metals extracted from within their countries. Plus, we’ve seen acquisitions quashed by governments, too. One of the largest was when Canada didn’t approve of BHP’s proposed takeover of PotashCorp.
As The Wall Street Journal reported:
“Many miners are pulling back or reducing the target size of foreign acquisitions to avoid defensive moves by governments. In some cases, they are abandoning huge exploration projects, which are costly and may end up benefiting the local governments rather than shareholders or customers.”
This is a sword that cuts both ways. On one the hand, if you are an investor in a project for which the rules change, you’re not happy. On the other hand, all of this uncertainty means that new supplies for key resources look iffier. It discourages new investment, which helps boost the prices of underlying commodities. The lucky mines and exploration ventures that manage to operate freely, without governmental expropriation, become all the more valuable.
Because resource nationalism – along with environmental issues like the BP disaster in the Gulf of Mexico – will slow the development of essential new commodity supplies, the prices of most commodities are all but certain to maintain their upward trends over the long term.
Additionally, the deteriorating fiscal position of the US government – which implies a lot more money printing and a weakening dollar – means that prices for many commodities could go a lot higher still. Sure, you’ll get some frightening corrections along the way, but you’ll want to be a buyer when these corrections arrive.