The Problem with Resource NationalismSome have commented that it is fair that nations take a sigificant stake in the equity of a mine, gratis, as a natural inalienable right of controlling the land beneath which minerals lie. And if they have a small or no equity ownership, that they are giving away for free something which is rightfully theirs. There are a number of problems with this assertion. One is that a majority of revenues generated from a mine are consumed by costs, including labour, equipment and other supplies. Some of this is foreign-sourced, but in many cases most of it is local. Whatever is foreign sourced is often subject to tariffs and other excise taxes which compensate for costs not benefitting the local economy 100%. Another issue is that local governments collect royalties on the top line as long as the mine is in production, sometimes several different royalties at various levels of government, including revenue royalties, profits royalties, etc. Given that most mines are marginal in the long run, low-percentage royalties can consume much of their economic value. Furthermore, income taxes are collected by various levels of local government. Cash expended in the local economies for various costs are provided ultimately in exchange for labour, but bring jobs which would not be available without capital taking enormous risk to invest in a project with very long and uncertain lead times, uncertain costs, revenues, and political environment, and this is at the development stage. In mineral exploration the risk is at a maximum for just about any venture of any kind. True, workers work hard to earn a pay cheque. But royalties and taxes provide equity-like returns without the provision of capital. And it cannot be assumed to make its way into the broad economy of workers and those in need of support because they are unable to work. Especially in developing countries, much goes to inept and corrupt governments which seek only to enrich themselves and entrench their power. (Perhaps this is being generous to developed countries.) So the small slice of the pie left as profit for the capitalist, who takes all the risk (financial at least - mine workers do take physical risk) is then further eroded by various claims of greed and larceny until a substantial fraction (one suggestion was 50%) is provided to the state. But if 50% of the equity returns (which itself is only 5-10% of the revenue) is provided to the state, but not on economic terms, then it is really much more than 50%. In particular, if it requires no provision of capital, then it is just a 50% income surtax. Even if it is provided after deduction of capital charges ex-ante, for example via low-interest rate shareholder loans, then the 50% of profits less capital charges still amounts to an equivalent rate of forfeiture of equity higher than 50%. In addition, there are all the community initiatives financed by private foreign capital to support locals with new programmes and institutions for improvements to health, education, and infrastructure, augmenting the efforts of the state. So all these benefits go to the local interests just for geographic reasons. Indeed, how can local entities claim some metal is theirs when it has sat for millions of years utterly untouched and unknown? In a company such as this, where the best people in the industry work diligently and honestly with superior skill to create value, it may seem fair because their shareholders do all right in the end. But when one considers that this really is the cream of the industry, after all the predations of state and management, how poorly does the mining investor do in the average venture, let alone some of lower quality? The idea that the people and the government are entitled to equity in addition to all the revenue from cost and royalties and tax, and for free, simply because the raw materials are underground within their national borders, is really no different than saying that Apple phones and tablets should pay special taxes to the Chinese government because the components are made in sweatshops in China, and not only for sales within China, but throughout the world. It may sound absurd, but it is no different. The truth is that the outsized taxes on mining relative to other industries are intrinsic to their financial and geographic structure. All the costs are upfront; all the revenues come at the end. And you can't move a mine. That's it, that's the reason why it is such a perfect target for governments, NGOs and local communities. There are sunk costs and no escape. Add this to the fact of zero product differentiation in a commodity business, no control over sale price, and wild and unpredictable fluctuations in revenues unrelated to fluctuations in costs, rapidly depleting asset bases, highly fragmented ownership resulting in perfect competition, high capital intensity, and the fact that everybody hates mines ("not in my back yard") and you have the worst business in the world. Now, if wealthy privileged Western investors with a high standard of living and excess savings can afford to take risk, and the Third World needs their help... Alors, noblesse oblige. And that is good and right. Indeed, it warms the heart to know that the less fortunate should benefit from development, jobs, economic growth and social programmes, and emerging economies will benefit from supplies for the new green economy, environment-enhancing technology. Feed Africa, clean Asia, and get rich, so the story goes. What's not to like? But knowing the brutality of this industry, one must still take comfort in holding a premium name at a bargain price. For it is this which truly will produce the excess return. Buy quality and call the cycle right, for even to the best, full cycle returns are meagre, and nil or less in almost any lesser issue.