TORONTO/MELBOURNE (Reuters) - Indonesia's decision to shut the door on foreign control of its mines has gone down badly with global miners but none are yet threatening to quit the country: the truth is, they no longer have any easy investment destinations to turn to.
After a decade of rapidly growing resource nationalism, from stable emerging markets like Indonesia and South Africa to developed nations such as Australia and Canada, doors everywhere are harder, more expensive or just plain dangerous to open.
Indonesia's sudden announcement this week of a new rule capping foreign mine ownership at 49 percent follows a series of international tax grabs and expropriations that have pinched returns in some of mining's most profitable markets.
It has left mining companies few options other than to venture into ever more politically risky territory, including restive parts of Africa. Countries previously seen as too risky, such as Burkina Faso, Congo and Mauritania, are now firmly on their radar. "This is certainly the mining industry's biggest bugbear at the moment," said Avril Cole, an associate with the law firm Norton Rose in Toronto, who has written about political risk and regulatory changes affecting the mining industry.
Cash-rich mining companies, raking in profits from metal prices that are well above historical levels, have emerged as easy targets for governments. Higher taxes and royalties on big miners are often used by politicians as populist moves to help rally the public and serve as platforms ahead of elections.
In Australia, the government is bringing in a 30 percent tax on profits from coal and iron ore mines. The gold and iron ore rich Canadian province of Quebec moved to raise taxes on miners in 2010, even as the country's federal government blocked global miner BHP Billiton's (BHP.AX) $39 billion bid for fertilizer giant Potash Corp (POT.TO), in a protectionist move that many argue equates to another form of resource nationalism.
"We've seen a sustained period of record prices for certain minerals such as coal, copper, iron ore and gold. And record profits for resource companies, which tend to make governments think that they should be readjusting the deal with resource companies, because the record profits do not reflect record returns to them," Cole said.
For graphic on Tax Contagion: link.reuters.com/bek96s
Ernst & Young last year flagged resource nationalism in its various forms as the single biggest risk facing miners. It identified at least 25 countries that have increased or plan to raise their governments' take via taxes or royalties.
Some newer mining jurisdictions such as Peru, Ghana and Zambia have also explored such moves. Poland last week approved a new mining tax linked to the prices of copper and silver.
"Resource nationalism is sometimes just driven by greed, but very often it's because governments come under political pressure as they are not delivering enough from their resources," said Peter Leon, who is based in South Africa and heads the African mining practice for law firm Webber Wentzel.
Mining investors and consultants expect a rebalancing of investment as countries like Indonesia slap new restrictions on the industry, but overall they don't expect it to beat a retreat. Despite increased risks, prices remain high, fueled mainly by strong Asian demand, and profits are healthy.
"Capital will move in the longer term to where you can get a better deal. Places like Mozambique and Botswana are open for business," said Michael Blakiston, a Perth-based partner at law firm Gilbert + Tobin, who advises on mining deals.
Mike White, chief executive at investment bank IBK Capital in Toronto, agrees, saying higher political risks are unlikely to lead major investors to move their money out of the sector.
"Will it affect a fund's decision making? Yes. Will it affect the amount that they put into mining, I don't think so," said White. "It's not going to push them away, but they certainly will reallocate their money." Advisers to the industry argue the threat of resource nationalism hurts smaller miners and their projects more than the bigger projects, which are controlled by the major miners and typically enjoy better protections and stability clauses in their contracts.
"Once you start squeezing project margins, the little guys can't raise the money," said Blakiston. "You're put in a position where no financier will want to lend to (them)."
Though expropriation of mineral assets remains a risk, governments are using more sophisticated ways to raise revenues from mining, through higher royalties, increases in existing corporate taxes and the introduction of windfall profits taxes.
"The more common form of resource nationalization now is manifested through increased taxes and royalties rather than ownership," said Divya Reddy, a natural resources analyst with the Eurasia Group, a political risk consultancy.
Miners in Australia fought hard to overturn Canberra's mining tax when it was unveiled in 2010 and managed to force the government to water it down. The new tax comes into force on July 1, but even its loudest critics, including Fortescue Metals Group (FMG.AX), are ploughing ahead with massive investments in new iron ore and coal mines in the country.
On top of the political risks, the minerals themselves are becoming harder to find, especially world-class deposits in established mining jurisdictions. So when a government changes the rules, miners have little choice but to stay in the game.
"You have to go to the developing world and you have to play by their rules," said Alex Granger, president of East Asia Minerals EAS.V, a small Canadian exploration company that owns assets in Indonesia.
"Whether it is in South Africa, Central Africa, South East Asia, Russia or Mongolia. You've got to play by the rules of those countries."
Additional reporting by Steve James and Pav Jordan; Editing by Mark Bendeich