Private Sector Players To Gain Firmer Footing In Frontier Markets
BMI View : Although we forecast strong mining growth across Asia, much of this will be led by state-owned firms. With a series of positive reforms on the cards, we believe private sector players are more likely to find success in frontier markets as opposed to traditional mining regions. While the growing tide of resource nationalism will remain a salient risk, an abundance of untapped mineral wealth will nevertheless make frontier mining an attractive story worth embarking on.
We believe private companies will gain a firmer footing from investing in frontier markets as opposed to traditional mining regions. Although the growing threat of resource nationalism will continue to c ast a shadow over miners operating in countries such as Mongolia, we believe the governments will gradually relax their stance against foreign investors in a bid to develop their nascent mining sectors. In contrast , we expect the majority of mining activity in China and India to remain largely dominated by state-owned companies. While efforts ha ve been made in China and India to encourage private participation, the persistence of regulatory and bureaucratic hurdles, coupled with wid esprea d corruption, will continue to dampen investment in the mining space.
|Asia's Story Dominates|
|Global - Mining Industry Value (US$bn)|
Frontier Markets To Prove Most Attractive
We believe frontier markets are poised to attract increasing interest s from foreign players. As evident from the surge in capital inflows into Myanmar and Mongolia over the past few years , MNCs are laying claim to a deep portfolio of expansion projects beyond their home countries. This is driven by the need to secure a stable and long-term supply of key mineral s and the fact that elevated metal prices by historical standards prov ide a strong incentive to expand output. Although prices will not return to their recent highs and cost rationalisation is once again becoming a critical issue, we believe frontier mining will remain an attractive prospect. For one, many mines in developed regions are facing a myriad of issues, including higher capital costs, declining ore grades , depleting reserve s and ever-more complex regulatory environments.
While the threat of government assuming greater control of mining industry output will be a persistent concern for investors, the series of positive reforms that have been taking place in frontier ma rkets provide scope for optimism . For instance, we expect Myanmar ' s mining sector to experience blistering gro wth as the government leaves no stone unturned to create an investor-friendly environment. We believe the eventual passing of a new mining law will set the stage for considerable investment. Under the draft law ' s provision, foreign companies are allowed to own 100% of mining projects, take leases of up to 50 years and enjoy tax holidays during the first five years of operations. This is in stark contrast to countries such as Australia, where the imposition of a 30% super tax was met with vitriolic criticism by some of the largest players in the industry.
|Brighter Days Await|
|Myanmar - Mining Industry Value & Growth|
Myanmar aside, the Vietnamese government has also been actively pursuing reforms to further encourage and stimulate foreign direct investment. Although the mining industry in Vietnam is heavily regulated and largely state-led, we believe the country will witness a significant increase in private sector involvement. This is especially so given the enactment of a mining law which took effect on July 2011. The law not only took a tougher stance on illegal mining, but also provides for longer exploration licenses and a subsequent priority right in mining licenses, In addition, we highlight that the Philippines ' mining sector also have massive growth potential given the country's relatively untapped mineral resources and ongoing regulatory improvement. The historic signing of the Bangsamoro Peace Framework Agreement between the Philippine government and the country ' s biggest Muslim rebel group, the Morro Is lamic Liberation Front (MILF), o n October 2011 will be a major boon to the overall investment climate.
|Dotted With Potential|
|Philippines - Metal & Coal Mines|
I n Mongolia, regulatory uncertainty over mining rights is set to become an increasingly prevalent problem. The new governing coalition led by the Democratic Party (DP) has continued to pursue a course of greater resource nationalism with the recent plan to impose further restriction s on foreign ownership being the most notable. Although the evolving foreign investment regime will continue to create rough headwinds for the mining sector, we believe the government will gradually reach the realisation that it can ill-afford to alienate the foreign investment community. Mongolia ' s economy remains heavily reliant on the development of the mining sector, of which Rio Tinto ' s Oyu Tolgoi mine is expect ed to contribute more than 30% o f the country ' s total GDP. Despite the near-term headwinds tha t we have mentioned, we do not expect foreign investors to lose interest i n the country. Mongolia sits atop a treasure trove of copper, coal and gold reserves and is home to an estimated 6,000 deposits of 80 different minerals. We forecast the country ' s mining industry value to reach US$4.1bn by 2017, marking a stellar growth of 21% per annum from 2011 levels.
|On The Charge|
|Mongolia - Mining Industry Value & Growth|
China: State-Owned Miners Hold The Trump Card
In contrast to frontier mining regions, we expect state-owned companies to remain the backbone of China ' s mineral industry over the coming years. While the drive towards attaining self-sufficiency of key minerals will see that the Chinese government is more willing to open up the mining sector to private investors, we retain our view that investment from the latter i s unlikely to be forthcoming. T he Chinese government has announced reforms to cons olidate its mining industry into large state-owned production bases as part of China's 12 th Five-Year Plan (2011-2015). Underpinned by our expectation that the consolidation process will gather strength over the coming quarters, we believe small-scale companies will be deterred from entering an industry that is heavily dominated and controlled by the government. Given that th e state -owned miners such as Chinalco , Shougang Group and Wuhan Iron & Steel will continue to gain greater prominence, we believe there is little reason to justify the economic s of undertaking investment in a sector that largely lies in the hands of a few players. Indeed, private companies are unlikely to find much success in China due to the outsized dominance of state-owned firm s which often enjoy significant economies of scale and efficient in mining production.
|An Outsized Role|
|China - Share of State-Owned Enterprises (%)|
India: Private Participation To Stay Muted
Although the chorus of support for privatisation of India ' s coal industry is growing louder after nearly 40 years of state o wnership, we expect Coal India Ltd (CIL), which has a near monopoly of the sector, to retain its dominance. We believe privatis ing the coal sector will be a parlous undertaking as it requires not only the establishment of a regulatory body to sort out pricing issues, but also an amendment of the country ' s existing law. Moreover, the legislative environment in India is poor and application s for mining licenses are often time-consuming, opaque and rife with corruption. Despite its rich endowment of natural resources, we believe private investors will most likely await key implementation of bills on mining rights and land acquisition before outlaying significant sums. Despite being approved by the cabinet in 2011, the Mines and Minerals Development a nd R egulation (MMDR) Bill has yet to be put to parliament due to disagreement s over issues such as the provision of profit and royalty sharing schemes between miners and the local community. While not our core scenario, we do not rule out the possibility for a rapid improvement in India's business climate as the growing deficit in iron ore and coal production forces the government to undertake aggressive policies to attract mining investment.
Indonesia: Foreign Investors To Take Front Seat
With the ban on exports of raw mineral scheduled for implementation in two years, we believe the Indonesian government will eventually be forced to adopt more conciliatory rhetoric with regards to foreign miners ahead of the elections in 2014. Indeed, the success of the government in moving up the value chain by exporting refined products hinges greatly on attracting foreign companies to invest in the country. As the construction of smelters and refineries requires considerable financial resources and a great deal of technical expertise, we believe a moderation in the government stance is more likely to happen.
|Australia||Under the Mineral Resources Rent Tax (MRRT), a 30% tax on iron ore and coal miners with an annual profit of more than US$79mn is imposed.|
|China||Increased mining taxes on iron ore, tin, molybdenum, magnesium, talc and boron (effective February 2012) in a bid to control production output.|
|India||The recently proposed 2011 Mines and Minerals Development and Regulation (MMDR) bill seeks to improve transparency and introduce better legislative environment for attracting mining investment.|
|Indonesia||Foreign investors are required to divest at least 51% of their ownership in Indonesian mining assets 10 years after initial production. Furthermore, a 20% duty on 14 mineral ore exports is implemented ahead of a complete ban in 2014.|
|Mongolia||The government is seeking to extract more than US$319mn of additional royalty payments from the Oyu Tolgoi project.|
|Myanmar||Plans to reform the existing 1994 mining law is currently underway. Under the draft law's provisions, foreign companies can own 100% of mining projects, take leases of up to 50 years and enjoy tax holidays during the first five years of operation.|
|Philippines||The government has issued a ban on all new mineral extraction contracts and is looking to increase the excise tax on mining firms from the current rate of 2% to between 5-7%.|