London, 19 May 2010

High mineral prices are stoking risks for miners worldwide as countries move to cash in on the profits, and the trend may accelerate due to prospects of nationalisation in some places. Robust metal prices have raised governments' incentives to impose higher royalties, windfall taxes or, in extremes, nationalisation.

Spot gold hit record highs above $1,200 last week while copper, at around $7,000 a tonne, has more than doubled in value since hitting $2,800 at the end of 2008. "The big looming potential political risk for miners is, ironically, the increase in mineral prices," said Fred McMahon, vice president of international research at the Fraser Institute in Canada.

"When (prices rose) prior to the recession, miners faced increased demands from both governments and unions, and this can push some mines over the edge of economic viability," McMahon said. He added miners around the world "feel under attack".

Mining shares sank early this month when Australia announced a 40% tax on mining profits. Canadian province Quebec is also raising its mining taxes. Top copper producer Chile recently hiked royalties, although this was spurred by the need to rebuild parts of the country after February's earthquake.

Some investors are concerned that countries risk pushing miners out by over-stepping the mark and threatening the financial viability of projects. Underlining this risk, global miner Rio Tinto is reviewing its Australia operations due to the tax change.

Analysts voiced concern that governments often slap inflexible taxes on the cyclical business in boom times, but are sometimes slow to adjust taxes down when the boom times fizzle.

"Appetite is coming during the meal. As you get a taste of mining taxes, and then you would like to get more of it," said Eugen Weinberg, an analyst at Commerzbank.

Appetites Growing

Prices look set to keep whetting governments' appetites. Base metals are poised to strengthen on powerful Chinese demand, interest from investors and supply tightness, while gold looks well supported by Eurozone sovereign debt problems.

"As prices continue to be supported, you're likely to see other countries following suit, particularly in Africa," David Wilson, an analyst at Societe Generale, said of governments worldwide raising taxes and royalties.

Indeed, the trend is growing in Africa. A recent example is Tanzania which has passed a new law increasing the rate of royalty paid on minerals like gold, and requiring the government to own a stake in future mining projects.

But where next? Ghana is high on investors' radar after Africa's second-biggest gold producer announced in November plans to double royalties paid by mining firms.

In South Africa, investors are unnerved because the ruling party's youth wing has been calling for miners to be nationalized. And investors will also keep an eye on Latin America after some nationalization drives in the region in recent years.

But for now foreign investors there seem undeterred. "One has to wonder whether mining's near-term future is to be characterized by on-going earnings downgrades," said Christian Georges of Olivetree Securities, citing Australia's tax as well as potential tax hikes in China and South Africa.

However, miners can be comforted by signs of restraint by some countries that are wary not to scare off foreign investors. Zambia, for example, has raised mining taxes but the country last year agreed to scrap for good a windfall tax in order to keep foreign investors on side.

Ends --

By Rebekah Curtis, Reuters - for Commodities Now.