Nationalization Panic Strikes Gold Miners

COLORADO SPRINGS ( TheStreet ) -- Nationalization fears were reverberating through the gold mining community at the Denver Gold Forum.

"Ernst Young had a report out on the mining industry," said NovaGold ( NG) cheif executive officer Rick Van Nieuwenhuyse, "and they identified the number one issue for the mining industry is nationalization, whether it's in bite sized pieces by taxing you to death ... or its taking a bigger piece of the pie or the whole pie. They usually don't take the whole pie until you've invested your capital."

The fears are warranted. Mongolia announced Tuesday that it was thinking about increasing its stake in the Oyu Tolgoi project in South Gobi. Ivanhoe Mines, which is almost 50% owned by Rio Tinto ( RIO), owns 66% of the project and the government 34%. According to reports, the government might try to increase its share to 40%.

Hugo Chavez in Venezuela did something similar Monday by announcing that all the gold mined in the country had to be sold to the government and that 55% of gold miners belong to the state -- companies have 90 days to make that joint venture.

Australia is still debating raising its mining tax and Peru just hiked taxes. Mining companies will be taxed on their operating profits and not more than 50%. This tax increase was actually considered a victory by the mining industry that newly elected socialist leader, Ollanta Humala, didn't get more aggressive.

David Christensen, CEO of ASA Gold and Precious Metals ( ASA) said " nationalization is going to play out ... the pie has gotten bigger and so the perception is that they should take the larger portion of the pie."

Christensen names West Africa as the nation with the biggest risk, although South America has been getting the most press, which is bad news for Randgold Resources ( GOLD), which operates exclusively in the region.

Randgold CEO Mark Bristow is completely unconcerned. "If you're Barrick Gold ( ABX) in Tanzania and you've delivered on none of your promises and you don't have anything to offer and everyone hates you, you're in the ****. But if you're in Mali where we represent 22% of GDP with AngloGold Ashanti ( AU) and we've delivered on everything and we've paid $1 billion of taxes since 2001 and created 7,000 brand new jobs" then it's a different story.

Christensen says Randgold is relatively insulated from the nationalization risk, although higher taxes are a given, because Bristow has done such a good job of working with the local communities. "We don't deal with governments. We deal with the country, we don't pay bribes, we deal with the company and its people and the government happens to represent them."

Randgold's corporate tax holiday for its Tongon mine in the Ivory Coast runs out in 2015. The company has been paying royalties but no duties and corporate tax. Once that grace period expires, the company will have to pay out 25% more in taxes. Bristow was unfazed not only because he is expecting it, but also because his tax holiday in Mali just ran out and that increase was even steeper at 35%.

Newmont Mining ( NEM) CEO Richard O'Brien thinks nationalization is a trend but that "it's part of life." He says Australia started the trend by pushing for higher taxes and that other countries are now saying 'what about us?' It should be noted that South African miners have had to deal with this problem for years, which is why local miners like Harmony Gold ( HMY) have been trying to diversify out of the country, but now the rest of the world is catching up.

"I think there is a point where you push too far. People can't make investments or they won't make investment or they chose to go somewhere else,' says O'Brien, who added that the company is working with governments to communicate the benefits of mining. Since Newmont is a global miner with projects in hot-button tax areas like Australia, Peru, Ghana and Indonesia, O'Brien has his work cut out for him.

Barrick Gold, the largest gold miner in the world, has the same problem as Newmont. "The encouraging thing is that in most countries where we are operating," said CEO Aaron Regent, "there has been a constructive dialogue between the industry and the government."

Regent is not concerned about outright nationalization and thinks the tax situation should stay in check as long as governments are open to working with the industry.

Two companies that are relatively protected from the threat of nationalization are Silver Wheaton ( SLW) and Royal Gold ( RGLD). As royalty companies, they give money to miners in exchange for gold or silver but carry no production and execution risk.

"When it comes into increases in taxation," says Silver Wheaton CEO Randy Smallwood, "they have no impact on our business. They are the responsibility of the operating partner." Silver Wheaton gives money upfront to a miner and then buys silver ounces at a fixed cost of $4 an ounce.

Royal Gold has that type of streaming royalty but also has other arrangements where it can put up a lot of cash upfront for a portion of gold production over the life of a mine or it can take a percentage of the miner's profits. Profit royalties, as they are called, could be hurt by a higher tax rate although Jensen says he hasn't seen that yet.

Jensen also tries to stay in less risky areas. Ninety seven percent of the company's reverses come from the U.S., Canada, Mexico and Chile - although Chile could see more tax reform - and 80% of revenues come from those countries. "In all our business interests we have we don't have any kind of concern right now that nationalization might be on the forefront of any of those."

Smallwood says that some of their streaming royalty contracts might even protect them against nationalization "we've got, in some cases, corporate guarantees pertaining to ownership and such," meaning that in some cases its contract would pass over to the government.

"There is just such a long track record with nationalization," says Smallwood, "and as the information age gets broader and broader and that history is out there for everyone to understand that option just has less and less strength behind it" Smallwood sites the tax reform in Peru as a good example of government leaders being reasonable about taxes (if 50% of operating profits can be considered reasonable) "I think that anyone that was concerned about Peru has to be a bit humbled in terms of how positive it has actually turned out."

NovaGold could actually be the biggest winner of increasing nationalization fears. Van Nieuwenhuyse was one of the few CEOs to highlight the nationalization trend in their presentation, as many ignored or dismissed it, and he made sure to use it to underscore the safety of NovaGold's properties located in British Columbia and Alaska. Shares are down more than 40% year to date and the company has received a lot of bad press recently due to rising capex budgets, so any kind of positive news is like a lifeline for the company.

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-- Written by Alix Steel in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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