Spain has some of the most mineralised territory in western
Europe and one of the most diversified mining sectors,
producing mostly significant quantities of industrial minerals
and stone.
The country is a leading EU
producer of natural sodium sulphate, slate, and strontium
minerals and is the world’s third-largest producer of
gypsum, fifth-largest producer of sand and gravel and
sixth-largest producer of fluorspar.
Spain has an established mining
history and is attractive to local and overseas mining
companies. Its highly prospective geology is complemented by
the country’s stable regulatory framework and transparent
legislative standards. The fiscal environment is favourable for
the extraction of natural resources and is further boosted by
the provision of nonrefundable government grants for
exploration and mine development.
Spanish minerals are owned by the
state. The Mining Law of 21 July 1973 and the Hydrocarbon Law
of 7 October 1998, govern the mineral industry and the
Direcci—n General de Pol’tica EnergŽtica y Minas
implements these laws. Under Law-20 of 5 June 2006, the Finance
Regime of government-owned holding company, Sociedad Estatal de
Participaciones Industriales (SEPI), was modified and it has
mining as one sector in its portfolio. SEPI owns a number of
mines in Spain and has a stake in others. The sector is
comprised of state-owned companies, joint ventures between
state and private companies and privately owned companies,
including international mining companies.
Mineral fuels and derivatives
accounted for around 5% of total exports and 15% of imports in
2011. Aluminum accounted for 1.2% of total exports and 1% of
total imports; iron and steel, 3.3% of total exports and 4.3%
of total imports; industrial minerals, 2.6% of total exports
and 3% of total imports; and base metals, 2.3% of total exports
and 2% of total imports respectively . Spain’s top import
and export partners are other EU member states, plus China.
Impact of the global
financial crisis
Spain was severely impacted by the
global financial crisis and its industrial minerals sector is
still under pressure from the Eurozone recession. Between 2008
- 2010, industrial minerals output decreased by 50% in response
to the economic downturn that affected major end markets for
construction materials and ceramics. In 2010 the minerals
sector contributed 1% of Spain’s GDP and employed over
80,000. By 2011, as demand contracted, the contribution of the
mineral sector had fallen to 0.8% of Spain’s GDP and
employed around 60,000 people.
Throughout 2011, market confidence
remained weak, and Spain saw a substantive reversal of foreign
investment in the second half of 2011 and early 2012. For
instance, Alcoa, Spain’s leading manufacturer of
aluminium, announced that production would be curtailed by
mid-2012 at its Aviles and La Coru–a aluminum smelters,
which have production capacities of 93,000 tpa and 87,000 tpa,
respectively. An uncompetitive energy position combined with
rising raw material costs and falling aluminum prices, which
decreased by more than 27% from their peak in 2011, led to the
curtailment of the facilities.
In particular, cement production
fell by over half from around 42m tonnes in 2008 to just 20m
tonnes in 2012. The primary drivers of this were a near halt to
new construction activity in Spain and the Eurozone more
broadly, including budget cuts that hit public works spending.
Production drops for fluorspar were less severe, falling from
around 150,000 tonnes in 2007 to 120,000 tonnes in 2012. Gypsum
production has held steady at around 11.5m tonnes.
Spain’s speciality minerals
like sepiolite (an alluminate silicate clay) and iron oxide
have fared much better and consumer demand remains more
consistent.
Subsidies and industrial action
A rise in protests and other forms
of industrial action have been triggered by the
government’s response to the financial crisis. Subsidies
to the coal industry were one of the main casualties of the
austerity budget, introduced by Mariano Rajoy’s
conservative government when it came to power in December 2012,
and a casualty of EU directives. EU member states are not
usually permitted to subsidise national industries but because
of the importance of coal to Spain, accounting for 30% of
electricity production, an exception was made in 2002. The
exception expired in 2010 and Spain is set to stop subsidies to
non-profitable mines by 2018. European coal is uncompetitive to
produce and the EU is against the subsidising of industries
that cannot survive on their own. EU initiatives to reduce fuel
emissions by 20% by the year 2020 also make it illogical to
subsides a sector with high emissions.
The Spanish government is speeding
up these cuts and reducing the subsidies it pays to the mining
sector by 63% next year. The miners say the current Spanish
government should stick to an agreement, signed by the previous
socialist government in Spain, to reduce the subsidies by only
10% in 2013. Around 8,000 mineworkers from over 40 coal mines
in northern Spain staged a nationwide strike in June 2012
organised by unions bitterly opposed to reductions in coal
subsidies from Û300m ($391.63*) to Û110m. The
subsidy cuts are intended to save Spain millions as it seeks to
reduce its budget deficit and borrowing needs at a time when it
is challenging to raise loans at sustainable interest
rates.
Mining unions claim the cuts will
put 8,000 mining jobs in jeopardy and affect the towns and
communities that depend on the salaries for their survival.
With unemployment at 25% (50%, among the under 25s), the
prospects for miners to find alternative employment in the
future is limited.
The subsidy cuts are made more
contentious because Spain has limited energy resources, causing
many to view coal as a strategic sector amidst a huge
dependency on energy imports. The country has one offshore
natural gas field (2.5bn cubic meters), no significant oil
reserves (150m barrels) and coal mines that contain low-quality
coal (530m tonnes). Spain’s output of mineral fuels is
insufficient to satisfy domestic demand, and the country will
continue to be a large-scale importer of fuel minerals.
Investing in Spanish
minerals and mining projects
The Spanish minerals sector
continues to be of interest to domestic and foreign mining
companies, with the Iberian Peninsula a notable target for
mineral exploration because of past discoveries of large
volcanogenic massive sulfide (VMS) deposits. Operating in an
established mining region is advantageous as some crucial
infrastructure will already be in place and local communities
will have experience of working with mining companies.
While Spain is a developed
territory, the potential for an adverse political risk event to
affect mining operations remains. Given the current level of
country economic risk and the need for the government to raise
income receipts, the risk of non-payment or changes to the
legal and regulatory framework affecting mining concessions
pose the most significant risks.
There are a number of steps mining
companies can take to minimise the risk to mining projects in
Spain.
The first step is to understand
that all risk is local and that an integral part of the due
diligence process is to review the specific environment in the
specific region of the country for their specific project. A
review of security on the ground, legacy issues, reputational
risk, social impact, environmental impact and relations with
the current and potentially future political decision-makers in
the host country is essential. This is exemplified by the
changes that occurred in subsidy policy towards the mining
sector in December 2011 when the socialist government was
replaced by the conservative government of Mariano Rajoy
Brey.
The second step to reduce country
risk for a mining project is to identify the range of
stakeholders and their respective interests. Stakeholders are
not limited to those entities that finance the project and
include the host government, local government, community groups
or tribes, project sponsors, lenders, offtakers and NGOs.
Active engagement with the full range of stakeholders at the
onset of the project will contribute to the establishment or a
stable operating environment.
The third step is to ensure
equitable reward sharing between project sponsors, the host
government and other participants. A major driver for resource
nationalism has been perceived inequality in returns when
commodity prices rise. This is a particular issue in the mining
sector where agreements between a multinational enterprise
(MNE) and a host government initially reach favour the MNE but
where, over time as the MNE’s fixed assets in the country
increase, the bargaining power shifts to the government. One
way to address this is to link government royalties to
profitability and commodity prices. Direct government equity
participation in projects can also be a risk management tool
and may be an alternative to the royalty structure.
While resource nationalism is more
usually associated with emerging territories, many
cash-strapped western governments have used taxation to extract
greater revenue from natural resources projects.
The fourth step is to engage with
non-governmental stakeholders. Many operational NGOs are more
appreciative of the developmental benefits of investing in the
resources sector and are willing to work with foreign
investors. Their local expertise may prevent the project
company from inadvertently creating new risks and, for example,
in developing local infrastructure can advise on balancing the
interests of competing tribes, employing from across ethnic
groups and sensitivities to such things as religious and
historical sites.
The fifth step is to consider the
benefits engagement with multinationals may bring. As a
preferred sovereign creditor, the World Bank wields
considerable influence in the event of contractual disputes and
defaults with emerging governments. This influence is
reinforced by the World Banks’s role as a key source of
liquidity when a country is in turmoil.
The sixth step is to consider
recourse under bilateral investment treaties (BITs) which have
long provided a valuable source of risk mitigation and valuable
safety net to counter the worst excesses of government
behaviour. This is particularly beneficial in the case of Spain
which has signed 61 BITs and ratified the majority of them.
The seventh step is to provide
adequate protection for personnel, particularly in territories
with histories of kidnap for ransom and active terrorist
groups. In conjunction with ensuring operational continuity,
companies owe a basic duty of care to their employees and must
ensure that suitable security plans are implemented and
regularly reviewed to minimise the risks of an incident
occurring. Risk cannot be completely removed from a project and
should an event happen the company needs to have an effective
crisis plan in place, which will include access to specialist
third party service providers for medical or political
evacuation or kidnap response.
The eighth step in the risk
management process is to insure these risks. Political Risk
Insurance (PRI) can insure against loss to foreign lenders,
investors, suppliers and traders with mining companies. There
are a range of perils that these risk participants may be
exposed to depending on the specific project, the basis on
which it trades, the location and associated contractual
agreements.
Local politics matter
A key issue that is often
misunderstood when looking at political risk in the mining
sector is the idea that the key asset to be insured is the
energy reserves. In the private sector the asset is in fact the
right to explore for and receive a share of the revenue derived
from natural resources, not an ownership right in those
resources. This means that the fundamental peril for investors
and lenders to resources projects is often the repudiation of
the operating agreement by the host government and not the
confiscation of the mining assets. This is a crucial in an era
where government action may take different forms that are not
of the character of expropriation as has been traditionally
understood but do constitute a repudiation of existing
operating agreements, often through a process of ‘creeping
expropriation’.
The private PRI market, comprising
of over 40 syndicates and companies, has theoretical capacity
for a single project in excess of $1bn. Securing this capacity
and agreeing conditions and a competitive price is most
successfully achieved by demonstrating clear identification of
the underlying perils and appropriate risk management.
Political risk underwriters of resource projects pay careful
attention to due diligence and do distinguish between the
qualities of similar projects in the same territories.
PRI won’t fix a bad deal or
contract. But when a project is well structured and the correct
PRI coverage purchased, PRI does act as an effective safety net
for your investment.
*Conversion made July
2013