RIO Rio Tinto Limited

By Rhiannon Hoyle in Jakarta, Indonesia, and Alexandra Wexler in Kalumbila, Zambia 

From Congolese jungles to Indonesian highlands, a struggle is raging between governments and major mining companies over control of commodities vital to the production of everything from steel to electric cars to smartphones.

Developing-world leaders, spurred by rising mineral prices, are making their toughest demands on Western mining companies in years, squeezing them to pay higher royalties and taxes, process commodities locally and cede control of mines.

In Indonesia, Rio Tinto PLC and Freeport-McMoRan Inc. were pressed to sell majority control of the world's second-largest copper mine, Grasberg, to a government that aims to transform its state-owned resources companies into industry behemoths.

Tanzania last year slapped a subsidiary of Canada's Barrick Gold Corp. with a $190 billion tax bill -- four times the country's gross domestic product. In March, Zambia handed Canada's First Quantum Minerals Ltd. a tab for import duties and penalties totaling roughly $8 billion. The Democratic Republic of Congo signed into law a new mining code in June that will take a bigger slice of miners' profits. Papua New Guinea, Mali, Sierra Leone and others have also put mining contracts and legislation under review.

"I will not hesitate to close down all the mines if companies don't pay what they owe us," Tanzanian President John Magufuli told a cheering crowd last year. "I have launched an economic war."

Governments say the countries deserve more of the profits from the extraction of their resources. Demands for bigger stakes in resource wealth have risen before -- often when prices go up -- but people in the industry say fiscal and political pressures now are hardening governments' resolve to extract more wealth from mining conglomerates.

A wave of new, populist governments are struggling to pay the bills after their countries borrowed heavily for infrastructure in recent years. Governments see miners -- often the biggest companies in the country, who have little flexibility to leave after years of investments -- as potential sources of revenue. Prices of many commodities have recovered, even though they aren't close to record levels seen roughly eight years ago, and profits of the world's top 40 miners more than doubled last year.

"We are very profitable and therefore everybody -- communities, governments -- wants to have a bigger share of the cake," Rio Tinto Chief Executive Jean-Sébastien Jacques said in an interview.

Miners argue they deserve large profits because of the financial risks they take and the huge upfront costs needed to explore and build a mine. Still, miners say they have a new understanding of the importance of disclosure in contracts, and of the need to be more collaborative with governments to gain what they call a social license to operate -- the widespread support of the community.

Some mining giants are staying put, contesting the moves or trying to renegotiate terms with governments, which typically give them the rights to dig up resources in exchange for royalty payments. Others are turning to new investments at home, hoping technology can help revive older sites. Anglo-Australian BHP Group Ltd., the world's biggest mining company by value, says it wants to focus on more-predictable places including Australia and the U.S. after pulling out of South Africa, Mozambique, Indonesia and elsewhere.

Some miners walking away are selling assets to local investors or to Chinese companies, who are driven by demand at home and who don't face the shareholder pressures over risk that Western miners do. State-owned companies also tend to report less than listed, international miners.

Mining executives say the resurgence of what they call resource nationalism could stifle investment in new projects because of increased costs and risk. Local miners may lack the capital or skills to operate alone, potentially reducing output, they say. Countries that depend on resources revenue to fund their budgets could suffer.

For markets, fewer new supplies could send metals prices soaring if global growth remains strong, potentially making products from Tesla Inc.'s Model 3 to Apple Inc.'s iPhones more costly.

In Tanzania, populist Mr. Magufuli took power in 2015 in an election marked by fraud allegations, and began centralizing power. After campaigning on a promise to carve out a bigger stake in resources for the state, the leader nicknamed "the Bulldozer" canceled mining licenses for many companies, raised royalty payments and accused Barrick Gold's subsidiary, Acacia Mining PLC, of underreporting gold and copper production, leading to its $190 billion bill for unpaid taxes, penalties and interest.

The country also seized a U.K. miner's roughly $15 million shipment of diamonds from an airport, claiming it had been undervaluing exports, and banned exports of some metal concentrates to force the development of its local refining industry.

Mr. Magufuli said the moves, which polls show are popular locally, reset the balance between foreign companies and taxpayers after many miners received sweetheart deals under previous administrations.

Acacia, which accounts for 15% of Tanzania's total exports, denied wrongdoing. Barrick last year said Acacia would pay $300 million as part of a deal to resolve the dispute, or nearly 40% of Acacia's 2017 revenue, but a final agreement hasn't been reached.

Acacia's production has nose-dived in the face of Tanzania's export ban on metal concentrates, and the company has said it is looking to sell a stake in some or all of its assets in the country.

Zambia was long seen as being among the most investment friendly countries in the region, but that has shifted. Its position as Africa's No. 2 copper producer behind Congo helped spur economic growth, bringing shopping malls and tidy brick homes to the landlocked nation.

Copper prices, while healthy, are still down about 40% from their 2011 peak, leaving the government with deteriorating finances. Mining accounted for 12% of the country's GDP in 2016. Zambian government debt is expected to balloon to 66% of GDP in 2018, from 27% five years ago.

First Quantum's Sentinel copper mine, which it built for $2.3 billion, went into production in November 2016. More than 45 giant trucks haul rock out of the pit daily. Off-duty workers and their families stroll along paved, tree-lined streets dotted with giant anthills in a town First Quantum built for over $85 million.

This spring, Zambia delivered First Quantum a nearly $8 billion bill for what it said were mislabeled import duties on machinery and materials brought in to build Sentinel, as well as penalties and interest. "We shall pursue all available options to the authority to recover all taxes on behalf of the Zambian people," a spokesman for the Zambia Revenue Authority said in March. Officials declined to comment further.

First Quantum has denied wrongdoing. "We're just stunned there," Philip Pascall, chief executive of First Quantum, said on a call after the fine was announced. "We completely refute the entire amount." First Quantum said it was engaging in dialogue with the government on the issue.

Zambia announced new mine tax measures in September, including a royalty increase of 1.5 percentage points, a fresh 5% charge on copper and cobalt concentrate imports and a 15% duty on the export of precious metals and gemstones. The finance minister said the measures are intended to ensure that "Zambians benefit from the mineral wealth."

Across the Indian Ocean, in Indonesia, many foreign miners have sold operations after years of revisions to mining policies. Leaders in the mineral-rich archipelago nation have long wanted foreign miners to share more profits, fueled by concerns they got cushy deals under former dictator Suharto, who ruled until 1998.

Indonesia has focused on the Grasberg copper mine, by far its most important asset, and to many Indonesians the biggest symbol of foreign corporate power.

Located at more than 14,000 feet in the mountains in the remote province of Papua, it has been a cash cow for Freeport, catapulting the Phoenix-based company into the ranks of the biggest copper producers, with $1.8 billion in profits last year.

It has also been a source of local controversy since its initial contract was signed in 1967, which originally gave no stake to the government. Contract negotiations then and in the decades that followed were surrounded by reports of insufficient expertise within the regime, and insider dealing between Suharto and his inner circle and Freeport officials, documented in a Wall Street Journal investigation in the 1990s. Freeport said that its contract was fair.

The mine was also dogged with allegations that Freeport caused environmental damage and colluded with Indonesia's military, which has violently cracked down on separatists who oppose the mine. Freeport said it adheres to the highest human rights standards and is committed to minimizing its impact on the environment. It said it has invested more than $14 billion at Grasberg over five decades and has been one of Indonesia's largest taxpayers.

With its license running out in 2021, negotiations intensified last year to give Indonesia more control and profit. Jakarta canceled Freeport's export permit. "After 50 years we also have to consider the people of Indonesia," Luhut Pandjaitan, coordinating minister for maritime affairs, which oversees minerals, said last year.

Freeport declared force majeure at the mine, laid off more than 10% of its 32,000 workers and threatened to take Indonesia to arbitration.

Jakarta then threatened to cut off services needed to export commodities, such as access to customs documentation, to mining companies that weren't up-to-date with taxes owed under new permits.

In early 2018, environmental officials ordered Freeport to start recovering 95% of its waste from a nearby river in which it discards the material known as tailings, from 50% of the waste now.

Freeport chief executive Richard Adkerson said that was impossible. "It cannot be done within six months, 24 months, five years...This is so far out of bounds," he told investors. He said he feared political motivations were behind the move.

Jakarta said the move wasn't politically motivated and was sparked by violations seen during a site visit. Freeport's share price fell 15% on the day the news became public. Shares are currently near an 18-month low.

A deal was signed in September in which state-owned PT Indonesia Asahan Aluminium, or Inalum, will pay $3.5 billion to Rio Tinto for its interest in Grasberg and $350 million to Freeport, pushing Inalum's stake from 9.4% to 51%. Freeport will retain 49% and operate the mine. Mr. Adkerson earlier described the result as a "major concession" but necessary for continued investment there.

Freeport is hiring for a new copper project in Arizona, joining the ranks of Western companies who are working to expand operations in the U.S., Canada and Australia. The Lone Star resource was found during exploration near the company's Safford mine, and production is expected to begin by late 2020. Freeport forecasts the mine will produce about 200 million pounds of copper a year, with a life of around two decades.

Rio Tinto and BHP say autonomous vehicles and the ability to dig deeper because of advanced climate-control systems and data analytics have made it economically feasible to mine areas far underground, such as at the pair's joint-venture Resolution Copper project in Superior, Ariz.

South32 Ltd., a BHP spinoff, recently bought Arizona Mining and its Hermosa zinc, lead and silver project in Santa Cruz County, Ariz., for $1.3 billion. The company is working to unload a coal unit in South Africa, where government policy requires miners to sell large stakes to black-owned entities.

"We want to go to places where we are welcome and the friction towards our investment is low," BHP chief executive Andrew Mackenzie said in May.

--Nicholas Bariyo in Kampala, Uganda, contributed to this article.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com and Alexandra Wexler at alexandra.wexler@wsj.com

(END) Dow Jones Newswires

November 18, 2018 14:32 ET (19:32 GMT)

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