One of the most serious and unpredictable risks facing mining
operations and investor interests is "country risk" - where the
political and economic stability of the host country is questionable and
abrupt changes in the business environment could adversely affect profits or
the value of the company’s assets.
Miners, because the number of discoveries was falling and existing
deposits were being quickly depleted, have had to diversify away from the
traditional geo-politically safe mining countries, ie Canada and the US. The
move out of these “safe haven” countries has exposed investors to a lot of
additional risk.
We’ve seen far too many instances of companies losing assets that
were lawfully theirs. If the management side of the companies we invest in is
so important then maybe we should start regarding the management of the
country they operate in as at least as important?
Many countries might come to mind as places where shareholders could,
without warning, receive news that their operations have been taken over by
the government and/or its friends, or that permits are suddenly suffering
delays or have been cancelled outright.
There is nothing quite so heartbreaking to an investor as having his
company’s flagship project taken over, nationalized, by the "El
Presidente for life" of the country they’re working in.
Security of Supply
Access to raw materials at competitive prices has become essential to
the functioning of all industrialized economies. As we move forward
developing and developed countries will, with their:
- Massive population booms
- Infrastructure build out and urbanization plans
- Modernization programs for existing, tired and
worn out infrastructure
Continue to place extraordinary demands on our ability to access and
distribute the planets natural resources.
Threats to access and distribution of these commodities could
include:
- Political instability of supplier countries
- The manipulation of supplies
- The competition over supplies
- Attacks on supply infrastructure
- Accidents and natural disasters
- Climate change
Accessing a sustainable, and secure, supply of raw materials is going to become the number one priority for all countries.
Increasingly we are going to see countries ensuring their own industries have
first rights of access to internally produced commodities and they will look
for such privileged access from other countries.
Numerous countries are taking steps to safeguard their own supply by:
- Stopping or slowing the export of natural
resources
- Shutting down traditional supply markets
- Buying companies for their deposits
- Project finance tied to off take agreements*
Country Risk + <Security of Supply = >Resource
Nationalism
Resource Nationalism isthe tendency of people and governments to
assert control, for strategic and economic reasons, over natural resources
located on their territory.
Traditionally the major benefits for developing countries (from their
natural resource endowment) came in the form of:
- Employment/wages
- Government revenues - taxes, royalties or
dividends
There can also be indirect benefits such as knowledge and technology
transfers. Foreign investments can also involve infrastructure investments,
sometimes on a massive scale, like electricity, water supplies, roads,
railways, bridges and ports.
Today many governments are looking at other ways to get more money from
miners.
Ernst & Young Global Mining & Metals Leader Mike Elliott says
governments have gone beyond taxation in getting more out of the mining
sector with a wave of requirements such as mandated beneficiation/export
levies and limits on foreign ownership.
Mandated beneficiation/export levies - Governments are imposing steep new export levies
on unrefined ores to force mining companies into domestic beneficiation.
Minerals beneficiated in-country capture more of the value-chain as the
products will achieve higher prices.
Increasing state ownership- How does a mining company factor in a
change to forecast returns after a countries mining policy mutates during/after
project development? Miners are easy targets because mining is a long term
investment and one that is especially capital intensive – mines are also
immobile, so miners are at the mercy of the countries in which they operate.
Outright seizure of assets happens using the twin excuses of historical
injustice and environmental/contractual misdeeds. There is no compensation
offered and no recourse.
Below are a few examples of recent resource nationalism:
Argentina re-nationalizationed YPF, in 2012, at the expense of
Spain’s Repsol.
Bolivia’s President Evo Morales expropriated South American Silver’s
silver and indium mine on Aug. 2, 2012.
“The nation has no financial obligation to South American Silver.”
Mining Minister Mario Virreira
“Indonesia has kicked off the new year (2014 –
editor) with a total ban on exports of nickel, tin and bauxite, a warning
that resource nationalism remains a potent force despite the commodity
slump.” The Telegraph, Resource
nationalism alive and well as Indonesia bans key metal exports
Zambia, Africa’s second largest copper producer, has raised both underground and open pit mining
royalties from 6% to 8% for 2015. The hike in royalties is especially painful
as it’s on gross revenue not a companies’ bottom line, completely missing
rising operating costs. Zambia will also introduce a 30% corporate processing
and smelting tax, a 30% tolling tax and open pit mining will be subjected to
a 20% mineral royalty.
Guatemala is going increase its mining royalties in 2015, from 1
percent to 10 percent, with 9 percent going to the central
government and 1 percent remaining in the municipalities.
Conclusion
There’s a storm brewing on the horizon - country risk and lack of
security of supply means resource nationalism is on the upswing. These
developments could also mean increased regional militancy and insurgency.
Keeping a weather eye on developments in the countries we’re invested
in should be on all our radar screens.
Are you
storm watching?
If not, you should be.
Richard Mills
Richard lives with his family on a 160 acre ranch in
northern British Columbia. He invests in the resource and
biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com.
His articles have been published on over 400 websites, including:
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Association of Mining Analysts.
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***
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