Wednesday, May 7, 2014

Expanding Mining Worldwide: Political Risks


Expanding Mining Worldwide: Political Risks

The changing world brings a lot of changes in the way the natural resources business is conducted.  It is now obvious that many companies are looking for new markets that promise new achievements in their quest for adding value – thus they go to the areas of the world that are not exactly encouraging for miners. Thus, the most imperative tasks today is to understand  and correlated the risks and measure them across the favorable outcome. In this short post I would like to discuss some ideas in regards to one of the most important risks factors in mining – political.

Ernst & Young in their annual report Business risks facing mining and metals  just touch one of the aspects of the issue: “Resource nationalism. Mineral-rich countries are ensuring that they are extracting sufficient economic rate for the right of a mining company to exploit that resource. In some instances, governments are looking to replace other areas of lost revenue with further imposts on the mining and metals sector.”

Yet in 2006 Ben Cattaneo, Practice Leader, Mining & Metals, Control Risks, in his presentation Managing Political Risk in Mining Operations provided this graph, that in my opinion is still factual  

Now, with all recent and continuing events, the political risks seem to be increasing in their importance.
Willis Group Holdings - a leading global insurance broker that is handling risk management and reinsurance in their Willis Mining Market Review 2010 note: “The mining industry is among the most vulnerable to Political Risks in emerging markets. Due to its importance to host economies, mining projects can easily become flash-points for nationalist debate, often leading to governmental expropriations, licence cancellations and contract “reviews”. These experiences are familiar to commodity producers in many countries, especially as resource nationalism resurfaces.”  This is good analysis with some specific case studies (including DRC).

A week ago PwC released a presentation: Political Risks in Mining. PwC Mining Minds: Monthly executive Breakfast Series. 7 April 2011, Robert Johnston and Divya Reddy, Global Energy & Natural Resources.

This presentation discusses the natural resources and political risks, the key components being: geopolitics, global trends, legislation, regulation, rate-making, comparative analysis, and other. In particular, the authors note that politically risky countries dominate gold and copper supply jurisdictions. They also introduce the frontier markets, as less politically stable places that provide an uncertain operating environment for mining companies, as examples: Madagascar, Mongolia, DRC and others.

“Mining companies must, and generally do, treat the management of their relationships with government as a top priority. Governments are, in most cases, a long-term partner in a mine, even if they do not hold an equity interest.” – This is statement for the October 29, 2010 Mining Journal’s Special Report Staying on side. Mining companies use a range of tools to avoid disputes. It in detail analyzes the policies and methods that foreign governments are using in their dealings with mining companies.“Investment protection should be one of the main considerations when structuring a new investment (alongside tax, financing and regulatory considerations), especially in a country deemed to be high-risk.”

Alongside with the suggestions from this article there is another way: Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, which provides Political Risk Insurance (PRI) to investors in emerging markets against non-commercial risks, including currency transfer restrictions; expropriation; war, terrorism and civil disturbance; and breach of contract. I would not go into details, that can be found at the Agency’s Web-site, but I recommend to look into the projects that are supported by MIGA at their MINING SECTOR PAGE (or download the brochure that explains their mining projects), and read the Blog Post on possible political risks in Africa in the view of latest world events.

And here are some useful documents that I recommend to read:

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