THIS
POST WAS ORIGINALLY PUBLISHED APRIL 16, 2011
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.
Source: Political Risks in Mining
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:
- Old problems remain, new ones crop up: Political risk in the 21st century, Jo Jakobsen, Norwegian University of Science & Technology, NTNU, NO-7491, Trondheim, Norway – more theoretic paper
- Business risks facing mining and metals by E@Y
- Managing Volatility Risk in mining investment decisions by Deloitte
- Measuring and mitigating risk in mining operations
- Political Risk Insurance Critical for Global Mining Projects By MIGA
- Managing Political Risk in Mining Operations Ben Cattaneo Practice Leader, Mining & Metals, Control Risks
- Political risk and the mining sector Tanya Costello Associate Director, Control Risks
- Bankable feasibility studies for mining projects D. S. Evans, Sr. Partner, CSC Project Management Services Calgary
- Mitigating Political Risk In International Projects
- Challenges to Cross-Border Investments in Mining in Africa
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