Expanding Mining Worldwide: Political Risks

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.”

 

Source: Business risks facing mining and metals

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

Doing Business Worldwide - World Bank Project

THIS POST WAS ORIGINALLY PUBLISHED MARCH 24, 2010

Doing Business Worldwide - World Bank Project

When entrepreneurs are trying to expand their business vision and find new applications for their business acumen, they usually start thinking of going to other countries of the world besides those their business is in at the time being. Thus, they require a lot of information about how to start a business in new jurisdiction, and usually seek for some good resources. Here I would like to point to a very functional one – a project of World Bank - the Doing Business project. It was launched 8 years ago and looks at small and medium-size companies and measures the regulations applying to them through their life cycle for many countries of the world. The first Doing Business report, published in 2003, covered 5 indicator sets in 133 economies. In 2010 it covers 10 indicator sets in 183 economies. The project has benefited from feedback from governments, academics, practitioners and reviewers. The initial goal remains: to provide an objective basis for understanding and improving the regulatory environment for business.
Doing Business provides a quantitative measure of regulations for starting a business, dealing with  construction permits, employing workers, registering property, getting credit, protecting
investors, paying taxes, trading across borders, enforcing contracts and closing a business—as they apply to domestic small and medium-size enterprises. It encompasses 2 types of data. The first come from readings of laws and regulations. The second are time and motion indicators that measure the efficiency in achieving a regulatory goal (such as granting the legal identity of a business).
Seven years of Doing Business data have enabled a growing body of research on how performance on Doing Business indicators—and reforms relevant to those indicators—relate to desired social and economic outcomes. Some 405 articles have been published in peer-reviewed academic journals, and about 1,143 working papers are available through Google Scholar.

So, I strongly recommend to look into it and thoroughly analyze the data before going to any country.

MENA Mining (xi): Yemen

THIS ORIGINAL POST WAS PUBLISHED AUGUST 12, 2011

MENA Mining (xi): Yemen

 Yemen is a country that now is facing an acute economic distress. Discussing political events is not my task here, and this table shows the current situation:

Source: © World Bank Doing Business in the Arab World 2011

More information can be acquired from Doing Business in Yemen 2011 by World Bank

I guess that this paragraph from the Cantex Mine Development Corporation’s Website may be relevant to describe what is going on:

“In the media Yemen has (at best) a tarnished image. It seems every week of late one hears of the conflict in the northern reaches of the country, separatist movements in the south, Al Queda training centers… Whilst these events are factual they present a very skewed image of what is actually happening on the ground.”

Geology of Yemen is in detail described by the Petroleum Exploration and Production Authority (PEPA) and on this page of Ministry of Oil and Minerals.

Beautiful INTERNATIONAL GEOLOGICAL MAP OF THE MIDDLE EAST (reproduced is a part of it) can be downloaded from this resource

This Mining page of the General Investment Authority states:

“The extensive number and measurable reserves of Yemeni rocks and minerals provide opportunities for a variety of industrial use products. Metallic mineral reserves are possibly the most lucrative, with tones of Gold, Zinc, Lead, Silver, Copper, Cobalt, Platinum, Iron and Titanium already discovered and partially mined. Non-metallic minerals, including Limestone, Dolomite and Gypsum also provide profitable investment opportunities.”

Here is the slide that portrays the mining operations:

Source: Yemen Mining Policy Reform: A Key To Future Mineral Resources Investment  Dr. Gaber Ali Al-Sanabani, Acting Country Officer, World Bank at The 3rd International Yemen Oil, Gas & Minerals Conference

It is obvious that most of the operations are running in the North-West and Western parts of the country.  In fact Canadian Cantex Mine Development Corp. has a special presentation : : North-West Yemen. Where Success Need not to Be a Dream where it analyses all operation and in particular provide these results.

Source: North-West Yemen. Where Success Need not to Be a Dream. Cantex, 2010 The 3rd International Yemen Oil, Gas & Minerals Conference

The non-hydrocarbon minerals situation is described with this official summary , which is not up to date. Ministry of Oil and Minerals provides the same not updated information on mining companies operating in the country. Here are some:

ZincOx  Resources Plc . The exploitation and development rights to the Jabali zinc deposit are owned by Jabal Salab Company (Yemen) Limited (“Jabal Salab”), in which ZincOx holds a 52% interest. The balance (48%) is held by Ansan Wikfs Investments Limited, a company owned by a prominent Yemeni business family. The projected total cost of US$ 216 million. Information on minerals may be found on this MINDAT page. However, the latest studies show that there is presence of Zn-rich dolomite phases and zinc occurring in dolomite cannot be processed economically with today's methods. The company suspended this project: “as a result of the uncertain political and security situation in Yemen, the Board determined that none of the Company’s share of its investment in the Jabali Project (£52m) could be recovered with absolute certainty”

One of the companies with a long story of operations in Yemen is Cantex Mine Development Corporation. Detailed description of these operations is found on the Website, as well as the latest update in Interim consolidated financial statements October 31, 2010. Some of them are:

- cooperation with  Vale International SA  in regards to  Suwar, Wadi Qutabah and Al Masna nickel, copper, cobalt and platinum group element projects;

- activities on cooperation of Cantex with Cheetah-Yemen Holdings Ltd. regarding Al Hariqah gold project;

- cumulative expenditures of Cantex on Yemen programs reached $ 22.384 million as of October 31, 2010

Thani Dubai Mining Limited - a wholly owned subsidiary of a privately Thani Investments LLC, based in Dubai, United Arab Emirates,  is currently developing a number of concessions. One of them is the Wadi Medden, located near Al Mukalla ( prefeasibility stage). In 2010 SRK Consulting defined measured and indicated reserves of least 2.2 million ounces. This year Thani announced that the new drilling results have indicated the probable presence of an additional 2.7 million ounces. However, the operations are a long way from the beginning and it is estimated that an expenditure of US$300 million is required until production starts. This technical report provides details of electromagnetic survey at N’teisha gold occurrence (a part of Wadi Medden).

The Arab Mining Company - a joint Arab company headquartered in Jordan, is exploring manganese occurrences in al-Thania area, Marib province. It showed that manganese content is 32.4% - 45.8% and reserve crude material in the concession area is 30.2 million tons.

And finally, a few notes on the investments and incentives for investors.

Two main Laws, the Investment Law No. 22/2002 and the Free Zone Law No. 4/1993 are determining Yemen’s investment environment.

IFC/Yemen Mining Policy Reform Project. Since September 2006, International Finance Corporation's (IFC) regional advisory service agency, thePrivate Enterprise Partnership Middle East/North Africa (PEP-MENA) jointly with the Ministry of Oil and Minerals, is conducting efforts to develop the country’s mining industry. In 2008, first results were achieved, including an internationally competitive fiscal regime in the form of a mining tax section for the new Income Tax Act. In addition, a Mining Law was drafted, redesign of Mining Law/Regulation was conducted. All these materials were submitted, and this past May the Government of Yemen approved draft regulations on the Law of Mines and Quarries; issued directives for the completion of legal procedures to release the regulations. The new law reflects the best international practices that meet demands of local and foreign investors alike with the mining legislation in neighboring countries.

The main characteristics of the investment climate are as follows:

·                  Arab and foreign investors are given the same treatment as Yemenis.

·                  Simple and easy administrative procedures for obtaining an investment license.

·                  Guarantee of repatriation of investment capital and profits.

·                  Exemptions from custom fees and taxes on fixed assets.

·                  Exemption from taxes on profits for seven years with a possible extension up to 16 years.

·                  Exemption from taxes on real estate, capital and contract authorization fees.

·                   Exemptions from returns as a result of technology utilization licenses for five years.

·                  The right to own land and buildings.

·                  Management of the project at the investor's discretion without any interference.

·                  Adequate guarantees against nationalization, expropriation or sequestration of projects, or the freezing of assets unless done through legal means

Useful Links:

·                  Yemen Business Tax Highlights 2011 by Deloitte

·                  Country Profile: Yemen, August 2008 -- Library of Congress – Federal Research Division

·                  Yemen Economic Update Winter 2010

·                  Yemen Economic Update – Spring 2009. The World Bank

·                  Mining Companies in Yemen, November 2008. Ministry of Oil and Minerals

·                  Doing Business in Yemen © 2005 Pytheas Limited

·                  Yemen Country Note Disaster Risk Management Programs