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

Mining Investments - WHERE NOT TO INVEST by Behre Dolbear

THIS POST WAS ORIGINALLY PUBLISHED MAY 19, 2010

Mining Investments - WHERE NOT TO INVEST by Behre Dolbear

One of the oldest mining consulting companies in the world Behre Dolbear provides quality advice for mining investors worldwide, and their documents are well respected by industry professionals.

Indeed, when making the right decision about investment strategy it is important to take into consideration as much information as possible.  Since 1999, Behre Dolbear started a political risk assessment of countries important  to the mining industry. This is alleviated by the fact that mining industry is vital to the creation of wealth and prosperity in
any country.

The  Behre Dolbear's assessment includes the high risk and low risk parts of the world for receptivity to mineral investment, as well as information about conditions in the countries such as economic and political systems, social issues, permitting, corruption, etc. It interesting to note that the company has a very peculiar stance regarding their report, as it is mentioned in the preface:
"We recognize that many might consider what we have said to be provocative, which is our intent." 
However, whatever provocative their findings are, they are nevertheless valuable  both in staregy panning and execution of everyday business. This is not technical assessment, as one might expect -  "Geology and mineral potential were not considered, as the fact that exploration, development, and mining activity are occurring confirms the existence of such potential. We recognize that if a major mineral deposit exists in a high-risk country, a mining company might well decide that the financial incentive exceeds the political risk; e.g., Barrick’s Reko Diq project in Pakistan and Banro Corporation in the eastern Democratic Republic of the Congo (D.R.C.)."
The countries are ranked by the following criteria:

• the country’s economic system;
• he country’s political system;
• the degree of social issues affecting mining in the country;
• delays in receiving permits due to bureaucratic and other delays;
• the degree of corruption prevalent in the country;
• the stability of the country’s currency; and,
• the country’s tax regime.

So, this make another essential document that any mining professional has to read and study
It can be downloaded HERE