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

Arab Spring: is Investment Momentum Broken?

THIS ORIGINAL POST WAS PUBLISHED OCTOBER 12, 2011

Arab Spring: is Investment Momentum Broken?

 In my previous posts I touched the issue of political risks and mining:

·                  Expanding Mining Worldwide: Political Risks

·                  Mining: Political and Resource Nationalism Risks

A lot of attention in news coverage is nowadays dedicated to Arab Spring. Googling gives 130,000,000 hits: among them Wikipedia page, The Guardian’sArab spring: an interactive timeline of Middle East protests, and many others. In the contest of our business it is important to understand – how do the current events affect investment climate, and in particular – investments in mining sector? Generally speaking, besides specific industry peculiarities, investments in mining follow the common rules of investments.

Broken momentum, but mixed outlook – this exactly fitting term was applied to current situation with investments in MENA region (Economic Commentary by Arab Petroleum Investments Corporation Volume 6 No 9‐10, September‐October 2011).  

The “wait and watch” approach is characteristic for investors. And quite naturally, most of them envision detailed studies of political risks and thorough due diligence of all projects with key focus on macroeconomic risks.

In this content, the picture of MENA looks very complex. Let’s look at the recent newswires:

Gallup poll results – October 10, 2011

What the population thinks:

·                  Qatar: 92% economy is getting better

·                  Morocco:  68% economy is getting better.

·                  Tunisia: 50% economy is doing better; 20%  doing worse and 27% “staying the same.”

·                  Egypt: 42% see conditions in their country “getting” better, versus 37% who said it is “getting worse”

·                  Syria:  34% economy getting worse ; 32% getting better

·                  Yemen: 19% doing better

·                  Iraq: 16% economy looks to be doing better

Top ranking H1 2011 M&A Deals:

·                  As to volumes of M&A deals: Jordan, UAE and Oman

·                  AS to deals value: Qatar, UAE, Kuwait

·                  Sectors: banking, education and healthcare, construction

Real Estate:

Factors like political stability and security of income are at the forefront of investment decisions

·                  Secure and stable markets: Abu Dhabi, Dubai, Qatar, and Saudi Arabia

·                  Uncertain: Bahrain, Egypt, and Syria

Business Monitor International:

Algeria, Bahrain, Iran, and Yemen are most at risk of further unrest

Arab Investment and Export Credit Guarantee Corp.:

FDI inflows into 21 Arab nations are forecast to fall to $55.1 billion this year compared to $66.2 billion in 2010, the Kuwait-based Arab Investment and Export Credit Guarantee Corp. said in a report. FDI inflows into 21 Arab nations are forecast to fall to $55.1 billion this year compared to $66.2 billion in 2010, the Kuwait-based Arab Investment and Export Credit Guarantee Corp. said in a report.

Estimated cuts in FDI

·                  Egypt – 92%,

·                  Libya – 87%,

·                  Syria – 65% ,

·                  Bahrain – 35%

 Increase – 7 countries; the biggest – Saudi Arabia and Iraq

The London-based EBRD launched plans in May to expand into the region, after a wave of uprisings in the so-called Arab Spring, and wants to start investing in the area next year

The international community, especially the European Union, has pledged an aid package of hundreds of millions of euros in support of the Arab Spring inTunisia, Egypt and Libya, so as to help them continue on the path to democracy and rebuild their economies.

US Envisions Trade Zone In Mideast In Wake Of 'Arab Spring'

The Financial Times notes that many international companies have found themselves in a very delicate position as transitional governments in Tunisia, Egypt and Libya review foreign investments with links to former members of deposed corrupt and autocratic regimes.

MENA Venture Capital: “The private equity industry may be pausing to reflect on these changes of 2011. However, it is a pause to see how to clutch on the emerging opportunities whilst avoiding short-term risks,”

In June HSBC states: Regional political turmoil fails to dampen business confidence and  Global companies positive about future for business in Middle East, reveals Grant Thornton research

What about Private Equity?

“Most PE firms that participated in the PwC/INSEAD survey, continue to believe that the MENA region’s sound demographics and vast natural resources will spur economic growth in the next five years. This positive sentiment is largely driven by the growth propects of the Gulf countries, the economic engine of the wider region, which has remained largely sheltered from the political turmoil.”

These is one of the points that is listed in just released by PwC/INSEAD, Abu Dhabi report “The Next Five Years, MENA PE”

This screenshot form the report’s Contents Page gives a very clear picture:

A deep dejection feeling is overwhelming when we look on the report’s data and graphs. However, let us look at some positive signs:

·                  GCC countries remain largely unaffected by social unrest;

·                  investments to resume soon,

·                  fundraising efforts to continue.

And many survey participants offer some good advice:

·                  Better wealth redistribution

·                  Greater transparency

·                  Less corrupt environment

And of course, the top diagram of this report is the following: 

  © INSEAD and PwC

Thus, making any decision to invest may be linked to the above mentioned analytic.