Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
One of the most serious and unpredictable risks facing mining operations and investor interests is "country risk" - where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.
Miners, because the number of discoveries was falling and existing deposits were being quickly depleted, have had to diversify away from the traditional geo-politically safe mining countries, ie Canada and the US. The move out of these “safe haven” countries has exposed investors to a lot of additional risk.
We’ve seen far too many instances of companies losing assets that were lawfully theirs. If the management side of the companies we invest in is so important then maybe we should start regarding the management of the country they operate in as at least as important?
Many countries might come to mind as places where shareholders could, without warning, receive news that their operations have been taken over by the government and/or its friends, or that permits are suddenly suffering delays or have been cancelled outright.
There is nothing quite so heartbreaking to an investor as having his company’s flagship project taken over, nationalized, by the "El Presidente for life" of the country they’re working in.
Security of Supply
Access to raw materials at competitive prices has become essential to the functioning of all industrialized economies. As we move forward developing and developed countries will, with their:
- Massive population booms
- Infrastructure build out and urbanization plans
- Modernization programs for existing, tired and worn out infrastructure
Continue to place extraordinary demands on our ability to access and distribute the planets natural resources.
Threats to access and distribution of these commodities could include:
- Political instability of supplier countries
- The manipulation of supplies
- The competition over supplies
- Attacks on supply infrastructure
- Accidents and natural disasters
- Climate change
Accessing a sustainable, and secure, supply of raw materials is going to become the number one priority for all countries. Increasingly we are going to see countries ensuring their own industries have first rights of access to internally produced commodities and they will look for such privileged access from other countries.
Numerous countries are taking steps to safeguard their own supply by:
- Stopping or slowing the export of natural resources
- Shutting down traditional supply markets
- Buying companies for their deposits
- Project finance tied to off take agreements*
Country Risk + <Security of Supply = >Resource Nationalism
Resource Nationalism isthe tendency of people and governments to assert control, for strategic and economic reasons, over natural resources located on their territory.
Traditionally the major benefits for developing countries (from their natural resource endowment) came in the form of:
- Government revenues - taxes, royalties or dividends
There can also be indirect benefits such as knowledge and technology transfers. Foreign investments can also involve infrastructure investments, sometimes on a massive scale, like electricity, water supplies, roads, railways, bridges and ports.
Today many governments are looking at other ways to get more money from miners.
Ernst & Young Global Mining & Metals Leader Mike Elliott says governments have gone beyond taxation in getting more out of the mining sector with a wave of requirements such as mandated beneficiation/export levies and limits on foreign ownership.
Mandated beneficiation/export levies - Governments are imposing steep new export levies on unrefined ores to force mining companies into domestic beneficiation. Minerals beneficiated in-country capture more of the value-chain as the products will achieve higher prices.
Increasing state ownership- How does a mining company factor in a change to forecast returns after a countries mining policy mutates during/after project development? Miners are easy targets because mining is a long term investment and one that is especially capital intensive – mines are also immobile, so miners are at the mercy of the countries in which they operate. Outright seizure of assets happens using the twin excuses of historical injustice and environmental/contractual misdeeds. There is no compensation offered and no recourse.
Below are a few examples of recent resource nationalism:
Argentina re-nationalizationed YPF, in 2012, at the expense of Spain’s Repsol.
Bolivia’s President Evo Morales expropriated South American Silver’s silver and indium mine on Aug. 2, 2012. “The nation has no financial obligation to South American Silver.” Mining Minister Mario Virreira
“Indonesia has kicked off the new year (2014 – editor) with a total ban on exports of nickel, tin and bauxite, a warning that resource nationalism remains a potent force despite the commodity slump.” The Telegraph, Resource nationalism alive and well as Indonesia bans key metal exports
Zambia, Africa’s second largest copper producer, has raised both underground and open pit mining royalties from 6% to 8% for 2015. The hike in royalties is especially painful as it’s on gross revenue not a companies’ bottom line, completely missing rising operating costs. Zambia will also introduce a 30% corporate processing and smelting tax, a 30% tolling tax and open pit mining will be subjected to a 20% mineral royalty.
Guatemala is going increase its mining royalties in 2015, from 1 percent to 10 percent, with 9 percent going to the central government and 1 percent remaining in the municipalities.
There’s a storm brewing on the horizon - country risk and lack of security of supply means resource nationalism is on the upswing. These developments could also mean increased regional militancy and insurgency.
Keeping a weather eye on developments in the countries we’re invested in should be on all our radar screens.
Are you storm watching?
Ominous signs emerging in one of the world's most well-endowed mining nations. Where a newly-elected president may be setting up for a major battle with foreign minerals firms.
The place is the Philippines. Where president elect Rodrigo Duterte made some very strong comments this past week about the mining sector -- and the companies that work in it.
Duterte was elected president of the Philippines in May. And is now touring the country on a series of press junkets ahead of his June 30 takeover of the federal government.
Speaking last Thursday at one such news conference in the southern Philippines city of Davao, Duterte let rip on the mining industry. Telling the assembled crowd, "I have a big problem with mining companies. They are destroying the soil of our country."
He continued, "The mining people must shape up. It has to stop. The spoiling of the land, the destroying of Mindanao." The latter statement being a reference to the mineral-rich southern island of the Philippines, where major copper-gold projects like the Tampakan deposit are located.
Perhaps most ominously, Duterte insinuated that he might support local mining firms over international operators. Saying, "I want it to be a cooperative of all Filipinos. We will support them and give them instructions how not to end up spoiling the land."
All of which is very concerning for a mining destination that has already seen a major flight of international capital the last few years. Due to permitting issues and local opposition to the mining sector.
There had been some headway late in 2015 on permitting of copper-gold mines here. But Duterte's comments raise the possibility that any recent advances in mining will be negated under the incoming government.
Of course, it's possible all of this is just strong words meant to win public support. But the mining sector will be cautious as Duterte assumes the presidentship in July -- watch for any further news on mining policy changes here, as well as possible moves toward nationalization of mining assets.
Here's to knowing when to fold 'em,