Daily News Wednesday, May 14, 2008

CANADIAN MINING PERSPECTIVES: Investor protection needed when foreign governments revoke mineral rights

When the Ecuadorian government decided last month to review mining licences, its action forced many foreign mining companies to flee the country. Others face an uphill battle trying to negotiation a reasonable outcome with the government.

Fortunately, CMJ readers are a knowledgeable group. One, Cristina Pekarik who is a senior planner, resource development for the Yukon Ministry of Energy, Mines and Resources, was moved to comment: "I think it is time that the Canadian securities commissions and the Canadian government take some action to protect investors. I look to these players for leadership in fostering emerging/struggling democracies to understand that in order to participate in the modern global economy … it is essential to ensure that investors can invest with confidence."

Hmmm … that got me thinking about countries that impose their laws on sovereign foreign states. Could this be creeping imperialism? I tossed the idea over to CMJ editor Jane Werniuk, and she had a different thought. She recognized immediately that the idea of the TSE rating investment risks in certain governments would be a good idea.

So we asked Ms. Pekarik to expand on her idea. She grew up in Honduras where her father worked in the mining industry, and she spent weekends as a teenager hand-pressing fire assay cupels.

She says it was not her intention to call imperialism to mind, but rather to point out that certain regimes need to be reminded to meet the commitments made on behalf of their nations. She continued:

"When a government issues a concession … granting the right to work and extract minerals, investor concern around the revocation of those rights is a legitimate quarrel with the host nation. The host nation fails to act in good faith when it revokes those rights without full and fair compensation. All governments, of course can and should reserve the right to revoke interests that are granted by it. The state does, after all, retain this authority. It also retains the ability to revoke on our life and liberty, but a modern state does so very carefully (less so since 9/11) and in the public interest. Please don't get me wrong—I am not saying that property rights are as valuable as human life and liberty.

"To revoke rights issued on a systematic basis, as Ecuador has, where there is no specific public interest, violates the fundamental contract between investors and the owner of the resource. Capital markets cannot effectively function without this contract. Historically, the market has discounted for this risk by trading the securities at a discount when compared to a similar investment/prospect in a low-risk political environment.

"One of the points I was trying to convey is that our securities commissions and government of Canada have made efforts to protect the interests of Canadian investors. Why shouldn't investors have this kind of support internationally? Obviously it would not happen in the same way (i.e., use of rules and legislation and self-regulation), but there are certainly diplomatic vehicles and market vehicles such as an assigned country-risk factor for revocation of rights and interests.

"[These options are] used all the time to soft-regulate the industry. The mining industry is subject, for example, to the Mining Association's Tailings System Management Rating auditing and scoring system. There is no legal obligation, but the market receives important information about investments, and whether the costs of tailings management may increase or decrease into the future. One would only hope that the governments in the countries considering systematically revoking concessions without compensating - or at least consider such a strategy - are aware that it will affect the ability to attract future investment.

"From my experience in Central America during the '70s and '80s, I witnessed the many straw dogs set up by politicians, political movements and the press. It was regularly cast as a matter of the foreign elites looting and pillaging, etc., etc. It was often good fodder for rallies during political campaigns and made for plentiful graffiti. It made for feverish rallies, but it did not get at the matter of chronically failing or failed statesmanship."

Ms. Pekarik had more to say, and the second part of her comments will appear on Monday.