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 is the 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:

• Employment/wages
• 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.

Mining Facts:

The low-hanging mineral fruit has been picked

Metallurgy is becoming more complicated

There is no substitute for many metals except other metals – plastic piping is one exception

There hasn’t been a new technology shift in mining for decades – heap leach and open pit mining come to mind but they are both decades old innovations

Increasingly we will see falling average grades being mined, mines becoming deeper, more remote and come with increased political risk

Labor shortages loom, baby boomers are starting to retire en masse, and the resource-orientated talent pool is thinning out

We're rushing headlong into shortages of resources and the conflicts generated from a lack of security of supply

Mine production of many metals shows us a number of similarities:

• Slowing production and dwindling reserves at many of the world’s largest mines
• The pace of new elephant-sized discoveries has decreased in the mining industry
• All the oz’s or pounds are never recovered from a mine - they simply becomes too expensive to recover

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Rick Mills