Tuesday, April 27, 2010

Investors received three reminders yesterday of just how sensitive junior mining companies are to political risk, and how one strange ruling or proclamation can incite panic.

Greystar Resources Ltd. (in Colombia), General Moly Ltd. (in Nevada) and several gold companies in Venezuela were all harmed by surprising government actions that few people saw coming.

The most serious was Greystar, which wants to develop the Angostura gold-silver project, one of the world's biggest undeveloped precious-metal deposits.

The company was making good progress until late last week, when it learned that it would be subject to changes in the government's mining code. The new rules essentially ban mining in Colombia's "Paramo" ecosystem. Greystar infringes on that area.

In the case of Angostura, the rules forbid mining activity at elevations higher than 3,200 metres. Almost all of Greystar's infrastructure is above 3,200 metres in the current project design, along with half of the proposed open pit.

If this law is upheld, it would instantly undo much of the work that Greystar has done at Angostura over more than 15 years at the site. The stock plummeted yesterday on the news, closing in Toronto at $3.60, down $2.90, or 46%.

Steve Kesler, Greystar's incoming chief executive, said the company thought Angostura would be "grandfathered" by the government and would not be subject to the changes in the mining code. But for now, that does not appear to be the case.

John Tumazos, an independent analyst, pointed out that much of the mining in Latin America is at very high elevations, which raises questions about what the government wants.

"Regulating mining by altitude is, in my opinion, just a way to outlaw mining," he said.

At a large mining conference in Toronto last month, a delegation of Colombian politicians called for more mining investment in their country, but this decision will make some companies think twice about it.

General Moly, meanwhile, announced yesterday that a Nevada district court overturned a decision that gave the company water rights for its Mount Hope project.

While the announcement does not threaten the viability of the project, analysts said yesterday it likely increases the time line to production.

And in the case of Venezuela, President Hugo Chavez caused panic after he threatened to nationalize the country's gold industry. He accused "capitalist mafias" in the industry of destroying the environment and exploiting workers.

Venezuela has blocked two Canadian mining companies, Crystallex International Corp. and Gold Reserve Inc., from developing projects in the country. But the government appears to have good relations with Vancouver-based Rusoro Mining Ltd., which has emerged as its partner of choice for gold projects.

Shares of all three companies fell yesterday. Like many junior miners, all of their mineral assets are in one country, leaving them vulnerable to political risk.

pkoven@nationalpost.com---------