Since 1999, the Behre Dolbear Group Inc. has compiled annual political risk assessments of the key players in the global mining industry. Over time, its assessment indicates a positive correlation between the growth of a nation’s wealth, and the prosperity of its mining industry. Only when a country recognizes its critical need to adapt, and restructures burdensome policy, will it truly optimize this economic potential. While this perspective often is considered provocative, its intent is to highlight countries whose policies and business conditions promote investment growth in the mining sector.
Behre Dolbear solicits continued feedback from its clients and industry professionals alike. Both positive and negative dialogue enables Behre Dolbear to hone its assessment. This year’s survey, as it has in the past, concentrates on specific countries, regional issues and notable trends. Geology and mineral potential were not considered, as the fact that exploration, development and mining activity are occurring confirms the existence of such potential. Only factors relevant to political risk have been considered. No effort is made to include mitigating factors such as economic returns or an investor’s relevant experience in a particular country as part of the rankings.
The 25 countries considered in this year’s survey are ranked based on seven criteria:
- the country’s economic system,
- the country’s political system,
- the degree of social issues affecting mining in the
- delays in receiving permits due to bureaucratic and other
- the degree of corruption prevalent in the country,
- the stability of the country’s currency, and
- the competitiveness of the country’s tax policy.
6. United States
20. South Africa
21. Papua New
23. Republic of Congo
Note: Venezuela and Zimbabwe are not on the list, even though both contain significant mineral wealth. Behre Dolbear advises its clients to exercise notable caution when considering investments in these countries. The political and social situation in Zimbabwe continues to warrant exceptional consideration in risk mitigation. In Venezuela, nationalization of gold mines and other mineral resource assets severely limits investment return potential.
Looking beyond these countries, the minerals market’s strength is supportive of new investment. Despite the market’s low activity during former recessionary cycles, there now are significant investments occurring in locations that previously were deemed unviable due to the perception of high political risk.
Typically, it takes six years or more until investors will see revenues from a green field mining project. For the inexperienced, the long lead times combined with the potential for adverse change in business conditions can make the mining business one of the greatest destroyers of capital, as success is subject to navigation of many risks, hence, the rationale for this analysis.
State-owned enterprises (SOE) and sovereign wealth funds (e.g., China, Korea, Russia, India, Singapore, Saudi Arabia and elsewhere) continue to invest in mineral resource development and production, because their parent countries consume increasing quantities of mineral products, which is correlated to economic growth. SOEs also can comprise a large portion of a country’s stock market valuation. They account for 80 percent of the Chinese stock market capitalization, 60 percent of Russia’s, and 35 percent of Brazil’s. Government-sponsored investment, when compared to private investment, can entail vastly different time and strategic considerations, and can have other investment criteria.
Since the start of the current commodity price cycle, market participants seeking to profit from the minerals boom have been investing globally. A relative lack of opportunity has brought attention back to older, out-of-favor mining regions (e.g., Greece, Spain and the United States) despite the perceived risks. Politically stable countries with committed regulatory environments help create viable resource bases that can provide competitive returns for investors relative to other asset classes. Conversely, mineral-rich nations with less stable or changing political environments (e.g., Australia, Mongolia, Chile, Ghana and South Africa) can add uncertainty to the development of mining projects, ultimately resulting in downward pressure on returns, due to project delays or, in extreme cases, project cancellations.
The commodity price boom that began in 2005/06 began to level off in 2011. Mineral prices are in decline because of the continued slow economic growth of the United States and Europe, and moderating growth in China.
The initial resurgence in mineral consumption during the first half of 2011 appears to have abated, with mineral prices and demand both retreating from recent highs. Producers still are cautiously expanding capacity to meet the expected growing demand from the emerging market consumers. Sovereign investment funds and emerging market-sponsored mineral companies will continue to play an important role in the funding and development of mineral resources. These groups’ time horizons and investment strategies can be markedly different from traditional resource companies, and may provide additional opportunities in those countries with mineral wealth to capitalize on their resources. The competition for mineral resources will make those countries perceived to have the lowest political risk, all other things being equal, able to attract a significant portion of the global mineral investment, as well as receive a premium for their resources over countries where perceived instability exists.
The outlook for 2012 remains uncertain, mostly due to the band-aid approach the European Union is using to resolve the debt problems in Greece, Portugal, Spain and Italy. This uncertainty has impacted commodity prices, since austerity measures or a collapse of the euro as a currency will have potentially serious impacts on the marginal global demand for minerals. Similarly, should fears of a hard landing come true in China, that also would devastate global commodity demand.
The long-term fundamentals, however, are unchanged, and as economies rebound, we will revisit the rapid ramp-up of commodity prices again. It is probable that resolution on the direction prices take will occur before this year’s end.
ENVIRON: Mining Rule to Cost JobsENVIRON International Corp. recently completed an analysis on behalf of the National Mining Association (NMA) of the anticipated economic impacts associated with the Office of Surface Mining Reclamation and Enforcement’s (OSM) proposed rewrite of the Stream Buffer Zone Rule (the Stream Protection Rule) and other provisions of the Surface Mining Control and Reclamation Act (SMCRA). The key findings of the analysis:
- Between 133,441 and 273,227 coal mining-related jobs are
at risk, with the Appalachian region alone losing as many as 220,003
Direct mining jobs at risk are predicted to be between 55,120 and
- Both surface and underground coal mines will be affected, with an
overall decrease of 30.4 percent to 41.5 percent in recovery of demonstrated
- The annual value of coal lost to production restrictions is projected to be between $14 billion and $20 billion, with $4 billion to $5 billion foregone in annual federal and state tax revenues.
“The projected jobs loss, the potential impact on the nation’s energy security and the lost revenue to local, state and federal treasuries is staggering,” says NMA president Hal Quinn. “Coal is America’s most abundant, affordable and reliable energy provider. The proposed rule would have us forego this great national asset at the expense of jobs and communities across the country.”