Country Risk
Richard (Rick) Mills
www.aheadoftheherd.com
Gold 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 gold producing countries, ie Canada and the
US. The move out of these “safe haven” countries has exposed investors to a lot
of additional risk.
One only has to
compare a share price chart to news release dates to see the effect Mongolia’s
ridiculous windfall profit tax and other political games have in the past had
on certain company’s share prices. Uzbekistan claimed Newmont owed the
government taxes so they stole cash and bullion and when that wasn’t enough to
pay off the supposedly owed taxes they expropriated a gold mine. The government
in Uzbekistan also annulled Oxus Gold’s license to develop the Khandiza
polymetallic deposit.
In many parts of
the world capitalist hating Marxist governments are becoming greedy, here’s an
example of a news release an investor doesn’t want to read - “The Venezuelan government plans to
nationalize the Las Cristinas gold mine, which is estimated to have the largest
gold deposits in the country and is currently conceded to the Canadian company
Crystallex.” Minister of Basic Industries and Mining (MIBAM), Rodolfo Sanz.
The military government in Fiji seized the Vatukoula mine belonging to
Australia’s DRDGold and Russia got into the act with their environmental agency
revoking two mining licenses owned by Peter Hambro, the London-listed gold
producer.
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.
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.
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? 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.
The Fraser
Institute, in conjunction with the Prospectors and Developers Association of
Canada (PDAC), has just released their excellent must read annual “Survey of
Mining Companies 2008/2008.”
http://www.fraserinstitute.org/Commerce.Web/product_files/MiningSurvey20082009_Cdn.pdf
“Since 1997, The Fraser Institute has
conducted an annual survey of metal mining and exploration companies to assess
how mineral endowments and public policy factors such as taxation and
regulation affect exploration investment. Survey results represent the opinions
of executives and exploration managers in mining and mining consulting
companies operating around the world. The survey now includes data on 71
jurisdictions around the world…..The companies participating in the survey
reported exploration spending of US$3.4 billion in 2008 and of US$3.02 billion
in 2007. Thus, survey respondents represent 24 percent of total global
nonferrous exploration of US$14.4 billion in 2008 and 30 percent of US$9.99
billion in 2007.”
Social Turmoil
If a country's economic fundamentals weaken, then social problems cannot be
avoided. Economic slowdown and rising unemployment cause massive social
turmoil. The current worldwide economic meltdown has already caused many tens
of millions to become unemployed and worldwide hundreds of millions,
potentially billions of people, could be facing starvation.
Socio-economic turmoil - lawlessness, poverty, lack of adequate medical
facilities and attention, low to no employment, low wages, disease, no clean
drinking water or water for irrigation and shortages of food or unaffordable
food are all causing socio-economic pressure to build in many countries that
were once stable environments for investment.
The riots that erupted in Mexico early in 2007 in response to rising corn
prices were but a harbinger of what’s to come. Given the “dust bowl” droughts
(and other conditions in third world and developing economies), now gripping
countries that make up almost two thirds of the worlds breadbasket - the US,
many countries in South America, Australia, China and parts of Canada, the
price of food staples - wheat, rice, corn etc, will again rise to riot causing
levels in the coming months.
UCL DEPARTMENT OF SPACE AND CLIMATE PHYSICS
Global Drought Monitor
http://drought.mssl.ucl.ac.uk/drough...2Fdrought.html
And this is happening just when tens of millions of people are being laid off
and billions of people in the developing world are sure to see their already
well below poverty-level incomes drop further or cease to exist altogether due
to the worldwide ongoing economic collapse and lack of investment in developing
countries. “The whole global picture is flagging up signals that we’re moving
out of a period of abundant food supply into a period in which food is going to
be in much shorter supply.” Henry Fell, chairman of Britain’s Commercial
Farmers Group.
Developing economies stand to lose
most. These countries rely on imports to sustain themselves, and on average
their citizens spend a much larger percentage of their wages on food than do
their counterparts in developed nations. Some published estimates are as high
as 50 to 60 percent of income going towards food, Britian was recently surveyed and 13%
was the norm.
When you combine no economic growth with rising food prices you have a perfect
recipe for unrelenting massive social turmoil. Food prices will soar and in
countries with food deficits millions will be facing starvation. Food riots and
social unrest seen in 2008 are going to seem like a walk in the park compared
to what might be in store for 2009 and beyond if these epic droughts and
worsening economic conditions continue.
Crops allocated for biofuels, epic caliber widespread
droughts, the high price of fertilizer, the high price of fuels and a growing
global population are all conditions
that have pushed up the cost of food. And if we get hit by a
particularly bad harvest or if a severe El Nino strikes, food supplies could
get totally out of control in many countries. If this happens then almost any city, and almost any
countryside could be aflame with strikes, riots and civil disobedience.
From the Headlines
In January 2007, three months of price rises for corn in Mexico
culminated in riots. The cost of imports of corn from once cheap American
supplies was up some 400 percent, rendering a staple Mexican food item
unaffordable.
In Indonesia, government officials and
police have been forced to clear the streets in an emergency action after food
riots broke out Indonesia over rising soybean prices.
Increasing demand in China, reduced US
capacity as more farmers plant corn for ethanol, and poor harvests in Brazil
and Argentina fueled the protests, the largest since Mexican protests and riots
over rising tortilla prices last year.
Deadly clashes
over higher costs for staple foods have broken out in Egypt, Haiti and several
African states.
Bangkok, Thailand - - Rice farmers here
are staying awake in shifts at night to guard their fields from thieves.
In Peru, shortages of wheat flour are
prompting the military to make bread with potato flour, a native crop.
In Italy, merchants from Milan began
clamoring about the cost of pasta.
The FAO has
reported popular unrest over rising food prices in Burkina Faso, Cameroon,
Indonesia, Ivory Coast, Mauritania, Mozambique, Bolivia and Uzbekistan, among
other countries.
The Philippines,
the world's biggest rice importer, moved to head off protests after global
prices doubled in a year.
It’s my opinion
the relief we’re currently seeing from this food driven social unrest is very
temporary. Worsening economic conditions, a shortage of fresh clean water for
irrigation and drinking and extremely expensive or non existant food supplies
for emerging and developing nations are going to be the coming norm. The
citizens of many of these countries have been given a taste of the good life.
They have seen what we have and they want it for their families. The increase
in living standards they’ve recently tasted has been reduced or completely
taken away.
Regime change could be a reality for
many countries, and social unrest could breed an upswing in regional militancy
and insurgency. There’s a storm brewing on the horizon. Keep a weather eye on
developments in the countries you’ve invested in.
If you’re interested in the junior resource market and would like to learn more
please come and visit us at http://www.aheadoftheherd.com/
Richard (Rick) Mills
http://www.aheadoftheherd.com/
rick@aheadoftheherd.com
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investment. Richard Mills has based
this document on information obtained from sources he believes to be reliable
but which has not been independently verified; Richard Mills makes no
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liability as to its accuracy or completeness. Expressions of opinion are those
of Richard Mills only and are subject to change without notice. Richard Mills
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