Editorial Political risk in North America

Regulatory requirements that are unclear, difficult to interpret and constantly changing are a form of political risk that is choking off investment in North America’s mineral resources. Political risk, in the past, typically meant the fear of nationalization, where investments were expropriated by the state. It was a phenomenon suffered largely in developing countries where a sudden change in government could mean an about-face in dealing with foreign investors. One day foreign investment would be welcome; the next day, confiscated. A company had to be convinced that its orebody was rich to take on that kind of risk.

Today, in developed countries like Canada and the U.S., political risk takes a somewhat different form. This new form of political risk is the large and growing body of regulatory requirements. Environmental regulations are a prime example, but they are not the only kind of “red tape” that is bogging down the industry. Increasing burdens of taxation, of legislation dealing with labor, and of health and safety regulations are some others.

That’s not to say that these issues should not be addressed. The mining industry, like the rest of society, welcomes measures that enhance safe working conditions or minimize impact on the environment. It recognizes that there are new standards within which operations must be conducted. What becomes intolerable are the uncertainties over what those standards are. For example, in Canada there is overlapping jurisdiction between the provincial and federal governments in the area of environmental protection and it is by no means clear which jurisdiction takes precedence.

Regulations in all these areas, however, are in such a state of flux and are so ill-defined that investors with the best of intentions simply cannot be sure if they will be able to comply. And even if they do comply, there is the possibility that the rules will change or that another political jurisdiction will establish further requirements sometime during the mine’s life and apply them retroactively.

That makes it just as risky to undertake a new mining project in North America as it is in any underdeveloped location. Whether the risk comes from local residents throwing spears at mine workers as happened at RTZ Corp.’s now shutdown Bougainville Island operation in the South Pacific or environmental activists blocking road access on Vancouver Island, the outcome is the same — mining activity is halted and a large investment threatened.

For years North America offered relatively stable government and that was thought sufficient to offset the political risk of expropriation in developing countries. Now investors have to seriously consider whether a mining project will ever get approval.

After overcoming the odds against making a discovery rich enough to warrant production given the uncertainty of metal prices, now investors have to consider whether operating permits will be granted and at what cost.

John Postle of the mining consulting firm of Roscoe Postle Associates, during a recent speech at a branch meeting of the Canadian Institute of Mining, Metallurgy and Petroleum, recalled an instance where bank financing required that permits be in place before the loan could be completed. In another case, a company had to go to the stock market to arrange financing to complete the environmental permitting process.

Those additional risks have to be taken with no assurance that the project will ever get approval — one more “disincentive” to mining investment.

Other costs of environmental compliance that Postle points out are new corporate officers and departments, more detailed monitoring, more stringent cleanup at closure, plants designed to be removed or portable and perpetual monitoring.

We are already witnessing an exodus of mining investment to other countries, particularly South America. That migration is not due to more prospective geology but to greater certainty that, if an orebody is found, mining will be permitted.

Twenty years ago investors steered clear of unstable regimes outside of North America. Today unfocused attempts in North America to regulate industry have turned the tables. Now it is North America that has to reassure the world that investment in mining is still welcome here.