A world of surprises

Political risk is causing conern again, just as markets were beginning to show some renewed strength. That mining projects are inherently risky is not new. However, most of the risk is usually related to the economic viability of a project or the technical aspects of bringing a project to production.

When the news coming from most mining and exploration companies focuses on the drill results and the results of feasibility studies, the onus seems to be on the investor to watch out for potentially damaging news that could affect his investments. Little if any information is released about negative changes toward mining policy in the country in which a company has projects. Or the news comes out too late, leaving the investor scrambling to try to limit his losses. So where does corporate responsibility come in, and how much risk should a junior company be able to take on?

Recent cases include the sudden and still-unexplained halt in exploration in Eritrea that saw the share value of four junior mining companies nearly halved within a day of the announcement. Over a month later, the companies say they are still unclear about why the order was issued. There has been speculation that the Eritrean government took the measure to put the juniors at its mercy: seeing the potential for at least two large-scale copper and gold mines, it wants a bigger piece of the pie.

Although governments may feel tempted to make more money, it is a short-term approach and the perceived unfairness and uncertainty will surely drive away investors.

Other forms of political risk include the recent Indonesian example, where a regional government’s get-tough attitude saw five representatives of Newmont’s Minahasa mine jailed for allegedly contaminating the ocean with mercury and arsenic. The company maintains its innocence and says illegal mining likely caused the contamination.

This incident highlights the fact that the majors do not always get favoured status, and that it doesn’t matter how much money they are spending or how many jobs they are providing.

Newmont has stated publicly it will re-examine its spending in Third World countries and try to focus its efforts on developing countries in an attempt to achieve a better risk profile.

But we need look no further than our own back yard to see the damage that can be done by a mining policy gone terribly wrong. The government’s expropriation of the Windy Craggy mine in British Columbia was a shattering blow to the mining industry, which has been dormant in the province for at least a decade.

Thousands of jobs disappeared, mines were shut down, and companies pursued projects that provided them with what they thought was greater certainty. It has taken more than two years to begin to turn things around in British Columbia after a decade in which the perception of mining as a viable entity has been eroded.

And without the resurgence in metal prices, investors would not even consider coming back to British Columbia. It’s still rather unusual to read about companies actually exploring for minerals in the province. And although the provincial Liberal government insists it is pro-mining, there are still some outstanding issues related to native land claims that could inhibit exploration and development.

According to the Vancouver-based Fraser Institute, the province ranked at the bottom of the pile of jurisdictions where companies would be willing to conduct exploration, whereas Nevada ranked highest. It will be interesting to see how things have changed in the institute’s next ranking.