A strategic view of the industry’s competitiveness

A large part of our industry activity is driven by enthusiasms — enthusiasms that capture the imagination of investors and of the industry press. The arrival of instantaneous information capability means that the herd instinct has become much more focused. There is a much shorter time period today between the beginning of a move to a new area or new metal and the time that the new play becomes overvalued. I would like to step back here for a moment and look at three areas of rapid change — politics, acquisition prices and environmental policy — from a longer-term perspective.

As governments in Canada, the U.S. and Australia have got involved in prolonged battles with environmentalists and other groups over land access and permitting issues in the past several years, companies have begun to talk about “sovereign risk” issues in these countries. Nevertheless, while much of the industrialized society seems to be reweighing the balance of resource development and conservation, at least the rule of law and a strong commercial culture are entrenched in Canada.

Many of the areas that are attracting interest still contain very substantial sovereign risk which we are reminded of on almost a daily basis. Aside from the U.S., we can cite the C.I.S. (Commonwealth of Independent States), which has been attracting the attention of many majors due to its extraordinary mineral wealth and which does not even have a commercial code or legal procedures suitable to long-term development in most areas . . . Argentina is attracting the interest of many companies wishing to exploit its rich border areas with Chile, but dealing with the individual provinces is very difficult. Bolivia, which is attracting a lot of interest for its mineral riches but not much activity yet by major mining companies, has had contractual problems with potential investors. Mexico is attracting a great deal of press for all the companies involved there, but some prospective sections of Mexico are virtually off-limits because of the danger to life and limb. In that context, we also have Peru, which is attracting a lot of interest from companies spilling over from Chile. Much of it is betting on President Fujimoro’s success in containing or overcoming the Shining Path guerrilla movement and solving the country’s explosive social problems, not a sure bet.

I say this not to denigrate the prospects in any of these countries but to point out that, interests of the moment aside, there are few places one can point to in this turbulent world where political risk cannot be deemed to be significant.

Next we have the issue of costs of entry abroad. According to Metals Economics Group’s work, roughly 40% of exploration spending worldwide is on actual grassroots projects and another 16% is spent at the mine site. The rest, therefore, depends on buying into at least partially explored projects. The costs of these projects have become extremely high in Chile because of intense competition and the inflated expectations that several very rich deals have brought about. The result is that grassroots programs have become the primary way to see the possibility of adding value. In Mexico and Argentina, property values are also quickly escalating to unsupportable levels because juniors are cutting very rich option deals with landowners in the hope of flipping properties to the majors.

As dollars move out of Canada, a shift in values will create a situation in which partially explored Canadian projects will begin to seem well priced for acquisition. Some feel this is already happening in British Columbia. Finally, there are the environmental and land-access issues. The problem here is not really environmental regulations. The Metals Economics Group has just completed a study of environmental regimes in 30 jurisdictions worldwide and it is clear that environmental regulations worldwide will become relatively uniform in the foreseeable future. Many developing countries are writing or rewriting regulations, a number of them to Canadian standards. Others were using World Bank and WHO (World Health Organization) standards as a blueprint. The real practical issue is the implementation of the regulations and the extent of difficulty (or ease) of working with the local bureaucracy to move a project through.

— From a speech presented at the 1993 convention of the Prospectors and Developers Association of Canada by Michael Chender, founder and chairman of Metals Economics Group and managing director of Eastern Capital Corp.