Editorial Foreign risks too often ignored

Mineral exploration, by its very nature, is a difficult endeavor fraught with numerous risks — risks which all investors hopefully assess before buying shares. With so much risk to digest and weigh against potential rewards, investors certainly don’t need the burden of country risk.

To absolutely no one’s surprise, the matter of country risk — which few junior companies care to address and which even fewer investors bother to consider — has once again cropped up in South America.

A vote in Brazil’s National Assembly to restrict foreign ownership of natural resources underlies the type of emotional and haphazard legislation which is unthinkable in democratic countries such as Canada. After coming to the conclusion that natural resources are currently attractive, especially gold mining, Brazilian congressmen quickly passed legislation requiring that 51% of all mining operations be owned by Brazilian companies. Foreigners have five years to sell or cut a deal with a Brazilian company. All this in a country, according to Japanese Ambassador Koichi Komura, where “hardly anyone wants to invest” and “where chaos seems to reign.”

Nationalization of mining assets is not something new. Following the defeat of the Batista regime at the hands of Fidel Castro’s insurgents, Cuba’s nickel mines were nationalized. In Nicaragua, the Sandinista regime has yet to pay the fair market value for all the base and precious metal mines it confiscated following the toppling in 1978 of dictator Anastasio Somoza. More recently, Falconbridge Ltd.’s nickel mining operations in the Dominican Republic have been shut down following the surprise imposition by that country’s government of an onerous export tax.

As has been demonstrated in the past, countries burdened by active insurgencies, military governments, be they right or left wing, rampant poverty and crippling debt, have the tendency to change their political nature suddenly and, often enough, violently.

Country risk then, no matter how attractive a prospect or how stable the current regime may appear to be, must be recognized and addressed by investors — especially for junior mining companies. The Alcans and Incos of the world can afford to lose a few investments in Third World countries. The “all-their-eggs-in- one-basket” juniors can’t. They remain most vulnerable to country risk, and under worst-case scenarios such as those which emerged in Nicaragua and Cuba, stand to lose everything.