EDITORIAL PAGE — Assessing political risk

Where in the world to invest? Delegates at this year’s convention of the Prospectors and Developers Association of Canada were told that decisions to invest in global mining opportunities should be based on two basic criteria, geological endowment and political risk.

A keynote speaker, Brian Hester of Africa Mineral Resource Specialists, told delegates that he assesses the geologic endowment of a specific country by relying on its history of mining and the appeal of its geology. Using a scale of 1-to-10 for gold deposit discovery (10 being the highest), he rated the geologic endowment of 19 African countries at between 6 and 10. The top-ranked countries were Ghana, Zaire and Zimbabwe (all 10s); Tanzania (9); and Burkina Faso and Ethiopia (8). Of the 48 African countries rated, 19 (or 38%) were rated as having a favorable endowment for gold deposit discovery. To assess political risk, Hester uses an international country risk survey published twice a year by Euromoney magazine. The latest survey ranked 44 of the 48 African countries; South Africa, at 48, was lowest in terms of risk, and Somalia, at 166, was the highest (the higher the ranking, the higher the risk). Zaire, a 10 in geological endowment, did not fare well in terms of political risk because it is experiencing some political problems. But when the political risk of investing in African countries is compared with that of Latin American countries, another story emerges. While the average rank of the African countries in the survey was 114, the average rank of the 23 Latin American countries was much lower, at 84. Chile had the lowest ranking of any country, and Cuba the highest.

On average then, Latin America is still much ahead of Africa. It has been estimated that the total investment in new mines currently under construction in Latin America, or on the drawing boards, exceeds US$10 billion. But Latin America, too, has its share of political risk. Venezuela, for example, must take concrete steps to improve its overall business climate before money is spent to build mines in the country.

Latin America has another advantage: the role model of Chile, which, having adopted broad reforms, is experiencing one of the largest mining and exploration booms in the world. Perhaps Canada, and the U.S., should check out exactly what it is that the Chileans are doing right.