EDITORIAL PAGE — Country risk

It wasn’t so many years ago that most Latin American countries were strictly beyond the pale for North American investors. Military dictators, political corruption and graft, popular uprisings and sustained guerrilla warfare all contributed to a chaotic state of affairs in some countries and, consequently, a hands-off attitude among investors.

In the mid-to-late-1980s, this began to change for the better. More recently, the rate of investment in formerly benighted countries (benighted, at least, from our unabashedly free-enterprise viewpoint) has increased and spread to more countries. It should be noted, too, that countries in Africa and Central Asia have also emerged, encouraging mine investment by presenting an image of newly stable, mining-oriented regimes. Even India and China are joining the procession. But as these and the Latin countries before them move, one by one, out of the dark night of economic disarray, it is inevitable that some will stumble in the half-light of a new economic dawn. This became apparent during the New Year’s weekend when southern Mexico erupted in violence. According to news reports, armed peasants fought government soldiers in four towns. After two days of fighting, nearly 90 people had been killed.

The rebellion tarnished somewhat the reputation of Mexican President Carlos Salinas de Gortari. For the past several years, Salinas has tried, through free-market reforms, to secure the country within the orbit of the rest of the North American economy. The North American Free Trade Agreement (NAFTA) is the vehicle that is supposed boost Mexico to First World status. It also apparently sparked the rebellion of the Mayan farmers in southern Mexico. In a nutshell, that’s the background to the weekend violence.

We don’t want to overstate what has happened. There is no indication that the violence will escalate or spread. In fact, as we go to press, it seems that Salinas has the situation well in hand. There are no signs whatsoever that Canadian mining companies have been, or will be, affected. The shares of companies with properties in Mexico have not been swamped with panicked sell orders. Salinas himself is clearly seeking peaceful solutions. But from an investor’s point of view, especially with regards to mining, the uprising underscores the uncertainties of investing in countries where new-found stability might mask problems which lie not far beneath the surface. It is particularly difficult to gauge such undercurrents as investors generally have poor access to historical information on the countries in which they are investing. To offer just one example, who can possibly foretell how the Cuban situation will unfold once Castro exits the stage?

It need hardly be said that investing in mining exploration stocks is a risky business. There are so many ways an investor can get burned: initially promising geological results prove misleading as the play matures, metals prices head south and make a formerly viable project uneconomic, unscrupulous promoters dupe investors, a government decides that developing a mine in a given area is environmentally unsound. (This latter incident occurred in Canada, demonstrating that such risks obviously are not the exclusive preserve of countries in the developing world.)

But as Canadian mining continues to expand globally, the “country risk” factor comes increasingly into play.