EDITORIAL — Sober realism replaces euphoria — Investment blues

In the heady days of 1996 — before Bre-X Minerals’ phantom gold deposit blew up on the world stage, and before most metals prices went into the dumper — Canadian exchanges were riding high on an investment boom that was fueling a global renaissance in mining and mineral exploration.

Mine financings on the Toronto Stock Exchange that year were reported to have totalled $5.4 billion, dwarfing equity financings of this type elsewhere in the world. Australian exchanges managed to raise only $1.5 billion for mineral ventures, while mine financings in New York and Johannesburg were $1.4 billion and $1.3 billion, respectively.

Despite the current slump in metals prices and reduced interest in mining investment, particularly among the juniors, most analysts predict that Canadian exchanges will continue to play a dominant role in mine financings worldwide. The dollar figures may be down, and companies with poor-quality projects and weak management may fall by the wayside, but Canada will hold its position as the world’s leading exploration and mining finance centre.

Even so, quality will be the watchword of the next decade, and only the strongest and the best will survive.

Mining companies are already coming to terms with their reduced prospects for success. Mergers and acquisitions are heating up as companies forge alliances in order to weather the rough days ahead.

It appears that many developing nations have yet to realize how this industry downturn will affect their prospects for new investment in mining.

Few appear to understand that the competition for capital will be tougher than ever. Here again, quality will be the watchword of the next decade, yet few countries (with the exception of some in Latin America) appear to be making much progress in improving their investment climates. All too often, the impetus for change is half-hearted and comes from outside agencies such as the International Monetary Fund.

Studies from all over the world have shown that economic volatility, regarding issues such as inflation, exchange rates and trade restrictions, has a negative impact on private investment in developing countries.

Similarly, studies show that government instability, social unrest and uncertainties over property rights in a country greatly affect the amount of foreign investment it sees.

That uncertainty is the bane of investment comes as no surprise to mining companies that are active in foreign lands. Nor is it surprising that two specific uncertainty factors alone have a striking effect on investment: the level of corruption and the relative predominance of the rule of law. Free enterprise thrives best where justice and individual rights and freedoms are well entrenched.

Recent studies by the International Finance Corporation (IFC), an affiliate of the World Bank, show that governments of developing nations can get the most mileage from an improvement in the predictability of law enforcement and, more generally, adherence to law. Therefore, the IMC adds, reducing corruption and improving the general predictability of the institutional framework should be among the reform priorities. These are areas where political leaders could make a difference, but rarely do.

The early days of the international mining boom were characterized by euphoria, which highlights the positive while hiding the negative aspects of any mineral venture. That boom is over, as evidenced by the drop in stock market valuations. Euphoria is being replaced by sober realism. Yet, many developing nations have political leaders who do not see the dark clouds gathering, who are reluctant to face these new investment realities and implement change. As always, their citizens will pay the price.