In part 2 of a series of interviews with experts on risky jurisdictions, INN speaks with financial analyst Jayant Bhandari of Anarcho Capital about what makes a jurisdiction not worth the trouble.
In part 2 of a series on risk in investment, INN spoke with financial analyst Jayant Bhandari from Anarcho Capital.
Bhandari shared his thoughts on what makes some countries not worth the trouble, and what he looked out for in them.
Before we explore Bhandari’s approach to risk, let’s recap on last week’s chat with Rick Rule.
Rule is the president and executive chairman of Sprott US Holdings, an American company operating in the resources space. Rule’s basic take on the subject was that every jurisdiction was risky because of what they had in common: politicians.
He said the major factor that throttles ‘rapacious’ instincts in leaders to squeeze as much money out of foreign miners was an appreciation that they couldn’t kill the goose that laid the golden egg, and had to play nice with the industry to keep royalties coming in.
Bhandari: Risk Lies in Expropriation
Financial analyst Bhandari said that for him, as an investor, the risk all lay in what would happen to his money.
“The only risk I have when mining is when I think that all of my profit will get expropriated.”
As an example, he said that many countries were led by leaders who did not fully understand the rule of law, and did not think ahead far enough to understand that expropriating foreign investment was not sustainable in the long term as investors would flee.
“For example, recently Tanzania came out with an outrageous law on royalties on mining and tax on mining, which basically means that it is now impossible to make a profit from mining in Tanzania.
“Same with Mongolia. Mongolia has never been able to create a proper mining regulation, which means that they keep within their control the possibility to take away everything. And these people, when they can, will take away your money.”
As Bhandari is saying, signs of trouble are all in the legal framework within those countries. But even when there’s a robust framework rather than a developing one, investors should make sure they understand what the laws mean and how they apply to foreign investment.
“There’s also risky places like the Philippines, which does not allow you to own 100 percent of the project. You can only own less than 50 percent of the project. This means that companies…even when they try to own 100 percent of the project, the ownership is very opaque to me. Making a profit for a listed company on such a project becomes extremely difficult.”
Knowing Where Costs Lie
Bhandari said that when it came to risk, if there wasn’t a chance of 100-percent expropriation of his money then it all came down to price —meaning he was free to invest anywhere he was comfortable.
“Canadians will take away my money … the Canadian government has very high mining and corporate taxes —but at least I know what it is. Whereas in the case of let’s say Tanzania, the risk is they will take away everything.”
According to Bhandari, the benefit of investing in developed countries like Canada, the US or Australia is that laws are ‘almost’—but not quite—set in concrete, and therefore “the best you can get” when it comes to knowing where expenses will come from.
“Whereas in Tanzania it’s rule by the rulers … so it’s rule by law —(and) they change it often.
“I don’t want rule by people who change their mind. I want rule of law, that applies equally to you, to Justin Trudeau, to me.”
He said that the overarching issue with developing countries were structural, in that they had bloated, overburdened and patched-together bureaucracies that were often leftover from European rule, barely functioning after years of neglect.
“These European institutions are not organizations that local people can manage. Certainly not as democratic societies. Because the tribal people who vote have tribal mentality, and they vote for tribal people—populists. So these institutions, institutionally they are falling apart.”
The South African Example
One country that he singled out was South Africa, which he decried for its Black Economic Empowerment (BEE) policies —a racially selective policy designed to lift black and colored South Africans to the level of wealth and prosperity as their white compatriots.
“South Africa says that 26-percent ownership of this company should belong to BEE. It is a compulsory requirement.”
Therefore, explained Bhandari, any company seeking to raise funds was required by law to give shares to Black South Africans that had no stake in the company otherwise.
“If you go to Johannesburg it’s an extremely interesting sight. If you go to car parks of mining companies they are like car shows —Lamborghinis, Maserati’s —all the fancy stuff sitting there. I have never seen such rich cars even in Zurich or New York or London —the only place you will find the highest concentration of every expensive cars is in Johannesburg is because of this reason —because they get free money.
“I will not invest in that because the upside always gets transferred for free to these people.”
Bhandari said that a problem for investors in developing countries was that countries that became rich quickly often did not know how to manage the wealth.
“When people become rich without having worked for it, they go broke very quickly. And by the time they go broke they are often in much worse shape because they overdo everything.”
Bhandari said that if no such risks existed, or he was sure there wasn’t a chance 100 percent of his profits would be taken from him, then it was all down to price, but developed countries still remained more naturally attractive.
“I don’t want to pay 100 million for the price of the same ground in Ghana when I can get it in Canada.”
Next week: INN chats with Independent Speculator Lobo Tiggre.
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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.