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Resource Investing

In the first of three interviews with experts in the field, the Investing News Network talks with Rick Rule about what makes jurisdictions risky for miners and investors.

Location, location, location — a phrase used most often by real estate agents is just as applicable to miners and where they stick a shovel.

Some jurisdictions are favored for their ease of investment and clear-cut laws, while others are on blacklists for social unrest or fickle decision making from their leaders.

Most fall in the middle, with plenty of pros and cons that draw miners in and push them away. The Investing News Network (INN) spoke to three experts in the mining space to find out what risk means to them, and to learn their thoughts on how to go about balancing risk with reward.

In the first of three articles on the subject, we explore the thoughts of Rick Rule, president and CEO of Sprott US Holdings. Speaking to INN, he discussed the risks companies and investors face, and shared examples of jurisdictions around the world and what they are like as places to do business.

What makes a jurisdiction risky?

Right off the bat, Rule said that all jurisdictions are risky with no exceptions — with politicians being the reason why. “I believe the most dangerous politician is the one that’s closest to you,” said Rule.

Rule added that because of that, assuming that developed countries are less risky than developing ones is misguided. “I would say that countries that enjoy a strange vacation from the perception of risk include Canada and the US,” he commented.

“I think the misperception of risk is really due to ethnocentrism. I believe that, if you will, Caucasian people somehow believe that money stolen from you by white people, in English, according to the rule of law — is less ‘gone,’” he said.

“You may remember here in Canada 20 years ago when gas prices were on a tear, the legislative assembly of Alberta doubled the gas royalty, having attracted upfront land payments for the three years prior with no anticipation. It caused us at the time to call the place ‘Albertastan.’”

Rule said that a “safe” jurisdiction is one where “even the worst politicians and even the most stridently socialist political groups understand that they can’t kill the goose that laid the golden egg.

“An example of that would be Chile, where despite the fact that a whole bunch of their budget comes from mining, or perhaps because a whole bunch of their budget comes from mining, they’re very conscious of how much theft the industry can endure.

“Another would seem to be Australia, where periodically the level of fiscal demand on the industry becomes rapacious — but then in the end the electorate walks it back down.”

In Australia, proposed and implemented taxes on extractive industries were debated all the way through the resource boom, which is credited with saving the country from economic hardship during the credit crisis in the late 00s.

The issue became toxic, contributing to the removal of a sitting prime minister, and swamping the electoral fortunes of another before all new taxes on the mining industry were scrapped in 2014 following the election of a new government.

Risky doesn’t mean never

Changing fortunes aren’t just something developed countries go through though. Rule said that countries already labeled as “risky” to begin with are still worth looking at.

“Countries that are absolutely broken tend to fix themselves a little bit, meaning that while they don’t necessarily get good, they get better,” he explained.

Examples of that happening are Peru and the Democratic Republic of Congo (DRC) in the 90s, two countries that came up from a very low base. Peru because of socialist policies and violence due to the Shining Path, and the DRC because of ongoing internal conflict and interference from its neighbors.

“Now, Congo isn’t what I would describe as a hugely favorable jurisdiction now, but if you compare it to what it was 20 years ago it’s a remarkably changed jurisdiction, albeit one with a situation that from a mining point of view is deteriorating,” Rule noted.

Mongolia is another example of how risk and understanding the rule of law can develop in emerging economies, said Rule.

“The fiscal goalposts in Mongolia have changed at least three times since I’ve been watching the country. The country is of course an emerging democracy, and a country that didn’t have very much by way of mining law prior to Oyu Tolgoi or certainly prior to Erdenet.”

He said that because the laws themselves around mining were being developed, the country was a test case on what was possible — and not just for miners.

“One hopes that the more rapacious instincts of the governing class don’t take over, because it would appear that the only route that Mongolia has to a higher standard of living for its people comes through mining,” he suggested.

While some countries become less or more risky due to their own development, others can become risky because of actions by other countries — like the relationship between the US and Russia.

“While I believe very many aspects of the Russian economy are improving, some of the groups in Russia with whom one would want to do business as a resource investor are on the US sanctions list.

“That’s as much due to political risk in the US and the overreach and extra-territorial reach of American administrations including, but also preceding Trump. That has as much to do with American political risk as Russian political risk. But it’s risky notwithstanding.”

Spreading the benefits of extractive industries

There’s no rulebook on managing risk, and there’s no one size fits all for balancing all the different factors in play — but Rule said that what companies can be do better is ensure they are smart about who they talk to, while understanding that as foreign investors, they are guests in countries they operate in.

“I think that as an industry we’ve been very bad about dealing only with the central governments and not with the local governments and communities. The consequence of that is that we’ve allowed as an industry the social rents from extractive industry to accrue to the capital — to the political elites, while the costs of our activities are borne by the region” — something that generates its own risk.

“So when we’re establishing the operating guidelines under which we exist in those countries — while cognizant of the fact that we’re guests and we can’t tell them what to do — when we’re negotiating the fiscal arrangements we need to do our best in terms of safeguarding our investments to make sure that the social rents from extractive industries accrue to the regions as well as to the center.”

INN spoke to Rick Rule as part one of a series of three articles on risk. Next week: INN chats with financial analyst Jayant Bhandari on what makes some countries no-go zones for investment, and why.

Don’t forget to follow us @INN_Resource for real-time updates!

Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: 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

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