Political Risk Is Part Of The Process For Junior Miners

Published by MAC on 2006-05-05
Source: Toronto Globe & Mail

Political risk is part of the process for junior miners

Bolivia's move to nationalize its energy industry sends a chill through investors

Toronto Globe & Mail

5th May 2006

As spokesman for Vancouver-based New World Resource Corp., Don Flahiff spends much of his time telling shareholders about the company's latest project, a gold and copper deposit in southwestern Bolivia.

So when Bolivian president Evo Morales sent in the troops to occupy the country's gas fields in a May Day show of force and vowed to take more control of Bolivia's natural resources, Mr. Flahiff admits he cringed. Yesterday, however, Mr. Flahiff said New World wasn't overly concerned about what Mr. Morales might have in mind, saying Bolivia needs foreign investors to help build and run new mines.

Besides, he adds, heightened political risk tends to be part of the equation for junior companies.

"If this project were in Nevada, we wouldn't have it," he said.

Nevada, as it turns out, takes top spot for "policy potential" in the Fraser Institute's annual survey of risk factors for miners.

Bolivia pulls in at 56 of 64 jurisdictions -- below favoured locales such as fourth-ranked Chile but ahead of Zimbabwe, which pegged a record low of 2.4 out of a possible 100 in the 2005/2006 survey.

Even though Bolivia's mining regulations were unchanged by the May 1 decree for the oil and gas business, shares of mining companies that have big stakes in the country were hammered, reflecting investor worries about possible delays or even confiscation of mining projects. "Given the potential for direct market impacts relating to changes in the political landscape, the market may begin to focus more on the geographical exposure of a company's asset base," RBC Capital Markets analyst Michael Curran said in a May 3 report on silver stocks.

Denver-based Apex Silver Mines Ltd., which is developing the San Cristobal silver-zinc-lead mine in Bolivia, has the greatest exposure to Bolivia, the report said. The report also looked at Venezuela, where populist president Hugo Chavez caused a stir last fall when he talked about reforms in the mining sector.

Mr. Chavez's comments have also proved a headache for Toronto-based Crystallex International Corp., which is developing the Las Cristinas gold project in Venezuela.

Crystallex shares were pounded last September after Mr. Chavez's comments sparked fears of wholesale nationalization, fears that ebbed somewhat after officials said reforms would be aimed at companies not actively investing in their properties. Crystallex shares have since recovered.

For the most part, the market takes so-called country risks into account through valuation multiples, CIBC World Markets analyst Barry Cooper said in a report Wednesday. Political risk can be forgotten in a bull market and is difficult to quantify, he added.

Using the Fraser Institute rankings, Mr. Cooper ranked gold producers he covers in terms of country risk by reserves and production.

The most at-risk company was Toronto-based High River Gold Mines Ltd., which has assets in Russia and the West African country of Burkina Faso, while the least at-risk company was Meridian Gold, whose sole producing mine is in Chile.

A big question mark is hanging over Peru, where two leftist candidates will face off in a run-off presidential election on June 4.

Ollanta Humala, who won the first round of the election in April, has talked of renegotiating contracts with international mining companies, although he has denied that he plans to nationalize the country's mining sector.

Major companies including gold miner Barrick Gold Corp. and base metal producers Teck Cominco Ltd. and Falconbridge Ltd. all have operations or projects in Peru.

Silver producers Pan American Silver Corp., Silver Wheaton Corp. and Silver Standard Resources Inc. also have assets in Peru.

The high-risk/high-reward motto holds true in many instances, said Sprott Asset Management Inc. chairman Eric Sprott.

His firm recently paid a little over $1-million to acquire a 13-per-cent stake in New World, and is not averse to making other investments in Bolivia, Mr. Sprott said.

Risky business

Several South American governments eager to gain a bigger slice of resource revenue are moving quickly to rewrite the rules for foreign companies operating within their borders.

Bolivia: The impoverished country has the second-largest natural gas reserves in South America after Venezuela, and disputes over how it should manage those riches have sparked several popular revolts since 2003. The nationalization plan announced by President Evo Morales stipulates companies will have to leave Bolivia unless they sign contracts recognizing state control.

Venezuela: President Hugo Chavez has rattled oil markets with takeovers in the world's fifth-largest crude exporter. A group of 16 international companies last month converted subcontracting deals to joint ventures, giving state oil company PDVSA a majority stake.

Ecuador: Lawmakers in South America's fifth-largest producer last month approved a bill that will force oil companies to hand over at least 50 per cent of profits resulting from oil revenues above benchmark prices. Most oil companies have said the reforms are unconstitutional and threatened to sue.

Peru: Citizens went to the polls on April 9 to elect a new president and two leftist candidates appear headed into a runoff vote on May 28 or June 4. Peru's business environment is likely to change regardless of who wins, as 92 per cent of Peruvians would like the government to review the hydrocarbon laws, according to local polls, analysts PFC Energy said.