FYI | Aug 29 2011
By Richard (Rick) Mills
As a general rule, the most successful man in life is the man who has the best information
Country Risk – Where the political and economic stability of the host country is questionable, and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.
Resource nationalism – The tendency of people and governments to assert control, for strategic and economic reasons, over natural resources located on their territory.
The major benefit for developing countries from natural resource development comes in the form of:
- Employment/wages
- Government revenues – taxes, royalties or dividends
There can also be indirect benefits such as knowledge and technology transfers. Foreign investments can also involve infrastructure investments, sometimes on a massive scale, like electricity, water supplies, roads, railways, bridges and ports.
Today many governments are looking at ways to get more money from miners as companies report record profits – the higher the returns and the higher the profits, the greedier governments become. As commodity prices rise governments try to boost their share of the proceeds from their countries energy and mining sectors.
The PricewaterhouseCoopers Mine 2011 survey highlights what governments across the globe are looking at in regards to the world’s top 40 miners:
- Achieved net profits of $110b last year
- Halved their debt
- Built cash reserves of $105bn
- Announced capital programs of $300b for 2011
In 2011, Resource nationalism became the number one risk for mining companies.
Miners are an easy target as mining is a long term investment and one that is especially capital intensive – mines are also immobile, so miners are at the mercy of the countries in which they operate. Outright seizure of assets happens using the twin excuses of historical injustice and environmental/contractual misdeeds. There is no compensation offered and no recourse.
“Resource nationalism is taking other forms as well, including greater controls on foreign participation, mandated beneficiation, use it or lose it demands and mandated government
“We know it’s tempting, at a time when government debt is mounting and metal prices are rising, for some governments to try to grab an even higher proportion of the revenue from mining. But we urge governments to remember that the cumulative effect of these unreasonable tax hikes will be to push up world prices and slow global gap.” And it’s going to get worse – the oldest baby boomers are turning 65 years old in 2011 – and the global mining industry is experiencing the biggest wave of workforce retirements in 70 years.
In the next five years one-third of the mining workforce will be eligible for retirement. According to the Mining Industry Human Resources (MiHR) Council’s latest labor market information report, “Canadian Mining Industry Employment and Hiring Forecasts 2010” the mining industry will need approximately 100,000 new workers by 2020.
As if the mining sector didn’t already have enough to worry about.
Mine production of many metals is showing a number of similarities:
- Slowing production and dwindling reserves at many of the world’s largest mines
- The pace of new elephant-sized discoveries has decreased in the mining industry
- All the oz’s or pounds are never recovered from a mine – they simply becomes too expensive to recover
Increasingly we will see falling average grades being mined, mines becoming deeper, more remote and come with increased political and nationalization risk. Extraction of metals from the mined ore will become increasingly more complex and expensive, even more so when one considers the effects of Peak Oil – the cost of technology innovation to power mining will be very high.
Broad spectrum peak commodities is a cause for concern over the longer term.
In the shorter to medium term there are several serious concerns in regards to global resource extraction that we need to consider:
- Resource nationalism
- Country risk
- A looming skills shortage
Junior resource companies with fully staffed, secure projects in safe, stable countries should be on every investors radar screen. Are they on yours?
If not, maybe they should be.
Richard (Rick) Mills?
rick@aheadoftheherd.com?
www.aheadoftheherd.com
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