With the announcement yesterday that Bolivia President Evo Morales will announce a decree on May 1st to dismantle the privatization model of the mining industry and expropriate all assets owned by private mining companies, is this just an isolated example or will this be the start of a trend that many other governments will follow? As a result of this announcement, Coeur d'Alene Mines (NYSE:CDE) and Pan American Silver's (NASDAQ:PAAS) shareprices plummeted yesterday. Since gold and silver mining companies will exhibit the fastest earnings growth rate among any industry for the next several years, one should consider political risk as a much greater component of the decision-making equation when investing in mining stocks in coming years.
So where are the riskiest mining jurisdictions in the world and where are the safest? According to the most recent Fraser Institute survey, here are the mining jurisdictions that graded the best and the worst for “encouraging mining investment” and granting “legal processes that are fair, transparent, non-corrupt, timely, and efficiently administered”. In order to rank these mining jurisdictions from top to bottom, the Fraser Institute asked mining executives and exploration managers in 79 mining jurisdictions around the world to grade the effect of government policies on mining operations (including restrictive regulations, uncertainties about land use, and the ever looming issue of restrictive taxes), the nature of trade, environmental, and operational barriers, and the effect of mineral potential on additional exploration investment. Furthermore, to encourage objective responses to the survey questions, the Fraser Institute surveyed all mining executives anonymously.
By comparing the grades of the jurisdictions below, you should be able to assess the risk and future probability of an Evo Morales type event happening to a mining company whose shares you own.
The Best 15 Mining Jurisdictions in the World, 2011
(6) Western Australia
(9) Newfoundland and Labrador
The 15 Worst Mining Jurisdictions in the World, 2011
(4) Democratic Republic of Congo
(11) British Columbia
(13) South Africa
In addition to inevitable increasing nationalization efforts of mining assets by more and more countries in the future (i.e. Venezuela), we can also expect governments, as it is inherently in their nature to gravitate towards extortion whenever possible, to attempt to significantly increase tax rates upon mining industry profits in future years. As an interesting side note, 1/3 of the 15 worst mining jurisdictions in the world as voted by mining executives are currently located within the United States.
As demonstrated in Australia, the mining industry, when subjected to unfavorable legislation, are quite capable of mobilizing and fighting back. When Prime Minister Kevin Rudd proposed a 40% “super” tax on all mining industry profits in excess of the long-term government bond rate in Australia, mega-mining corporations Rio Tinto, Xstrata and BHP Billiton joined forces to oust him and replace him with a new Prime Minister more favorable to their concerns, Julia Gillard. Eventually Gillard reduced the super tax rate from 40% to 30%.
In conclusion, all foreign mining companies that reap enormous profits from mineral interests should contribute to economic growth in the countries in which they operate through hiring local labor at fair wages and using profits to increase the standard of living of the nearby communities in some form, whether through the assistance of road or school construction, etc. Some mining companies perform quite admirably in this area while others perform quite atrociously. However, governments will have to carefully consider the negative consequences on future investment patterns and economic growth in their countries of expropriating mining assets and significantly increasing tax burdens, as mining companies will surely rank among the fastest growing profitable industries within many countries as the global monetary crisis ushered in by the global Ponzi banking system accelerates in future years.
On a final note, sometimes investors panic react much too strongly to news, that while negative, is not nearly as negative as the media projects it to be. I call this type or reaction, whether it manifests itself in negative impulse selling or positive impulse buying, the “prophet worship” syndrome. For those interested in exploring the psychology that causes investors to rashly swing the pendulum of rational behavior too far in either direction based upon media sound bites, check out this link.
About the author: JS Kim is the Founder & Managing Director of SmartKnowledgeU, a fiercely independent investment research and consulting firm whose objective is to help Main Street beat the fraud of Wall Street. Follow his daily thoughts (sometimes weekly) on Twitter at this link.