« Excellent weekly summary of economics, Mon, May 8, 2006, 6:10 AM | Main | Good, bad and ugly at CNBC, Mon, May 8, 2006, 10:49 AM »
May 8, 2006
Cara assessment of country risk, Mon, May 8, 2006, 9:11 AM
Using Table A11 from the Fraser Institute 2005/2006 Annual Survey of Mining Companies, I compiled my own perspective of political risk in jurisdictions all over the world from the assessment of mining company management that invested or considered investing there. Here is the table.
The Fraser Institute survey is a detailed piece of work that bears careful examination. I took one set of the data and set up a simple matrix giving a personal rating of 10 for the top quintile rating by the miners, down to 1 for the lowest quintile rating.
My work is not academic. What I am trying to do is discover the relative comfort of business people in dealing with international jurisdictions. This was mining related, not investing in energy or factories etc.
But at the end of the day, we all have to determine a comfort zone for directing our capital abroad. I trust the judgment of miners, and decided to pass this work along to you.
As we all have been concerned recently about Bolivia, Venezuela and perhaps Peru, after making major investments in companies that have mining properties there, isn't it interesting that the miners themselves have rated these countries at the bottom of 65 jurisdictions they operate in, along with Russia, Papua New Guinea and Indonesia.
In fact, my list rates Peru (57), Russia (59), Indonesia (60), Papua New Guinea (61), Venezuela (62), and Bolivia (63) near the bottom of the list of 65. Isn't this what Alan Greenspan was talking about when he said he didn't think the capital markets were properly assessing risk?
It seems that, before we take any action, we need to see a CNN report with images of a country leader like President Morales of Bolivia riding a military convoy into foreign-owned resource properties before we get the message.
I did this report this morning after replying to a money manager in Jakarta Indonesia, suggesting that "According to the Fraser Institute report that I discussed a couple days ago, Indonesia (and Papua New Guinea) are near the bottom on the miners country risk scale. Money people here are concerned about the terrorism and growing civil unrest there, as well as the graft (the Bre-X situation opened eyes). I know this is not your doing, but it is a problem that must be addressed."
Then I thought, if I'm going to make statements like that I had better get the data. And I did.
Posted by Posted by Bill Cara on May 8, 2006 09:11:42 AM | Category: Country Equities
Special risks when investing in a mining company
In addition to the usual risks involved when investing in a stock of given company like: mismanagement, corporation frauds, dilutions, Etc. Investing in a mining company carries specific additional risks:
1) Mining is depleting business, the more you mine the less reserves you have, unless you explore and find new reserves fast enough.
2) The revenues are completely dependent on the market price of the metal and the mining company is a price taker.
3) Hedging, some mining companies have sold some of their future production through the futures and derivatives market. They have sold in much lower prices, so higher metals prices do not always translate to higher revenues and higher profits.
4) Geo political risk, as the prices of metals are going up it is tempting for government to increase mining taxes. Under some circumstances mining licenses could be frozen or canceled.
The conclusions are: the price of some gold and silver mining stocks could outperform and give better appreciation then the price of gold and silver, but the risk is also higher. Be sure to do a good research before putting good money into any stock and don't place all your eggs in one basket – diversify.
If a gold or silver company has only one mine or no production at all the situation is even more risky as is the case with exploration companies.
http://goldandsilverstocks.blogspot.com/2006_02_05_goldandsilverstocks_archive.html
Posted by: real1![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
May 8, 2006 11:14 AM [link]