Thibaut Lepouttre, an expert and editor of Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals, hold an exclusive interview with The Gold Report magazine yesterday about the importance of country risks for mining investments.
Jjursdiction risk like nationalizing profitable mines continues to grow as countries attempting to capitalize on higher commodity prices.
Here is what he has to say when it comes to investment risks in Eritrea:
The Gold Report: Thibaut, at your presentation at the Prospectors and Developers Association of Canada in March, you said that country risk was the second most important factor investors should look at when analyzing mining companies. Obviously, management is the most important factor, but how has country risk changed over the previous five years or so?
Thibaut Lepouttre: I think you will agree that there is a direct correlation between the rise in commodity prices and how greedy a country gets. Country risks have increased dramatically over the past five years with the global financial crisis as commodities are a way a government can make money. This trend will definitely continue.
TGR: Will resource nationalism be the single greatest threat to the mining industry over the next decade or so?
TL: Several countries actually have written into their laws language that gives them the authority to nationalize or partially nationalize mining projects. For example, Russia’s mining code states it can nationalize every mine of strategic importance. However, it did not really define what strategic importance was.
TGR: Can a mining or exploration project with high grades and an experienced management team trump significant jurisdiction risk?
TL: Yes and no. There are countries where you can pull it off, and there are countries where you definitely cannot. An example of where you can is in Eritrea. There the government gets a 10% statutory ownership in a mining project and can acquire 30% more based on the net present value (NPV). Compare that to Mongolia home to the Oyu Tolgoi deposit, one of the richest copper-gold deposits in the world. A few larger companies still have severe difficulties with the Mongolian government.
TGR: Would you invest in Eritrea before Mongolia?
TL: I have been a shareholder of a company in Eritrea for three years and have never encountered any problems. The government of Eritrea is holding up its part of the deal
TGR: Do you attribute that almost entirely to the big stake that the government has in the project there?
TL: I would attribute it more to the intelligence of the government. In the Democratic Republic of the Congo, the government takes a 40% ownership, but it does not realize that if you nationalize part of it, you actually diminish and reduce your image in the world in the longer term. A lot of people have started to trust Eritrea because it thinks longer term.
TGR: What other countries would you add to the list where investment risk has dramatically increased since 2008?
TL: I would say South Africa. We have seen many strikes and wage hikes. On top of that, a regulation stipulates that 24% of every project should be given to the Black Economic Empowerment (BEE) movement. My main fear is that it is not just 24%, but that the percentage will actually increase over time and reach 49% or even 51%, just as in Zimbabwe.