Executives at Centerra Gold let out sighs of relief earlier this year when the Mongolian government reversed a massive windfall profits tax on its Gatsuurt development. The heavy-handed move would have effectively nationalized the gold miner’s operation.
Also in 2009, the Cuban government, which has a long history of nationalizing foreign investments there, tore up a long-term production sharing contract with Perbercan, in which Sherritt International has a significant stake. In exchange, Sherritt was to get about $140 million in cash, which the company then “voluntarily” invested in Cuban long-term bonds. However, with Cuba’s foreign debts estimated in the tens of billions of dollars, the value of those bonds on the open market is hard to judge.
In November, Toronto resource player Victoria Gold quietly spun off its Guyana-based holdings. According to its president Chad Williams, Guyanese officials were remarkably friendly to company personnel. “We never had any trouble,” said Williams. “We divested primarily because we thought our new partner would be more highly motivated and better placed to add value to the property than we could be.”
Three unique locales, each with their own particular challenges and opportunities, provide three different stories. What ties them together is the increasing demand for raw materials. The choice of available ore bodies is narrowing, so the collected tales of overseas adventures will inevitably grow as Canadian companies are forced to look for undeveloped opportunities abroad. These ventures will lead miners to places on which they may have previously turned their backs; ones fraught with political risks that can arise in the form of civil conflict, uncertain property title, bureaucracy and corruption.
Already Canada’s mining industry’s global footprint is staggering. As recently as 2005, close to 60 per cent of the world’s mining and exploration companies were listed in Canada. According to the Department of Foreign Affairs and International Trade, these companies account for more than 40 per cent of global exploration budgets and have interests in more than 3,200 mineral projects located in more than 100 countries. At the time of the DFAIT study, local firms had $17 billion allocated towards investment initiatives during the coming years. Staying alert and learning how to navigate the hazards of unfamiliar territory will be essential to developing many of these future resource opportunities.
Understanding the terrain
“The major risks are changing,” says Thomas Wexler, a partner in the London, England offices of Fasken Martineau, which was named “Global Mining Law Firm of the Year” for five straight years by Who’s Who Legal. A large part of Wexler’s practice is devoted to representing banks in their financing of resource-sector activities. “Ten years ago, the big threats that companies used to worry about were related to wars and insurrections. These days the threats are more subtle.”
Few countries will out-and-out nationalize a property, says Wexler. But what many can (and will) do is impose legal or taxation barriers that will either force an international investor to sell, or which will serve as a quasi-nationalization.
Speak no evil
One of the biggest challenges in following the investment risks that international mining investors face at the municipal, provincial or local levels is the silence that often surrounds them. Industry players are often loathe to even acknowledge that risks exist (beyond general boilerplate statements of the annual report variety), let alone discuss them publicly, for fear of worrying clients, investors and financiers or of aggravating the situation.
“Sometimes what gets into the public domain isn’t the whole story,” says Yolanda Banks a Senior Advisor (Corporate Social Responsibility) at Export Development Canada. “For example, if a mine has some sort of effluent spillage, there is often a public appearance that the mining company was irresponsible either in how the plant was designed or how it was operated. In fact, many factors may have been at play, including the possibility of local tampering. Indeed, it is a challenge to effectively communicate these complex issues to a doubtful public looking for simple answers.”
Banks should know. She has researched, visited and written about successful efforts by Canadian mining companies to integrate principles of social responsibility in foreign mining operations.
Despite the fact that many of the most promising resource areas are in countries where corruption is well-documented, the risk needs to be more openly discussed. Companies are solicited for a variety of requests or “asks,” some legitimate and others less so. All these need to be managed.
In fact, officials in mining investment locales can apply pressure when they are not happy, a process that substantially heightens investment risks. Common methods include cutting off power due to “uncontrollable demand surges,” road blocks, harassment at local check points, bureaucratic delays in granting licences or other lengthy paperwork, and so on.
Mitigating risks by understanding their causes
According to Banks, one of the keys to mitigating international mining risk, particularly at the local level, is to take the time to understand the causes. Ironically, a surprising number of difficulties that mining companies face relate to an inadequate understanding of the respective responsibilities to be undertaken by both the mine investors and local authorities.
“Many countries, governments and local communities don’t get as much benefit out of extractive industry investments as they initially expected when they authorized them,” says Banks. “Many international mines are developed in remote locations where the resource is the only major asset, and where the local community expects significant benefits in terms of health care, education, jobs and infrastructure, and they expect these to be spread broadly throughout the region,” explains Banks. “That can lead to community opposition against the mine.”