Where to Invest in Mining 2015

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SINCE 1999, Behre Dolbear has annually compiled political-risk assessments in the global mining industry. Over time, our efforts have revealed a positive correlation between the growth of a nation’s wealth and the prosperity of its mining industry. We have observed that when a country recognizes its critical need to adapt and restructure burdensome policy, it begins to optimize its economic potential.

The 25 countries considered in this year’s survey, as in the past, were ranked based on seven criteria. Each criterion was rated on a numeric scale that reflects the relative conditions that impact investment growth. A score was calculated from the collective results of all seven criteria; this led to our relative rankings. The lower the numerical ranking, the lower the risk.

Markets have taken a volatile downward trend in recent months creating concern for host country governments and miners alike. Mineral prices have dropped over the last year. For example, iron ore and coal prices have fallen by half. The market correction has led to a sharp decline in foreign direct investment, forcing the governments of countries hosting new production to reassess their recent goals of extracting more benefit from the industry. There is now a realization that governments must be more accommodating to remain competitive internationally. Lower export-related tax receipts are putting pressure on governments to adapt more austere budgetary measures.

Today, it takes six years or more until investors can expect returns from a greenfield mining construction project. It typically takes ten years to discover, define, and determine the feasibility of a project. Long lead times heighten a project’s overall risk profile, making it difficult for companies to achieve the level of return required to compete with alternative asset classes for investment. Mining companies are facing difficult challenges adapting to softening markets as their margins are squeezed and they dispose of non-core assets to conserve cash.

Minerals markets continue to react to robust supply and moderating demand while also being negatively impacted in US Dollar terms by the relative strength of the currency. Political and economic stability concerns in China and within the Russian sphere of influence are leading to changing perceptions and expectations for future mineral demand.

The adverse impact that more restrictive U.S. monetary policy places on minerals prices (denominated in USD) adds to the current uncertain outlook. Nonetheless, supply disruptions are likely to buffer this negative price trend as the production risk-profile for maturing mines increases. Ever since the 2008 financial crisis, investment in exploration has declined as surviving firms consolidated. Industry merger and acquisition served to build the resource base of surviving firms. Economic stimulus fueled competition for assets inflating values until more restrictive monetary policy reversed this trend. We expect to see a prolonged market correction that will continue until supply concerns begin to influence markets. The post-stimulus recovery period might prove to be very taxing on the sector.

Governments of resource-rich countries continue to question foreign investment precedents, risking investor confidence given the increasing strategic significance of nonrenewable mineral resources. Behre Dolbear believes that a sustainable minerals industry requires a substantial amount of on-going, as well as, new capital investment. The opportunity cost incurred by countries that sought greater participation in the returns of internationally financed mining development grew throughout the commodity super cycle. This exacerbated political risk concern and limited investment demand. We believe that political stability is derived from personal freedom and quality of life. Political stability is essential to assure the availability of affordable mineral resources – a key requirement to improve the world’s standard of living.

Forward

Reflecting on our past surveys, Canada, Australia, the United States, Chile, Mexico as well as a few others, share a common high ranking. These countries (with the exception of the U.S.) rise to the occasion as their mining sectors represent a relatively large component of their overall economies. They have long-dated mining histories and they have leading expertise within both the private and government sectors.

#3 The U.S. is a bit of a paradox. Its experienced governmental and financial sectors contribute to high investor confidence. However, the public’s worry over environmental legacy, combined with the incremental concern that new production capacity represents, leads to an onerous permitting process that creates sufficient uncertainty to sometimes destroy the viability of new projects.

#14 India’s ranking has improved after the election of a moderate president. In order to meet the needs of its fast growing economy and improve productivity, India has focused on expanding the private sector’s role in mining by priority government-held concessions. The political and economic demands of India’s growing population require regulatory reform to support its expanding role in global minerals trade.

#18 Kazakhstan’s economy, once dominated by the mining sector, is benefiting from recent reforms facilitating foreign investment in mining. The government is privatizing its holdings and supporting the growth of the private sector.

#11 Brazil, for example, fell from grace over the last three years as its changing political climate led to investor uncertainty. Brazil’s current permitting difficulty, political instability, and corruption has become a deterrent for mining. Political instability is manifested in Brazil due in part to the excess influence yielded by state agencies. National mining regulations often conflict with those of individual states, resulting in a difficult and sometimes corrupt permitting environment.

#17 Mozambique has been rising in the ranks due to greater political continuity, which has been a stabilizing factor in addressing the country’s inadequate infrastructure. Changing markets have reversed the fortunes of increased direct foreign investment. Nonetheless, the government is doing a good job dealing with the impact that volatile commodity markets have had on the value of its mining concessions and production. There has been a lot of courage displayed by its coping with the drop of coal prices in particular.

#19 Mongolia is recovering after a period of resource nationalism that drastically reduced its level of direct foreign investment. The government is working to better manage the country’s mining sector on many fronts from taxation and permitting to security of title, thus helping to restore investor confidence.

#20 Tanzanian social issues have adversely impacted investor confidence, as depicted by its rank depreciation over the last three years. Modern, mechanized operations compete with small-scale artisanal efforts while foreign investors have had difficulty with training locals to work in modern, industrial settings. Inadequate infrastructure also places notable limitations on the expansion of the sector. Frustration has manifested itself in violent incidents at foreign-owned mines, such as Bulyanhulu.

#21 China remains a difficult consideration as its domestic mining sector is essentially closed to foreign mining investment. However, China’s drive to secure supply by acquiring mineral assets offshore has led to both success and failure as measured by international standards. In certain cases, asset overvaluation has been attributed to China’s increasing presence in the markets. Nonetheless, growing mineral demand, tied to China’s emerging economy, can be expected to continue to underscore market trends and impact investor confidence throughout the sector. A relative lack of transparency contributes to market uncertainty and lower returns.

#22 Argentina continues to disappoint foreign investors. The Argentinian national government’s fiscal budget crisis has had a costly impact on its currency, politics, and international standing, which has lead to a complete loss of investor confidence. Therefore, as a result of the national budget crisis, some provinces demonstrate greater discipline and keep the door open for the future.

#23 Russia remains low in the ranking; however, many Russian firms with domestic operations have tapped into foreign sources of capital. These firms are seeking greater transparency and are adapting international standards to improve their access to international markets. While this is positive, Russia’s overall standing is penalized by its on-going lack of international accountability.

Participants in the mining sector are becoming disheartened by the severity and the length of the economic downturn. As we pull this report together, mineral commodity prices continue to move downward. There are many contributing factors leading to the negative market sentiment. We sense that the markets continue to recover from the general loss of government stimulus following the 2008 financial crisis. Government intervention helped promote high commodity prices, high asset values, and fostered new supply capacity. As tighter U.S. monetary policy is changing U.S. market sentiments, moderating Chinese economic growth is adversely impacting the global economy.
Low investor confidence has interrupted mineral exploration and development. In particular, junior companies have not had access to funding, while large firms have adapted austere budgets that aim to lower operating costs. Ultimately, even without markedly improving demand, supply constraints will materialize due to the lack of new discovery and the declining quality of maturing mine operations.

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Mission Statement
The employees and associates of Behre Dolbear are proud of their firm's 100 year history of providing clients with industry leading consulting services pertaining to all aspects of the minerals industry. Our mission is to provide independent, world-class advice to all minerals sector stakeholders as well as provide our associates with unparalleled support and opportunity. Headquartered in Denver, Colorado, we mobilize our resources globally from key offices throughout the world including Beijing, Hong Kong, Sydney, London, New York, Santiago, Toronto, and Chicago.
To learn more about Behre Dolbear, visit our website at www.dolbear.com .

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