Weighing Country Risk
We love copper, but is all copper created equal? If two mines have the same grade, same pit profile, same production profile, and same recovery, but one is located in the Congo and one is located across the border in Zambia, should we value both the same? Let’s go more extreme. Do investors prefer the country risk of the USA or the Congo?
USA: USA’s country risk includes the high cost of permitting coupled with NIMBY (not in my backyard). Investors want to see mines built, but no one wants a mine built where it’s visible. This combination results in overregulation where it takes years to get a mine into production. Lots of trees die to generate the thousands of pages of technical reports no one will read but are necessary to get the mine built. In many ways, regulation in the US has stopped mineral development. In the state of Oregon, for example, there are no new mines, and there probably never will be.
Congo: Every morning you wake up and worry some government official might have been killed, overthrown, or deposed. The other option is the government gets stronger and wants contracts re-written. At the same time, we’re seeing mines being built quickly and usually at much lower costs.
The US country risk is overregulation. The Congo’s country risk is a combination of nationalization and anarchy. As an investor, it is getting harder to decide which one to prefer. In the Congo, the mine gets built, but tomorrow you might find you no longer own it. In the US, the ore body is discovered and 20 years later the paperwork might have started.
We realize our comparison is extreme, however. Canada, Australia, Zambia, Indonesia, and lots of other places lie between the Congo and the USA. We do not think anyone, including the Fraser Institute, has built a rational discount curve for the resource investor. (By the way, we like the Fraser Institute; it’s the best place to start looking at country risk.) At best, what we receive is rough guidance. Had you asked us if Egypt or the Congo had a higher chance of revolution last year, we would have said the Congo.
Every day, we use up more and more natural resources. Country risk is everywhere, and the reality is we have a choice: chase higher grades in more politically difficult countries or accept regulations that allow you to build a mine in 30 years (maybe) with low grades.
The choice is yours as an investor.
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