Behre Dolbear “Where Not To Invest 2010”

9 August 2010 - By: Antonia Corr
Posted in: Blog, Commodities, Exploration, Mining

Behre Dolbear’s ‘2010 Ranking of Countries for Mining Investment’ ranks 25 countries with major mining exploration and operations on seven criteria that focus on “political risk”.

Seven criteria look at the country’s economic and political system, the degree to which social issues affect mining, delays in obtaining permits, corruption, the stability of the local currency and the tax regime. For each criterion a country is scored between 1 and 10, with 10 as the highest. The methodology is qualitative, based on opinion from Behre Dolbear’s global professionals and contacts. The rankings for each country are added up over the seven criteria to a maximum possible total of 70.

Winners and Losers

At the top of the Behre Dolbear ranking are Australia, Canada and Chile. Russia, D.R. Congo and Bolivia languish at the bottom. Mongoliaʼs maturing political system and “reasonable taxation regime” earned it four additional points on top of last year’s rankings. Brazil continues to improve its economic situation, and South Africa gained a point as fears of the Zuma government were not realised. Some political and economic improvement in Papua New Guinea, Indonesia and the D.R.Congo are predicted by Behre Dolbear, provided “extenuating circumstances do not intervene”.

The United States lost six points from last year, to tie in fifth place with Brazil. “Current populist policies [and] government intervention in the economy” damaged the US scores in all criteria except corruption. Even mining friendly states such as Utah and Nevada are affected by federal laws. Argentina, Namibia and Zambia also lost points due to taxation from “unfavourable government policies”.

Good or bad news?

The Behre Dolbear ranking highlights that in this economic climate, political factors that affect a country and the surrounding region should not be ignored. But what do the results mean for mine project development?

Brownfields in Australia and Canada

Top three podium ranks Australia, Canada and Chile will “remain the…best jurisdictions…to develop mining projects”. Starting with the two top spots, Australia and Canada are representative of countries with an extended mining history. As such, the largest and most accessible deposits are gone, and those remaining are only deemed economical when the price of the commodity is high enough to balance the cost of technology required to get the resource out.

These ‘brownfield-dominated’ countries are generally amongst the world’s ʻdevelopedʼ economies, which have shifted to secondary or tertiary service industries. Here, ʻnot in my backyardʼ (NIMBY) attitudes can be a major issue confronting mine project development. Government policies in these countries often seek to restrict mining, as seen in the US, whose score has been damaged by recent political changes, which could halt or slow down projects based there. Number two rank Canada lost a point “pending revisions in federal mining law [which would] empower first nations groups” and could affect future investments based near or in first nations groups land.

Despite higher operating cost of mines in developed countries from complex mining techniques, environmental remediation legislation and public resistance to projects; lower capital costs and stable and secure government and economies still make these countries a viable and attractive investment. The infrastructure, downstream companies and the markets are already in place, and the workforce tends to be already educated and skilled.

However, as the world grows smaller, global exports become increasingly important to a country’s economy. Australia is no exception, so Chinaʼs efforts to lessen its ravenous appetite for imported iron ore and coal pose the question of how Chinese growth could affect the investment climate in Australia, as witnessed at the Diggers & Dealers meeting in Western Australia recently, despite the upbeat outlook from the miners.

Greenfields in Africa, Asia and South America

Less developed countries tend to lack infrastructure and mining expertise, so the lower operating costs for projects on large, easy to access deposits are counterbalanced by higher capital costs. Such issues of infrastructure and a local workforce that needs to be trained and housed nearby can often hinder or halt projects. Even if the project is up and running, instabilities in government, corruption and u-turns in mining law can kill off projects. An example is miners in Kazakhstan who are keen for the government to adopt a profit-based tax rather than proposed export tax that could thwart a “$16.5 billion drive to double metal output by 2015” (Reuters).

Greenfields with greater patches of brown in Chile and Mexico

Chile and Mexico are countries in between undeveloped and developed, with some infrastructure in place and established mature mining departments that make project investments secure and viable with generally more competitive operating costs than countries in Europe or North America, and smaller capital costs than in countries such as Mongolia.

These advantages have led to a transition from a national ‘greenfield-dominated’ to ‘brownfield-dominated’ mining status, although these countries can still be affected by striking workforces and local grievances.

The new top ten

Geological potential was omitted from the Behre Dolbear ranking as the existence of projects in that country, regardless of what stage they are in, “confirms the existence of such potential”. But political risk alone is not enough to gain a complete picture of a country’s assets and drawbacks, and Greenfields has investigated how the rankings change when a score based on geological reserves is added. Greenfields used the national reserves of ten major metal resources: bauxite, cobalt, copper, gold, iron ore, lead/zinc, molybdenum, nickel, platinum group metals and tin, to create a ‘geological ranking’.

To rank the countries by the size of the commodity reserve, data was used from the USGS Mineral Resources Program Commodity Information. The country with the largest reserve is ranked 10, and the remaining countries are proportionally scored between 1 to 10 to the top country. The scores for each country are divided by 10 and multiplied by 7 to give a relative score on a scale between 1 to 7, giving each country a maximum possible score of 70 (the same as the maximum value for the Behre Dolbear ranking). Adding the scores for each country to the total from ʻWhere Not To Investʼ each country will have a final possible total of 140, with this each country is ranked accordingly.

No change at the top but China and Russia are the big movers lower down

Factoring in the metal reserve has changed the order of the ranking, but not dramatically. Australia still holds the top spot, but Chinaʼs colossal hoard of resources has boosted it to second place, with Canada and Chile close behind. Other countries with a poorer Behre Dolbear scores have been brought up the list due to their rich resources, such as South Africa, up from a tie for 19th with Zambia, to a tie for 9th tie with Colombia; and Russia from tied 23rd with the D.R. Congo to a tied 11th place with Ghana. For the countries with few or no officially defined resources included in the ten categories, their ranks have changed little and they remain around the lower half of the ranking list, such as Bolivia, which still remains in 25th place.

The future for project development

Overall, the geological reserve criteria is harsher; no country has a higher commodity score than the political risk. Only Russiaʼs commodity and political risk scores match, perhaps showing that of all the countries in the world its natural richness is the most tempered by the difficulty of working there. On a regional scale, South American countries tend to have higher scores than nations in Africa and Asia. As such, it is likely investments will concentrate in South America in the short-to-medium term, unless the political risk in African and Asian countries reduces.

Australia – on top of the world

That Australia came out on top of both lists indicates it should be by all accounts the best place in the world to build mines (by some distance). This could partly explain why its government is considering heavier taxes on the industry, as Australia can possibly afford to be a little less attractive. In a similar way, despite Chinaʼs rich reserves, a dislike towards foreign investment by the government makes it less attractive to look for metals or try and build mines. Such a rich cache of reserves though should persuade companies outside China to seriously re-consider how to overcome the resistance to foreign investment.

Those who are inclined to make riskier investments should look at South Africa or Peru, countries with average political risk scores of 23 and 33 respectively and reserve scores of 16 and 11 respectively, representing perhaps the best balance between geology and politics. Chile, Brazil and the USA also offer a balance between reserves and political risk, though leaning more towards political stability than geology. Canada and Mexico have a low political risk but smaller reserves than other countries, their advantages are political and economic stability – the chance of finding significant new deposits appears low.

Where is the best place to explore?

Seven countries score zero for their reserves, indicating “official” reserves have not been outlined enough to attain a rank of 1. Companies are active in these countries or they would not have a place on Behre Dolbearʼs ranking. These countries may therefore be most ripe for exploration rather than project development. Could we see a race for metals in Colombia (the highest political ranking of zero reserves countries)? Looking further down the list, we may also see that as the political risk lowers in Botswana and Mongolia, exploration activity may also increase, eventually leading to a surge in mine development there.

Cobalt and platinum supply problems pending?

The Behre Dolbear rankings cannot only shed light on the ease of developing a mine project in a particular country, but also which metals may be vulnerable to short or long term supply issues. For those metals which have production and reserves in unstable countries or regions, supply issues may appear as mine production is cut or project development stalled. This will have a knock-on effect on commodity prices.

Short-term supply issues will prevail if production is in unstable countries, whilst medium or long term issues will begin to arise if the bulk of the world’s reserves of a particular metal are in unstable countries. Such supply issues can cause commodity prices to rise in the short term if mine production is affected or in the long term if mine project delays have to be priced in. These potential supply problems are bullish indicators for metal prices, helping mine project developers and explorers market their plans, but, ultimately, only those miners that can successfully discover or develop a new mine will benefit from higher prices caused by supply restrictions.

Of the ten metals ranked cobalt and PGMs are at most risk of suffering supply issues in the short to long term, with gold likely to suffer but to a lesser degree. The largest reserves and production of cobalt are based in the D.R. Congo (figures from USGS Mineral Resources Program Commodity Information), itself scoring a low 19 out of 70 with Behre Dolbear. Half the amount of reserves and production originate from Australia which could temper an instability in supply, but by how much? Cuba, Russia and Zambia supply decreasing amounts of the metal, so prices could rise and Australian miners could benefit.

Similar to cobalt, South Africa has the largest reserves and production of PGMs, followed by Russia, and some is sourced from Zimbabwe. South Africa scores low with Behre Dolbear with 19, but not as low as Russia, whilst Zimbabwe does not even make the ranking, considered too unstable until Mugabe’s rule ends. Smaller amounts of PGMs originating from Colombia, Canada and the US may not be enough to provide global demand, and like Australia with cobalt, miners in these countries could benefit from higher PGM prices too.

An uncertain future

As the world emerges from the economic slowdown, caution is advised everywhere. Economic, political and currency stability are nowhere a given, making the “situation fluid and… difficult to predict”. The Behre Dolbear rankings seem to indicate a likely increase in exploration in South America, sub-Saharan Africa and central Asia. Will we see this or will investors continue to fear the risk in these jurisdications?

A number of other questions remain to be answered as well, such as will China continue to bat off foreign investment or will its rich cache prove too tempting for determined foreign companies? Can Australiaʼs low political risk and large reserves buffer the negative impact to projects the mining super-tax will inflict, if it goes through? If increased supply problems result from production or reserves in less stable countries, can the more stable countries buffer inevitable increases in commodity price? Greenfields thinks probably not.