PNG the worst country for mining project political risk - Behre Dolbear

The United States is the worst ranked nation in terms of mining permitting delays, while South Africa mining projects may encounter more corruption and social risk factors.

Author: Dorothy Kosich
Posted: Tuesday , 20 Mar 2012

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RENO (MINEWEB) -

In its annual ranking of countries in terms of political risks for mining investment, Denver-based mining business consultants, Behre Dolbear, has ranked Australia, Canada, Chile, Brazil and Mexico as the top five nations in which to locate mining projects.

The five lowest-scoring nations were Russia, Bolivia, the Democratic Republic of Congo and Kazakhstan with Papua New Guinea bringing up the rear as the worst in terms of political risk for mining projects.

The 25 nations considered in this year's survey were ranked on seven criteria: economic system, political system, degree of social issues affecting mining, delays in receiving permits, degree of corruption, stability of the country's currency, and the competitiveness of the nation's tax policy.

Each criterion was rated on a qualitative scale from 1 (worst) to 10 (best) with a maximum attainable score of 70 points.

Source, Behre Dolbear

"Due to their inherently low ranking", Behre Dolbear did not even bother to rank Venezuela and Zimbabwe on the list although both contain significant mineral wealth.

"Behre Dolbear advises clients to exercise notable caution when considering investments in these countries. The political and social situation in Zimbabwe continues to warrant exceptional consideration in risk mitigation while in Venezuela, Hugo Chavez's nationalization of gold mines and other mineral resource assets severely limits investment return potential. Significant political reform must occur in both countries prior to the restoration of investor confidence."

In their analysis, Behre Dolbear noted State-owned enterprises (SOE) and sovereign wealth funds (China, Korea, Russia, India, Singapore, Saudi Arabica, and elsewhere) are continuing to invest in mineral resource development and production as their parent countries consume more mineral products correlated to economic growth.

In China, SOE accounts for 80% of the Chinese stock market capitalization, 60% of Russia's and 35% of Brazil's.

Behre Dolbear observed that North America's "well-defined mineral endowment continues to attract significant capital investment despite regulatory hindrances due to its competitive standing relative to the quality of its resources, the capability of its existing infrastructure enabling products to access markets, and through the capacity of its human capital resources."

Capital available to many African projects continues to increase with more money from mineral development going into infrastructure, social services and better governments, the study observed. "Sub-Saharan Africa continues to be relatively stable by avoiding despotic or totalitarian regimes." Nevertheless, Zimbabwe and South Africa "prove challenging to foreign and domestic investor alike as an uncertain political atmosphere detracts from mineral development."

Low-cost energy in the Middle East region is continuing to promote the development of energy intensive industries such as fertilizers, aluminum and steel. These sectors consume aggregates, ferro and specialty alloys.

In Central and South America, the recent decline in mineral prices "combined with increased inflation and renewed nationalism is causing concern as producer's margins are squeezed," the survey noted. "Many countries throughout the region are increasing mineral taxes and imposing other requirements on mining operations."

In Asia, China's sphere of influence on its neighbors and their resources, such as Australia, although initially welcomed, "is coming under increasing scrutiny resulting in foreign ownership and export restrictions."

ECONOMIC SYSTEMS

In the economic system portion of the survey, Australia, Canada and Chile were the highest-rated countries, while the lowest-rated countries were Russia, Bolivia, DRC, Kazakhstan and South Africa. There were no improved ratings in this year's survey, as the ratings for five countries (United States, Mexico, Mongolia, China and India) declined.

POLITICAL SYSTEMS

No nation improved its ranking in the political system portion of the Behre Dolbear survey. Previously, the United States led in this category, but has now fallen one point "due to the continued stalemate in its Congress; the influence of powerful lobbying organizations and NGOs tilting the playing field." The highest rated political systems are Canada, Chile, the US, Australia and Brazil, while the lowest-rated are Bolivia, China and Russia.

SOCIAL ISSUES

Behre Dolbear stressed, "Social issues continue to be one of the highest risk factors affecting the development of mining projects all around the world." Industry watchwords, such as sustainable development, indigenous rights and social license "have often been used by opponents to delay or completely halt mining development not to mention, adversely impact established operations."

The NIMBY syndrome remains a persistent issue among the social issues considered in the survey, along with poverty levels, incidence of terrorism or guerilla activity, and disease, such as AIDS. "These issues affect the well-being and health of a country and affect mining economics in a country," observed Behre Dolbear.

The countries ranked most effective at managing social issues are Australia, Chile and Columbia, while Bolivia, PNG, India and South Africa were ranked the least effective in the survey.

PERMITTING DELAYS

Behre Dolbear found permitting delays to be "the most significant risk to mining projects in the United States. A few mining friendly states (Nevada, Utah, Kentucky, West Virginia, and Arizona) are an exception to this rule but are negatively impacted by federal rules that they are bound to enforce resulting in a 7- to 10-year waiting period before mine development can begin."

Ironically, the U.S. tied with PNG for the country with the most numerous permitting delays. The countries having the fewest permitting delays are Australia, Mexico, and Tanzania.

CORRUPTION

Australia and Canada continue to rate at 10, the highest rating in Behre Dolbear survey in this criterion. The countries with least corruption are Australia, Canada and the United States. Those with the greatest incidence of corruption are Kazakhstan, Russia, DRC, South Africa and PNG.

However, three African countries (Ghana, Namibia and Zambia) saw their corruption ratings improve in the survey through stable governments and improved transparency.

"Facilitation fees" often tied to local business practices in many countries are more prevalent in Africa, Asia and Latin America, Behre Dolbear observed. "Investors must be mindful of and monitor corruption from the early stages of exploration and throughout project development and operation."

CURRENCY STABILITY

"History has shown that countries with depreciating or devalued currencies inhibit new investment in their country," said Behre Dolbear. "As investment, money has focused on mineral-rich emerging countries, this trend has led to higher inflation within these countries."

"High levels of inflation have historically created political turmoil and civil unrest. Although central banks may attempt to intervene and governments may alter policies, strong global demand for commodities and rising prices can overwhelm such efforts."

Zambia was the only country in this year's survey to see its currency stability rating increase.

The highest-rated countries for currency stability are Canada, Australia and Brazil, while the lowest-rated countries are DRC, Russia, Zambia, Bolivia and Indonesia.

TAX REGIME

The total taxes applicable to a mining project-duties and imposts, income taxes, royalty and severance and excise taxes were considered in this section of the survey. "Behre Dolbear's experience is that once the total ‘government take' from combined taxes reaches 50%, a mining project's economic viability, during periods of normal commodity pricing, is threatened. Stable and predictable tax policies are essential in evaluating a mining project's perceived risks and viability."

Behre Dolbear did not reducing the ratings of any countries in this survey while two counties-US and South Africa-rose in this year's survey.

The highest-rated countries for tax regime are Mexico and Canada. The lowest rated countries are South Africa, Bolivia and Zambia.

To download the free survey report, "2012 Ranking of Countries for Mining Investment Where ‘Not to Invest'", go to http://www.dolbear.com