Richard (Rick) Mills

Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

One of the most serious and unpredictable risks facing mining operations and investor interests is "country risk" - where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.

Miners, because the number of discoveries was falling and existing deposits were being quickly depleted, have had to diversify away from the traditional geo-politically safe mining countries, ie Canada and the US. The move out of these “safe haven” countries has exposed investors to a lot of additional risk.

We’ve seen far too many instances of companies losing assets that were lawfully theirs. If the management side of the companies we invest in is so important then maybe we should start regarding the management of the country they operate in as at least as important?

Many countries might come to mind as places where shareholders could, without warning, receive news that their operations have been taken over by the government and/or its friends, or that permits are suddenly suffering delays or have been cancelled outright.

There is nothing quite so heartbreaking to an investor as having his company’s flagship project taken over, nationalized, by the "El Presidente for life" of the country they’re working in.

Security of Supply

Access to raw materials at competitive prices has become essential to the functioning of all industrialized economies. As we move forward developing and developed countries will, with their:

• Massive population booms
• Infrastructure build out and urbanization plans
• Modernization programs for existing, tired and worn out infrastructure

Continue to place extraordinary demands on our ability to access and distribute the planets natural resources.

Threats to access and distribution of these commodities could include:

• Political instability of supplier countries
• The manipulation of supplies
• The competition over supplies
• Attacks on supply infrastructure
• Accidents and natural disasters
• Climate change

Accessing a sustainable, and secure, supply of raw materials is going to become the number one priority for all countries. Increasingly we are going to see countries ensuring their own industries have first rights of access to internally produced commodities and they will look for such privileged access from other countries.

Numerous countries are taking steps to safeguard their own supply by:

• Stopping or slowing the export of natural resources
• Shutting down traditional supply markets
• Buying companies for their deposits
• Project finance tied to off take agreements*

Country Risk + <Security of Supply = >Resource Nationalism

Resource Nationalism is the tendency of people and governments to assert control, for strategic and economic reasons, over natural resources located on their territory.

Traditionally the major benefits for developing countries (from their natural resource endowment) came in the form of:

• Employment/wages
• Government revenues - taxes, royalties or dividends

There can also be indirect benefits such as knowledge and technology transfers. Foreign investments can also involve infrastructure investments, sometimes on a massive scale, like electricity, water supplies, roads, railways, bridges and ports.

Today many governments are looking at other ways to get more money from miners.

Ernst & Young Global Mining & Metals Leader Mike Elliott says governments have gone beyond taxation in getting more out of the mining sector with a wave of requirements such as mandated beneficiation/export levies and limits on foreign ownership.

Mandated beneficiation/export levies - Governments are imposing steep new export levies on unrefined ores to force mining companies into domestic beneficiation. Minerals beneficiated in-country capture more of the value-chain as the products will achieve higher prices.

Increasing state ownership - How does a mining company factor in a change to forecast returns after a countries mining policy mutates during/after project development? Miners are easy targets because mining is a long term investment and one that is especially capital intensive – mines are also immobile, so miners are at the mercy of the countries in which they operate. Outright seizure of assets happens using the twin excuses of historical injustice and environmental/contractual misdeeds. There is no compensation offered and no recourse.

Below are a few examples of recent resource nationalism:

Argentina re-nationalizationed YPF, in 2012, at the expense of Spain’s Repsol.

Bolivia’s President Evo Morales expropriated South American Silver’s silver and indium mine on Aug. 2, 2012. “The nation has no financial obligation to South American Silver.” Mining Minister Mario Virreira

“Indonesia has kicked off the new year (2014 – editor) with a total ban on exports of nickel, tin and bauxite, a warning that resource nationalism remains a potent force despite the commodity slump.” The Telegraph, Resource nationalism alive and well as Indonesia bans key metal exports

Zambia, Africa’s second largest copper producer, has raised both underground and open pit mining royalties from 6% to 8% for 2015. The hike in royalties is especially painful as it’s on gross revenue not a companies’ bottom line, completely missing rising operating costs. Zambia will also introduce a 30% corporate processing and smelting tax, a 30% tolling tax and open pit mining will be subjected to a 20% mineral royalty.

Guatemala is going increase its mining royalties in 2015, from 1 percent to 10 percent, with 9 percent going to the central government and 1 percent remaining in the municipalities.

Conclusion

There’s a storm brewing on the horizon - country risk and lack of security of supply means resource nationalism is on the upswing. These developments could also mean increased regional militancy and insurgency.

Keeping a weather eye on developments in the countries we’re invested in should be on all our radar screens.

Are you storm watching?

If not, you should be.

Richard (Rick) Mills

Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites, including:

WallStreetJournal, USAToday, NationalPost, Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost, Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews, SGTreport, Vantagewire, Indiatimes, Ninemsn, Ibtimes, Businessweek, HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com, MSN.com and the Association of Mining Analysts.

Please visit www.aheadoftheherd.com

If you are interested in sponsoring Richard’s site please contact him for more information, rick@aheadoftheherd.com

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.

Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.