It is not news that governments in less-developed countries can be unpredictable. What made news this week was the decision of the Eritrean Ministry of Mines to halt all mineral exploration in that country. The government's decision was made without consultation or explanation. That left several Canadian companies, including NEVSUN RESOURCES, NORTHERN MINING, SUNRIDGE GOLD and SANU RESOURCES in the lurch.
These are not the only Canadian companies willing to risk working in unstable political regimes. The majors as well as juniors are hunting gold in Russia, tiny African states, Latin America, and the former Communist Bloc countries. The successful development of Canadian diamond mines has led others to explore worldwide for these gems, often in countries with less-than-perfect human rights records. The hottest base metal plays in recent years have been nickel laterites, frequently found in countries such as Indonesia and the Philippines which are targets for terrorism.
The question arises: "Why bother?" The short answer is that if you hit the mother lode, you could make a ton of money. And there are undoubtedly other reasons to hunt for minerals in countries where the politics and geography make for rough going.
A few thoughts come to mind.
I wonder why investors would back projects in such countries. Prospectors and miners are by nature risk-takers, but to add political uncertainty on top of the usual risks is beyond my tolerance level. I have wondered if companies seek out projects in unstable areas because they can't get a foothold in a more "civilized" country. And I worry that spending exploration money in a country run by a tin-pot dictator could be seen as support for the ruling party. I wonder if some of these companies think they can made a quick dollar on the stock market and use only consultants for the field work, never intending to go in and do genuine development.
On a positive note, I believe some companies feel that the work they do will genuinely benefit a country. If they can raise living standards for the citizens and diversify the economy, more power to them. But in unstable regimes, the risks are still monumental.
Exploring and mining in countries such as Russia or China, which have been accused of human rights abuses, brings to light a double standard. On one hand these countries and their economies are too large to ignore. On the other hand working there might be seen as condoning the actions of the government.
As for working in countries that are frequently targeted by terrorists, I truly wonder if any amount of profit is worth exposing employees to continual threat. It is a very rough-and-tumble way of life when armed guards patrol the perimeter of a property.
So what can a company do about political risk? Assess it thoroughly from the view of not only management and investors but also employees at a given project. And if the combined risks of working in any corner of the world are intolerable, the minerals can be left in the ground until the governing regime is more friendly.