October 30th, 2021
Why You Need to Understand What a Safe Mining Jurisdiction Looks Like
Dear Fellow Fed Up Investor,
It’s no secret that copper has become a big winner over the last couple years.
While other lofty sectors like tech have seen stock values soar since their COVID lows, copper and most other commodities have enjoyed a slower climb, with rising demand now being exacerbated by supply chain woes.
But for copper, the future looks particularly bright.
It’s an essential ingredient in an increasingly electrified world, with demand set to explode over the next decade, as the rise of renewable energy puts pressure on copper’s price.
The result: companies are falling over themselves to get on the copper train—expanding production, reviving old mines and poking exploration holes across the globe.
The investment thesis is definitely there. And so is investor interest . . .
But this article isn’t really about copper.
Rather, it’s about what happens when there’s a surge of interest in a commodity.
First, a large number of companies and projects start popping up. Then, they pull on investor interest with the allure of outsized gains.
This is happening now with copper.
And, unfortunately, many will do what others have done before—overlook jurisdiction risk.
Jurisdiction risk is real
Just like in real estate, investing in mining is all about location, location, location.
A compelling narrative and business case, strong financials and good management are all absolutely necessary for a successful mining company, but even these can only get a project so far.
They are meaningless if larger jurisdiction risks are at play.
In the case of copper—it’s found everywhere, but a mining deposit’s location can be attached to vastly different risks.
So when you are looking at a global project, such as one of the many copper exploration plays that’s sure to crop up in this hot market, keep some of these factors in mind.
Unfortuately, politics is an all-too-common risk when it comes to mining.
Political positions vary dramatically around the world, and can impact mining for myriad reasons.
For instance, perhaps a newly elected leader or leading party is anti-mining, due to founded or unfounded environmental concerns, despite pre-election, pro-mining rhetoric.
Maybe politicians introduce punitive taxes out of the blue, under the guise (justifiable or not) of ensuring the country gets a piece of the pie.
Or, political decisions can suddenly emerge as part of a larger national spat with the mining company’s home country, and the unfortunate miner ends up being collateral damage.
At the same time, the country where the project is located could have well-known risks that are no surprise to the mining community, but eager investors take the gamble, only to get burned.
Either way, political ramifications can come on slowly or suddenly and can lead to nasty surprises—from sudden tax increases, to threats of halting activity, to the nationalization of mines, or endless regulatory red tape.
These scenarios have happened many times before. They are happening now. And they will continue to happen.
But, hopefully, not to you.
The good news is that you don’t need to be a political scientist to analyze the potential risk in this area. Some basic research on how mining has historically been perceived in a particular jurisdiction would be a good start, as it can provide clues to what the future could bring, despite changing political winds.
Also check out the regulatory environment and do some research on how it stacks up compared to other jurisdictions.
The Fraser Institute puts out an annual survey of mining companies, which lists the most attractive mining jurisdictions based on regulatory systems, taxation, political climates, local attitudes and more.
It’s a good starting point for understanding what regions are generally seen as stable and which ones are more dubious.
This one is the death of a lot of juniors.
Without access to proper roads and machinery, expenses will soon rack up.
After all, it’s great to find an absolutely enormous deposit with a successful drill program—but it’s another thing to make it economically viable if it’s in the middle of nowhere.
And when you add the reasonably good chances that the copper ore will be low-grade (more on that below), the economics become unfeasible.
Bundled into infrastructure is also the availability of trained labour. If there is no easy way to get employees in, it means higher operating costs. And if the employment pool is seriously lacking, it means even higher costs.
In summary, look closely at where a project is, whether it’s near to decent infrastructure, and if the employment scenario looks sustainable.
Mining companies ignore Environmental, Social and Governance—or ESG—criteria at their own peril.
While one might assume that any legitimate mining company would take ESG criteria into account in these modern times, think again.
There are many social factors at play that could destroy a project, tying it up in endless red tape and legal issues.
This could be a lack of agreements and/or interaction with local Indigenous Peoples.
It could be a lack of community consultation to address key concerns, which often include environmental risks and economic benefits.
And as most politicans are often at the whim of their financial sponsors and the voting public, rest assured that if an issue like this pops up and gains momentum, the mining project won’t last—or at least won’t be going anywhere any time soon.
So take some time to understand the local attitudes toward mining in a paticular region. And see what the company in question is doing to address ESG criteria.
A basic rule of thumb is that if you can’t find anything about ESG-focused protocols on a mining company website, avoid them.
Proven geological systems
This one’s often overlooked.
While there is plenty of copper left in the Earth’s crust, it’s mostly lower grade.
This presents a challenge for exploration, as the price of copper needs to maintain lofty heights to make development economical.
Nobody has a crystal ball to tell them what prices will do, so this becomes a gamble.
And in many cases, higher prices still don’t help. Because without proper infrastructure and proven projects in place, most large investors will be hard-pressed to commit.
Combine this with potential onerous taxation or other political issues and you can see why it’s attractive to mine at or near where others are already producing.
Because it’s proven.
One way to think about it is that it’s fairly easy to convince an investor to pay attention to an exploration company drilling near a world-famous copper project, in a well-known copper district.
Even better, a producing company doing exploration near one of its mines is more often than not a good bet.
This could be near Escondida in Chile—the world’s top copper producer—in one of several prolific districts in Arizona, or up in the Golden Triangle of B.C.
But trying to convince investors to put money into an unproven geological system far away from current success is a stretch.
Ask yourself: is it stable, accessible and proven?
The examples above are relevant for any metal or mineral, not just copper.
But as the commodity rally and the narrative around the electrification of the world continue, we will likely see more copper projects pop up.
There are many great jurisdictions out there that address all of these issues. These include top mining countries we know well, such as Canada, the US and Australia.
And they also include specific districts, like Saskatchewan, Western Australia and Nevada, which offer an edge over their neighbouring states and provinces with generous tax benefits, good infrastructure, mostly supportive populations, and more.
Safe jurisdictions are key to fully assessing the risk-reward scenario of a mining company.
You may find that the potential gains outweigh the risk in the right scenario, and all the more power to you if you do.
But as a general rule, applying the factors we mentioned—politics, infrastructure, social licence, geology—will at least help you make an informed decision and hopefully find the next great mine.
- Dear Retail Investor Editorial Team
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