Real Risks and Siren Songs

Burkina Faso’s ousting of its 27-year dictator, endless labour strife in South Africa’s mines, power outages and mining code revisions in the Democratic Republic of Congo, tax increases in Zambia, Ebola in Guinea, Sierra Leone and Liberia – enough uncertainties arise in Africa in any given month to make the continent seem the riskiest place in the world to mine.

But risk comes in many forms and sneaks into places that seem very stable.

Say a junior explorer with a nice copper-gold porphyry piques your interest. What do you do before investing? You investigate the management team, assess the geology, pick through the financials and share structure – and contemplate risk.

Where is the project? What hurdles might trip up progress? Is there social opposition, a slow permitting regime, an uncertain tax structure, or a debate over water rights? Is the government reliable and is there any risk of expropriation?

We tend to assume risk is inversely proportional to national development: highly developed countries like Canada or the United States should portend less risk than developing nations like Ecuador or Burkina Faso.

But this is not necessarily so.

Ecuador is a good example. Now known to host some very rich gold including the 6.7-million-oz. Fruta del Norte gold deposit, Ecuador saw very limited exploration until 2005 when the country loosened controls on mining.

The impetus worked and explorers arrived, eager to explore this tiny country surrounded by mining giants Peru, Colombia, Chile, Brazil, and Argentina. Fruta del Norte was discovered soon after and rapidly grew into one of biggest gold deposits in the world.

Then a classic scene played out. A new president, elected on a socialist platform, looked at discoveries like Fruta and saw dollar signs. In 2007 Rafael Correa announced plans to revise Ecuador’s mining taxes – and most exploration activity in the country ground to a halt.

Kinross gambled that Fruta del Norte was worth the risk, that Correa needed the hundreds of jobs and millions in tax revenues from a Fruta mine. So in mid-2008 the gold major spent $1.5 billion to buy Aurelian Resources for Fruta.

Five years later Kinross walked away, unable to reach an agreement with Correa’s government on reasonable terms to build and operate a mine.

Now Lundin company Fortress Minerals (TSXV: FST.H) has taken Fruta off Kinross’ hands, for just $240 million in cash and shares. That deal says two things.

First, it says Lukas Lundin believes in Ecuador. That is significant. Ross Beaty also believes in Ecuador, having put $5 million into Ecuador gold explorer Odin Mining (TSXV: ODN) several months ago.

These mining investing greats have done their diligence and believe Correa will soon table a new mining tax regime that both miners and Ecuadorians can accept. If that happens, expect explorers to return to this prospective and underexplored country.

The Fruta deal also suggests that Correa learned from his mistake. That is also significant. We expect mistakes when people or countries are doing something for the first time. We expect toddlers to fall down, entrepreneurs to err, governments of nations newly opened for business to get greedy. But we also expect that they learn and improve.

Learning and improving are now missing from some well-established mining jurisdictions – including Canada and the United States. In North America, our long mining histories have become a weakness.

Taseko Mines’ (TSX: TKO) failure to permit the New Prosperity copper-gold project in central BC is a good example. Some fault lies with Taseko, to be sure – the company blustered into the process overly confident that the end result was assured. In doing so it failed to engage local First Nations sufficiently or effectively.

Perhaps that justifies the government’s denial in Taseko’s first permitting go-round. But the same logic does not apply to round two.

The government gave reasons for its initial no. So Taseko re-engineered the mine and addressed those reasons. The company also make a laudable effort to repair relations, and while relations with First Nations were beyond help Taseko found real and significant support from local communities.

In short, Taseko jumped through every hoop the government erected. Regardless, regulators said no again.

This ultra-short version of the story glosses over the politicization of the process. I think Stephen Harper probably wanted to say Yes. Approval would have confirmed to the world that projects in Canada are assessed based on defined parameters.

But the prime minister had to say No because Canada is a democracy and the people – however mis-informed – were demanding denial.

That is precisely the kind of intangible risk that investors hate.

Risk assessments have always included politics, but we focus on the type of governance and assume dictatorships are riskier than democracies. That makes sense: dictators are far more likely to expropriate an asset.

But political risk is broader than that. In fact, I would say we have to add another category: democracy risk.

In a democracy, when the people speak leaders have to listen. And in an age where social media has collided with broad hatred for resource extraction, the risk of a population rising up against a project has grown dramatically.

It is impossible to know which projects will attract public attention. Curis Resources’ Florence project in Arizona should have been a permitting dream – an in-situ leach operation in a brownfields location surrounded by nothing other than a town that needed jobs – but environmentalists and real estate speculators united to oppose the project and stymied progress for almost four years.

Many projects struggle against similar standoffs. Today near Vancouver a group opposed to Kinder Morgan’s planned expansion of its Trans Mountain oil pipeline continues to impede survey work, all the while powering their protest camp and loudspeaker system with a gas-fired generator.

In Alaska, the Environmental Protection Agency was just slapped on the wrist for overstepping its bounds in opposing plans for the massive Pebble deposit – before any mine development paperwork was even submitted.

I am not calling North America a bad place to mine. Some parts are great. Wyoming is looking to streamline uranium permitting by excluding the feds from the process. Nevada is pretty darn efficient, especially in brownfields sites. Lundin Mining (TSX: LUN) just commissioned a copper-nickel mine in Michigan, the first new mine in the state in a long time.

North of the border, the decision to not require federal environmental approval for Integra Gold’s Sigma-Lamaque project is a reminder of the good in Canada’s systems. Regulators removed the federal requirement after Integra bought a mine and mill adjacent to its deposit, greatly reducing the surface disturbance required to develop its planned underground mine.

What I am saying is that we have to assess risk with open eyes. The assumption that a long mining history and a democratic government guarantees an efficient and reliable permitting process is no longer true when the people – often incited by a small and extremely biased subset – can derail everything.

And this kind of risk makes Canada unappetizing for some of the biggest sources of exploration and development capital these days: sovereign wealth.

China has money to deploy in its endless search for resources – but my connections stress China is not willing to gamble on democracy risk. After Taseko’s failure at New Prosperity, China won’t be putting a penny into British Columbia for a long, long time.

The only answer is for the industry to fight back. Miners cannot let environmentalists corner the masses with their siren songs – especially when those songs are recorded, transmitted, and broadcast using copper and steel and lithium and metals in general.

Mining is dirty and destructive. That is its nature. It is also conscientious and careful and, above all, utterly necessary.

And we need more people to understand that, for the sake of getting new projects permitted and in order to attract younger investors into the fold.

So next time you’re at a dinner party and your spouse’s friend starts spouting off against mining, speak up. Next time someone says the tailings dam at Mount Polley burst because miners don’t care about the environment, defend mining’s track record. Next time someone speaks out against a proposed copper mine in their area, point to their cell phone and computer and car and ask whether they’d rather the copper came from countries where the regulation allow far more environmental damage.

And if anyone else uses Ebola to argue that Africa is too risky, throw this map their way.

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