As metal prices surge, frontier markets seek ‘larger slice of the pie’ from miners
Executives ponder risks as countries with nascent economies rethink deals
Speaking to a crowd of miners in a downtown Toronto’s convention centre, noted investor Rick Rule sounds a bullish note about the risks of mining in the Democratic Republic of Congo.
The central African country has been riven by horrific violence, said Rule, chief executive of Sprott U.S. Holdings Inc., but it holds vast deposits of high-grade copper, cobalt and other minerals. That’s the good news.
“What could go wrong? We don’t have enough time” to answer that, Rule told the audience on Sunday, the opening day of the Prospectors and Developers Association of Canada. The annual gathering runs until Wednesday.
It’s a question that is attracting much reflection as mining executives look for the next place to explore or build a mine. Many of them are flush with funds to replenish their project pipeline, as a result of a surge in the price of a variety of metals.
At the same time, many countries with nascent economies, such as the DRC, are rethinking some of the deals that were cut with mining companies when commodity prices were struggling. Now that prices have risen, many are looking for ways to increase their share of the pie.
The result is that as metal prices rise, counter-intuitively, mining companies in emerging economy countries may also see their risk profile increase.
But there’s still plenty of exploration going on in countries with emerging economies.
Don Dudeck, chief executive of Toronto-based junior miner Savary Gold Corp., which is exploring in Burkina Faso, said the country recently increased its royalty rate by one per cent, and the government would own 20 per cent of any mine he built.
Still, that’s just the cost of business in West Africa, which he described as one of the last places where high grade, high volume deposits that have never been explored, can still be discovered.
“I spent the bulk of my career working in North and South America,” Dudeck said from his investor booth at PDAC. “I can find more here (in Africa), for less.”
Indeed, he pointed to other large companies that are already producing in Burkina Faso, including B2Gold Corp. and Endeavour Mining Corp., as evidence that it’s possible to flourish there.
“Governments are financial opportunists, too,” said Mark Child, chief executive of U.K.-based Condor Gold Plc., which is hoping to obtain permits in the next several months for what would be one of the largest mines in Nicaragua.
Child also noted that other mining companies are working in the country, including Vancouverbased B2Gold Corp., without incident or changes in the royalty rates.
“There’s always a risk in any frontier market that things will change,” he said, “but so far things haven’t changed.”
Still, David Manley, an economist, said it is not uncommon to see an increase in the friction between mining companies and emerging economy governments during a boom cycle.
“We know every time there’s a price boom or a price bust, you see a lot of governments trying to change taxes either up or down,” said Manley, who works for the London-based Natural Resource Governance Institute, a non-governmental organization that advocates for policies to benefit the people living in emerging economy countries.
Many countries negotiated deals with mining companies when commodity prices were low, and they were desperate to attract investment.
But as metal prices rise, the balance of power is changing, and the countries have more leverage to demand deals that bring more money in to their coffers, said Manley.
“The miners just don’t have as much as power as they did,” he said.
That may explain why many mining companies with assets in emerging economies are talking about diversifying their risks.
Scott Perry, Centerra Gold Inc.’s chief executive, told the Financial Post last week that after running into problems in the Kyrgyz Republic, his company is no longer looking at developing mines in emerging economy countries.
Last September, the Torontobased company settled arbitration claims it had filed against the Kyrgyz Republic, where it operates a gold mine. The deal included, among other terms, Centerra paying a $57-million lump sum payment to the country, in exchange for the resolution of environmental claims, and the lifting of a court order that restricted the ability of its subsidiary to transfer cash.
“The market just never ascribes full value to those assets,” said Perry.
Now, Centerra’s CEO said he is focused on a project in Turkey, which will constitute only a small part of that country ’s overall economy, and projects in Canada as well.
“I just find in general every single stakeholder in this business they all want a larger slice of the pie,” he said.